Classification of Companies Under the Companies Act, 2013

Did you know India has over 18 lakh active registered companies today? Every day, new companies are formed and classified across various sectors, each with unique structures and ownership models. Understanding the classification of companies is important for legal, tax, and business reasons. It helps you know the rules that apply to each type and how they operate.

The classification of companies in company law is a framework that divides businesses into categories based on structure, ownership, and other key factors. This classification is essential for determining whether a company is privately held or publicly listed. 

By understanding the classification of companies under the Companies Act 2013 and other relevant regulations, you can gain a better grasp of how businesses operate and the legal framework they must follow. 

How are Companies Classified as per Business Law? 

Business law classifies companies based on their purpose and structure. Individuals or groups form a company to conduct commercial activities, such as manufacturing, selling goods, or providing services. It operates independently of its owners, meaning it has its own rights and responsibilities. Companies can enter into contracts, own assets, and incur liabilities. 

According to the Companies Act, 2013, companies are classified based on various parameters such as size, ownership, liability, control, and membership. For example, they can be private or public, limited by shares or guarantee, or classified by size as small, medium, or large. 

Below are the key aspects of company classification:

1. Classification of Companies Based on Mode of Incorporation

The legal structure of business in India determines how companies operate, comply with regulations, and manage liability. The mode of incorporation serves as a key basis for classification, as it defines how a company establishes itself legally.

Based on incorporation, companies divide into two main types:

a. Statutory Companies

A specific Act of Parliament or State Legislature creates these companies. They do not follow the general provisions of the Companies Act, 2013. The special act itself determines their formation, governance, and compliance. 

Examples include RBI, SBI, and Employees’ State Insurance Corporation.

b. Registered Companies

Registered companies incorporated under Section 7 of the Companies Act, 2013, or previous company legislation. They must follow all provisions of the Companies Act, including registration, reporting, and compliance requirements. 

Popular examples are Tata, Reliance, and Infosys.

Choosing the right type of incorporation is crucial during company registration, as it impacts governance, liability, and compliance obligations.

2. Types of Companies Based on Liability

The liability of their members often classifies companies, defining the level of financial risk involved. This classification determines the legal structure of businesses in India and guides decision-making during company registration. The three main types based on liability are: 

a. Unlimited Companies

An unlimited company has no limit on its members’ liability. As defined in Section 2(92) of the Companies Act, 2013, members are personally responsible for the company’s debts. If the company faces financial difficulties, its personal assets can be used to cover the liabilities. 

For example, in a small family-run business, owners may have to use their personal assets to pay off company liabilities.

b. Companies Limited by Guarantee

A company limited by guarantee limits the liability of its members to a specific amount they agree to contribute, in case of liquidation. As per Section 2(21) of the Companies Act, 2013, members act as guarantors. Their financial risk is confined to their guarantee amount. 

An example of this is a charity or non-profit organization. In such companies, members agree to contribute a set amount in case of liquidation, but their personal assets remain protected.

c. Companies Limited by Shares

A company limited by shares is the most common type, where members’ liability is limited to unpaid share amounts. According to Section 2(22) of the Companies Act, 2013, shareholders are only responsible for their shareholding. This structure protects against unlimited financial liability. 

For instance, large corporations, such as tech firms, often operate this way, offering shareholders protection from personal financial risk.

This classification of companies in company law helps business owners understand their financial responsibilities and choose the right type of company during company registration.

3. Classification of Companies Based on Ownership & Management

The classification of companies based on ownership and management helps define governance norms and compliance requirements. Different company types have varying structures, each designed to cater to specific business needs. Here are the key types of companies in this category:

a. Private Company

A private company is a closely held entity with restricted share transfers. The Companies Act limits the number of members to 200, excluding employees. These companies must use “Private Limited” in their names. This structure promotes a controlled, intimate ownership environment.

Private Limited Company Incorporation is commonly preferred by small to medium-sized businesses.

b. Public Company

A public company allows for a larger shareholder base, with shares that are freely transferable. Unlike private companies, there are no limits on membership, and public companies can invite the public to subscribe to shares. The term “Limited” is used in their names, indicating the broader ownership structure.

For businesses planning to raise capital from the public, Public Limited Company Registration is essential.

c. One-Person Company (OPC)

An OPC is designed for solo entrepreneurs. It is a private company with only one shareholder, offering the benefits of limited liability. The OPC structure allows individual business owners to manage their companies independently, yet still enjoy legal protection.

One Person Company Registration is ideal for entrepreneurs seeking a simple legal structure.

d. Section 8 Company

A Section 8 company is formed for charitable purposes, such as promoting education, science, or social welfare. These companies cannot distribute profits among members and must reinvest earnings into their goals. They are crucial for promoting social and community development.

Section 8 Company Registration is a key step for non-profits focusing on public welfare.

e. Producer Company

A producer company is formed by farmers or producers to improve their income and resources. These companies engage in agricultural activities, pooling resources for the collective benefit of their members. This structure supports collaboration within the agricultural sector.

Producer Company Registration is a valuable option for agricultural businesses seeking collective growth.

f. Holding & Subsidiary Companies

Understanding Holding Company and Subsidiary Company is essential for large organizations. A holding company controls other companies by owning the majority of their shares. A subsidiary company operates under the control of another company. This relationship influences governance and decision-making within the companies.

These classifications under the Companies Act play a crucial role in shaping the business landscape in India. The classification of companies in company law ensures that businesses comply with legal frameworks suitable for their ownership and management structure.

4. Types of Companies Based on Size

Companies can be classified by size, which helps determine their operational structure and compliance requirements. The classification of companies by size includes the following types:

a. Micro, Small, and Medium Enterprises (MSMEs)

MSME registration in India is governed by the Udyam Registration system, which classifies businesses based on their investment and turnover. The updated thresholds for MSME classification are:

• Micro Enterprise: Investment up to ₹2.5 crore and turnover up to ₹10 crore.
• Small Enterprise: Investment up to ₹25 crore and turnover up to ₹100 crore.
• Medium Enterprise: Investment up to ₹125 crore and turnover up to ₹500 crore.

MSMEs enjoy benefits like government procurement preferences, easier access to credit, and reduced compliance, helping businesses grow at different stages.

b. Small Companies

A small company is defined by its paid-up capital and turnover. According to the Companies Act:

• Paid-up capital must not exceed ₹4 crores.
• Turnover must not exceed ₹40 crores.

Small companies do not include public companies, Section 8 companies, or holding and subsidiary companies. They benefit from simpler compliance processes and are exempt from certain provisions applicable to larger entities.

c. Large Companies

Large companies stand out due to their substantial capital, widespread operations, and significant market presence. They face stricter compliance regulations to ensure transparency and protect stakeholder interests. Large companies must adhere to extensive reporting and disclosure norms under the Companies Act, 2013.

This classification of companies in business law impacts governance, tax, and regulatory obligations. Understanding the classification of companies for tax purposes helps businesses determine their responsibilities based on size.

5. Types of Companies Based on Business Activity

Companies are classified by the nature of their business activities, and each type serves a distinct purpose. The following are common classifications based on business activity:

a. Profit-Making Companies

Profit-making companies are formed with the primary goal of earning profits. These companies engage in a variety of activities, such as manufacturing, trading, technology, or services. They aim to generate revenue that exceeds expenses, allowing them to distribute profits to shareholders or reinvest in business growth. 

Profit-making companies are typically the most common type of business entity.

b. Non-Profit Companies

Non-profit companies focus on social, charitable, or educational purposes rather than profit generation. As per Section 8 of the Companies Act, 2013, these companies must use their profits exclusively to promote their social objectives. They are typically formed to promote art, culture, education, charity, or scientific research. 

Members do not receive any dividends or profit distributions from non-profit companies.

c. Financial Companies

Financial companies, including Non-Banking Financial Companies (NBFCs), operate in the financial sector. These companies provide services like loans, insurance, credit, and other financial activities. NBFC registrations are regulated by laws such as the Reserve Bank of India Act and the Insurance Act. They play a vital role in the economy by managing risks, facilitating financial growth, and offering essential financial services to individuals and businesses.

This classification of companies based on business activity helps businesses align their structure with their primary goals, whether for profit or social good.

6. Types of Companies Based on Country of Origin

Companies can also be classified based on their nationality or origin. This classification determines the legal requirements they must adhere to and their operational scope. The main types are

a. Domestic Companies

Domestic companies are formed and registered within India. They operate under Indian law and follow all regulations specified by the Companies Act, 2013. These companies are governed by local laws and have a significant focus on the Indian market.

b. Foreign Companies

Foreign companies are incorporated outside India but conduct business within the country. They may have branches, offices, or subsidiaries in India. These companies must comply with Indian laws while also adhering to their home country’s regulations.

Foreign companies need to register with the Registrar of Companies (ROC) in India and comply with the Foreign Exchange Management Act (FEMA). For example, a company incorporated outside India, say the UAE, must complete company formation in the UAE to ensure compliance with local regulations.

c. Multinational Corporations (MNCs)

MNCs are companies that operate in multiple countries. They have a global presence, with operations, subsidiaries, or branches in various regions. These companies face regulatory challenges and must comply with the laws of each country they operate in, including tax and business regulations. MNCs often deal with complex compliance issues due to their international nature.

This classification helps businesses understand the regulatory landscape and ensures compliance with necessary legal frameworks.

7. Classification Based on Access to Capital

Companies are classified based on their ability to raise funds from the public. This classification helps determine the regulatory framework they need to follow.

a. Listed Companies

Listed companies have their stocks traded on public stock exchanges. These companies must adhere to strict disclosure requirements to protect investors. Their shares are publicly available, allowing them to raise funds from the stock market. Investors can buy or sell shares freely.

b. Unlisted Companies

Unlisted companies do not trade their shares on public exchanges. As a result, they face fewer regulations compared to listed companies. These companies rely on private investments or internal funds for capital. Unlisted companies typically have more control over their shareholding and governance.

This classification of companies highlights the differences in regulatory obligations and access to capital, impacting their growth and operations.

How to Choose the Right Type of Company?

When deciding on the company structure, consider the following key factors:

• Business Goals: Choose a structure that aligns with your objectives.
• Compliance Requirements: Understand the regulatory burden for each type.
• Funding Needs: Select a structure based on your capital-raising strategy.
• Liability Protection: Decide on the level of personal liability protection needed.

Checklist for Deciding Company Structure

• Define your business goals.
• Assess funding requirements.
• Understand compliance rules.
• Consider liability preferences.

When to Register with ROC or MCA

• Private Limited Company: For limited liability and private funding.
• Public Limited Company: For public investment and larger-scale operations.
• Section 8 Company: For non-profit, social objectives.
• One-Person Company (OPC): For solo entrepreneurs seeking liability protection.

Selecting the right structure ensures smoother operations and compliance with Indian company law.

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