Characteristics and Different Kinds of Companies

Beyond the basic private/public/OPC classification, companies are further categorised based on liability (limited/unlimited), purpose (profit/charitable), ownership (government/foreign), corporate structure (holding/subsidiary), and listing status (listed/unlisted). Each category carries distinct regulatory implications.

Legal Framework

Classification by Liability

Why: "Limited by shares" is the STANDARD form (99%+ of companies). "Limited by guarantee" is used for non-profit organisations (professional bodies, clubs, charitable companies). "Unlimited" is extremely rare used only where members want maximum privacy (no requirement to file accounts publicly under certain conditions).

Classification by Ownership/Control

Classification by Purpose

Section 8 Companies (Charitable Companies)

Classification by Listing Status

Holding-Subsidiary Relationship

Illustrations

1. Limited by shares (the normal case): A buys 1,000 shares of Rs.10 each (face value) in XYZ Ltd, paying Rs.7 per share (Rs.3 unpaid). XYZ goes bankrupt with Rs.100 crore in debts. A's MAXIMUM liability = Rs.3 × 1,000 = Rs.3,000 (the unpaid portion). Company's creditors CANNOT ask A to pay a single rupee more. Even if XYZ owes Rs.100 crore and has zero assets, A loses only Rs.3,000 + the Rs.7,000 already paid (total investment = Rs.10,000 per share × 1,000 = maximum loss Rs.10,000). This is "limited liability" limited to the amount UNPAID on shares.

2. Government company (public sector undertaking): Indian Oil Corporation (IOC): Central Government holds 51.5% shares. Therefore IOC is a "government company" under S.2(45). Consequences: (a) CAG can audit (S.143(5)-(7)), (b) Parliament can discuss its affairs, (c) Government appoints directors, (d) But IOC is STILL a separate legal entity (not a government department) it can sue, be sued, own property, and enter contracts independently. It combines corporate efficiency with public accountability.

3. Section 8 company (charity with corporate form): Five persons want to establish "Education for All Foundation" to provide free education in rural areas. They DON'T want to make profit only serve the public. They apply under S.8: get a licence, incorporate without "Ltd" in name (just "Education for All Foundation"), enjoy relaxed compliance. If ever they try to DISTRIBUTE profits to members: government revokes licence (S.8(6)), converts to ordinary company, and they must add "Limited" to name and comply fully. The S.8 structure ensures charitable purpose is PERMANENTLY locked in.

4. Holding-subsidiary (separate but connected): Reliance Industries Ltd (RIL) owns 100% of Jio Platforms Ltd. Jio is RIL's subsidiary. If Jio takes a loan and defaults: is RIL liable? GENERALLY NO separate entities (Salomon). Jio's creditors can only claim from Jio's assets. But: (a) RIL must prepare CONSOLIDATED accounts showing Jio's position. (b) If Jio was used merely as a SHAM to avoid RIL's obligations veil may be lifted. (c) Practical reality: banks often demand PARENT GUARANTEE from RIL when lending to Jio contractual route to liability, not automatic.

Recall Check

1. What are the three types of companies classified by liability?
2. What is a Section 8 company and what restrictions apply to it?
3. When is a company deemed a "subsidiary" under S.2(87)?

Key Cases

Macaura v. Northern Assurance (1925) Macaura-v-Northern-Assurance-1925 Issue: Whether a sole shareholder has insurable interest in company property. Rule: Company property belongs to the COMPANY, not to shareholders even a 100% shareholder has no insurable interest in company's property. Held: Macaura (sole shareholder) insured company's timber in HIS own name. Timber destroyed by fire. Insurance denied: "The timber belongs to the company, not to you. You have no insurable interest." Shareholder ≠ owner of company property. Separate entity applies rigorously.

Distinctions

Flashcards

Q: What is a company limited by shares? A: Company where members' liability is limited to the UNPAID amount on their shares. Most common type. S.2(21).

Q: What is a company limited by guarantee? A: Company where members guarantee to contribute a specified amount on winding up. No share capital typically. Used for non-profits. S.2(22).

Q: What is a government company? A: Company in which Central/State Government holds 51% or more of paid-up share capital (S.2(45)). Subject to CAG audit + parliamentary oversight.

Q: What is a Section 8 company? A: Company formed for charitable/not-for-profit purposes (education, charity, sports, etc.). Cannot distribute profits. Gets licence from Central Government. Need not use "Limited" in name.

Q: When is a company a "subsidiary"? A: When another company (holding/parent) controls composition of its board OR holds 50%+ total voting power (S.2(87)).

Q: What did Macaura v. Northern Assurance establish? A: A shareholder (even 100% holder) has NO insurable interest in company property. Company property belongs to the company, not to shareholders. Separate entity applied strictly.

Q: What is a listed company? A: Company whose securities are listed on a recognised stock exchange (S.2(52)). Subject to SEBI regulations + enhanced corporate governance norms.

Exam Scenario

A social entrepreneur wants to start a non-profit organisation to provide free healthcare in tribal areas. She does not want to distribute any profits but wants the organisation to have legal personality, perpetual succession, and ability to receive donations with tax benefits. Advise on the appropriate company structure.

Recommendation: Section 8 Company (S.8, Companies Act, 2013).

Why Section 8 fits: (1) Charitable objects: Free healthcare in tribal areas falls within S.8(1)(a) "promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment." (2) No profit distribution: S.8(1)(ii) profits and income must be applied solely for promoting objects. Cannot distribute dividends to members. Aligns with her non-profit intent. (3) Legal personality + perpetual succession: Being a company under the Act, it enjoys S.9 benefits separate entity, can hold property, sue/be sued, perpetual existence. (4) Donations with tax benefits: Section 8 companies can get 12A + 80G registration under Income Tax Act donations to the company become tax-deductible for donors. This is critical for fundraising. (5) Credibility: Corporate form gives institutional credibility for grants from government and international agencies. (6) Name advantage: Need not include "Limited" can simply be "Tribal Health Foundation" (not "Tribal Health Foundation Limited").

Requirements: (a) Apply for licence from Central Government (S.8(1)). (b) File MOA with objects restricted to charitable purpose. (c) Articles must prohibit profit distribution and dividend. (d) Minimum 2 members + 2 directors (if private form). (e) Annual compliance: file annual returns + financial statements (lighter than commercial companies).

Alternative rejected: Trust (no legal personality under Indian Trusts Act 1882 cannot sue in own name in many states). Society (Societies Registration Act has personality but weaker governance framework). Neither offers the corporate structure and perpetual succession that a Section 8 company provides.

Illustrations

1. Private vs Public: Zerodha is a private company (Zerodha Broking Pvt Ltd). It cannot issue shares to the general public through an IPO. If Zerodha wants to list on BSE/NSE, it must first convert to a public company by altering its AOA to remove the three restrictions of S.2(68), then file for an IPO with SEBI.

2. OPC constraint: Meera, an NRI living in Dubai, wants to form an OPC in India. She cannot, because S.2(62) requires the sole member to be a natural person resident in India (defined as person who has stayed in India for not less than 182 days in the preceding calendar year). Meera must either return to India or find a resident Indian to be the member.

3. S.8 Company: Wikipedia Foundation India is a S.8 company. It promotes education and access to knowledge. If it earns surplus from donations, that surplus must be applied towards its objects. It cannot declare dividends to its members. The words "Limited" or "Private Limited" may be dispensed with from its name.

4. Subsidiary test: Tata Sons holds 72% of TCS equity shares. Since Tata Sons holds more than 50% of total voting power, TCS is a subsidiary of Tata Sons. Consequently, TCS (a private company's subsidiary) is deemed a public company under S.2(71).

5. Small company benefit: A company with paid-up capital Rs.2 crore and turnover Rs.30 crore qualifies as a "small company." It gets relaxed compliance: no need for cash flow statement in financials, Board meetings can be held twice (not four times) a year, and auditor rotation provisions do not apply.

Recall Check

1. What three restrictions must a private company's AOA contain under S.2(68)?
2. Can an OPC be formed by a Hindu Undivided Family (HUF)? Why or why not?
3. What is the consequence of a private company becoming a subsidiary of a public company?