Depending on various factors, companies may be classified into various categories. These factors may include liabilities, member count, parameters of holding, or control among others. Let’s check the types of companies possible to be divided into various classes one by one.
Companies may be broadly categorized into the following types:
Companies Limited by Shares
Companies Limited by Guarantee
Unlimited Companies
One-Person Companies (OPC)
Private Companies
Public Companies
Holding and Subsidiary Companies
Associate Companies
Government Companies
Foreign Companies
Charitable Companies
Dormant Companies
Nidhi Companies
Public Financial Institutions
Now, let’s check the types of companies one by one:
Companies based on liabilities can be limited by shares, limited by guarantee, or simply unlimited.
Shareholders of some companies may be liable to pay the remaining of their liabilities instead of the full share amount during the sale of the company. These companies are known as limited liabilities companies.
The shareholders of such types of companies need only to pay the remaining part of their shares while the company winds up.
In some companies, the memorandum of association mentions the money that is guaranteed by the members to pay. In case of the winding down of such companies, the guaranteed amount must be paid by the members. The creditors cannot ask the members to pay any more money than what is mentioned in the memorandum. These companies are called to be limited by guarantee.
In the case of unlimited companies, there is no limit to the members’ liabilities. Therefore, all personal assets of the company can be used by the company in case of any need from the members. The liability of the members of the company is unlimited in such cases.
One person companies have only one member as its shareholder. It is different from a sole proprietorship in the sense that it is a distinct and separate legal entity from the shareholder of the firm. OPCs don’t have to maintain any specific amount of share capital.
In the case of private companies, their articles of association restrict the free transferability of shares. In terms of members count, private companies must have a minimum of 2 and a maximum of 200 members. These members may include present and former employees who may also hold shares. Private companies are the direct opposite of public companies.
Public companies have a requirement of at least 7 members to be considered as a company. The upper limit of members is however unlimited in the case of public companies. Public companies’ shares can also be transferred without any legal hassle or permissibility.
In terms of control, companies may be divided into two types:
In this case, one company holds ownership of another company. The company that has ownership is known as a holding company while the company that has been held is known as a subsidiary.
Holding companies usually hold positions on the board of directors of subsidiaries to keep control. Moreover, parent companies may also exercise control over the subsidiaries by owning more than 50% stake in their subsidiaries.
In associate companies, a 20% share has a significant influence on the firm. Although the other company does not have a majority stake, partial ownership offers them enough power to vote and regulate the subsidiary company’s actions.
The other company’s control remains in the associate company’s agreement. An associate company can also exist under joint venture agreements.
While considering the access a company has to capital, there may be two types of companies - listed and unlisted.
Listed companies’ securities are listed on stock markets or exchanges. This means that people can freely trade securities of listed companies. Hence, only public companies can be listed companies and not private companies.
Unlisted companies do not list their securities on stock exchanges. Therefore, their shares cannot be bought by the general public. However, both, public, as well as private companies, can be unlisted.
In government companies, more than 50% of the share capital is owned by governments. The government here refers to both central and state governments.
Companies that are established outside India are known as foreign companies. They conduct business in India by having a local place of business either by themselves or in association with some other Indian company.
Companies with charitable objectives are known as charitable companies. These companies are also called Section 8 companies for the reason they are registered under Section 8 of the Companies Act, 2013.
Charitable companies may be established to promote arts, science, religion, culture, education, trade, sports, commerce, etc. Charitable companies need not pay dividends because they are not profit-oriented.
Dormant companies are generally created for future projects. These companies do not have palpable accounting transactions and they do not have to follow all of the compliances of the companies act 2013.
A Nidhi company is a unique type of company that tends to enhance the habits of savings among its members. Members of these companies deposit the capital which is used for their own benefits.
Life Insurance Corporation (LIC), Unit Trust of India (UTI), and other such companies are treated as public financial institutions. These are government companies that conduct functions of public financing. Usually, these institutions are funded 100% by the government.
There are various types of companies in the business world depending on the nature of classification. It is important to consider the classifications because the different categories may show a set of particular industries.
Therefore, to study the common features of various sets and common industries, these classifications of companies may be used. For example, the holding and subsidiary companies may be checked in a set to ascertain whether the firms are performing as needed.
The study of kinds of companies becomes also important during times of recession and economic upheavals. These sets of companies in such instances reflect the average performances to check the health of the economy. Studying the kinds of companies is thus valuable for both businesses and economists.
Q1. What are the types of companies based on liabilities?
Ans. Three types of companies Based on liabilities are:
Companies Limited by Shares
Companies Limited by Guarantee
Unlimited Companies
Q2. Briefly illustrate the holding and subsidiary companies.
Ans. In the case of a holding company, one company’s shares are held by another company. The company holding the shares is known as a holding company while the company whose shares have been held is known as a subsidiary.
Holding companies usually exercise their control over their subsidiaries by holding positions on the board of directors. Moreover, parent companies also exercise control over the subsidiaries by owning more than 50% stake in their subsidiary companies.
Q3. Give two examples of public financial institutions.
Ans. Life Insurance Corporation (LIC) and Unit Trust of India (UTI) are two examples of public financial institutions.
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