Types of Enterprises in India: Company

This post is a continuation of my previous post in which I talked about Sole Proprietorships, Partnerships and Limited Liability Partnerships – the main types of Enterprises in India. The only significant type left is the Company, which I will discuss in this post. 

But before any of that, this (straight from my Facebook page). 

Spock speaks to future Spock

I figured it was a waste being my mother’s (T – 25 years) doppelganger, if I couldn’t use it for comic effect. 

What is a Company? 

A Company is defined in section 3 of the Companies Act, 1956 as a Company formed and registered under this act or any other previous company laws. A company usually raises the capital it needs for its operations through the issue of “shares”. The amount thus raised is called “Share Capital”. The persons who buy these shares are called “Shareholders” of the Company. They are the owners of the Company. 

A Company has the following characteristics:

• Legal Identity separate from that of the owners: A Company has a legal identity separate from its owners/ shareholders. It can sue/ be sued in its own name, pays its own taxes, has its own seal etc. 

• Limited liability of owners: As per the Companies Act, 1956 there are different types of companies. A Company may be a “Company limited by shares” or a “Company limited by guarantee” (we’ll explain what these mean later). In the case of a Company limited by shares, the liability of the shareholders is limited to the face value of the shares subscribed by them. In a Company limited by guarantee, the liability of owners is limited to such amount as they may undertake to contribute to the assets of the company in the event of its being wound up.

• Perpetual Succession: The Company continues to exist despite the death/ bankruptcy/ exit of owners/shareholders. It ceases to exist only when dissolved as per the Companies Act. 

• Compulsory to register Company with ROC (Registrar of Companies) 

Types of Companies in India

Per the Companies Act, 2013 (revised version of Companies Act, 1956), the following types of Companies can be registered in India (see section below, after reading the following note):

Note: “Company limited by Shares” is the predominant type of Company in India (this is what most people mean when they use the term “company”). Over 99% of all new companies registered under the Companies Act in 2013-14 were Companies limited by shares (see charts below). That said, I’ve talked about the other types of Companies allowed under the act as well, so that you - my reader - get some perspective on what’s out there. 

Companies Registered under the Companies Act, 1956, in 2013-14 (total number and as % of total): Click on charts to enlarge. 

       

Source: 58th Annual Report On the Working & Administration of the Companies Act, 1956 for year ended March 31, 2014, Ministry of Company Affairs.

1. Company limited by Shares: 

(The most common type of Company; 99% of all new companies registered in ’13-14 were of this type)

A Company limited by shares has a Share capital and the liability of each shareholder is limited to the extent of the face value of shares subscribed by him. Let’s explain this with an example. Let’s assume that the face value of a share in a company is Rs. 100, and shareholder “A” has subscribed to 10 shares of the company and paid Rs. 50/share. During the life of the company or in case of winding up, “A” can be held liable (asked to pay up) for the remaining Rs. 50/ share * 10 = Rs. 500, and not more. A company limited by shares may be a public company or a private company (we’ll discuss this later in the post). 

2. Company Limited by Guarantee: 

(Mostly Non-profit companies focused on social, cultural, religious or other work usually use this structure; only ~0.5% of companies registered in ’13-14 were of this type)

The liability of each member is limited to the amount he undertakes to contribute in the event of the company’s liquidation/ winding down in order to meet the liabilities of the company. Such a company may or may not have Share Capital. If it has share capital, it can be a public or private company. 

3. Unlimited Company: 

(Very rare; only 0.01% of companies registered in ’13-14 were of this type)

An Unlimited Company does not have any limit on the liability of its members. It may or may not have Share Capital. If it has share capital, it can be a public company or a private company. Unlimited companies are very rare. 

4. One Person Company: 

(Very new concept; introduced in the Companies Act, 2013) 

The concept of a One Person Company (OPC) was introduced in India with the Companies Act, 2013. Such a company has only 1 shareholder. Only a natural person, who is a citizen and resident of India, can form an OPC.

Why a One Person Company when you can have a Sole Proprietorship?

Unlike a Sole Proprietorship (read my previous post titled “Types of Enterprises in India: Sole Proprietorship, Partnership, Limited Liability Partnership” for details), an OPC has a separate legal identity from its owner/shareholder and the owner has limited liability (this is attractive for entrepreneurs who are just starting out). Since an OPC has a much higher compliance and disclosure requirement (under the Companies Act, 2013) vs. a Sole Proprietorship (minimal compliance), lenders feel more comfortable lending to an OPC vs. a Proprietorship. Also, it is easier for an OPC to convert itself into a Private Limited Company and attract venture capital and other investors. This transition is much harder for a Sole Proprietorship. 

The biggest drawback of an OPC vs. a Sole Proprietorship is that an OPC is taxed at a 30% base rate (MAT and dividend distribution tax is applicable as well) whereas the income of a Sole Proprietorship is taxed based on the tax slab in which the proprietor’s income falls. 

Private Company vs. Public Company

If a company has Share Capital, it can be a Public company or a Private company. We know from the section above, that a Company limited by guarantee and an Unlimited Company could both have share capital. However, these companies aren’t very common, so when we talk of Public companies and Private companies, we usually mean Public and Private companies limited by shares. 

Note: 96% of all new companies registered in 2013-14 were Private Companies limited by shares; 3% of all were Public Companies limited by shares (see charts above). 

Private Company (also called Private limited Company)

Per the Companies Act, 2013, a Private Company has the following characteristics:

• Has a minimum paid-up share capital of Rs 1 lakh.
• Minimum number of members (shareholders) is 2, and maximum is 200.
• Restricts the right to transfer its shares. If a shareholder wants to transfer his shares, he usually has to offer them to other existing shareholders first. The consent of other shareholders is required before selling shares. 
• Prohibits any invitation to the public to subscribe to securities of the Company. This obviously implies that private companies cannot be listed on stock exchanges and cannot raise funds in an IPO. 
• Has a Board of Directors – a minimum of 2 directors; maximum of 15. 

Public Company (also called Public limited Company)
Per the Companies Act, 2013, a Public Company has the following characteristics:

• Has a minimum paid-up share capital of Rs 5 lakh. 
• Minimum number of members (shareholders) is 7; no upper limit. 
• Shares are freely transferable. 
• Invites the public to subscribe to any securities of the Company (shares/debentures etc.) 
• Has a Board of Directors – a minimum of 3 directors; maximum of 15.

Between Public and Private companies, private companies are relatively smaller and are often owned by families. The restrictions on transfer of shares allows the family/a few shareholders to maintain control of the company. Also the compliance burden (with the Companies Act, 2013) and public disclosures mandated are lower for Private companies vs. Public companies. 

The downside however, is that Private companies find it harder to raise funds vis-à-vis Public companies, that can raise funds through from the public through public offerings. Lenders/ banks also feel more comfortable lending to Public companies because of the higher level of compliance/scrutiny that they are subjected to, more professional management, larger size, better access to capital/ expertise etc. 

Let’s take an example to underscore the different types of structures used by enterprises as they grow. Tribhovandas Bhimji Zaveri Ltd (TBZ), one of the top jewellers in India, was established by Tribhovandas Bhimji Zaveri in 1864. Business was carried out in Partnership between Tribhovandas Bhimji Zaveri and other members. The first partnership deed was executed in 1949. The partners changed through the years, and the partnership deed was altered to reflect these changes. The firm grew, opened new showrooms and hired professionals to manage the retail business. In 2007, the enterprise was incorporate as a Private Limited Company. It continued to grow and add additional stores. In December 2010, the company was converted into a public limited company - Tribhovandas Bhimji Zaveri Ltd. The company did its IPO (raise 200 crores) in April 2012, and started trading in May 2012 on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) under the ticker TBZ. 

Enough about Companies now. This post gives you all you’ll need to grasp company data as you encounter it in future posts. 

Sayonara.