TYPES OF COMPANIES

-IMPACT ON TAX LIABILITY

010221
 Meaning of Company
•  company is a body corporate or an incorporated business
organization registered under the companies act.

• It can be a limited or an unlimited company, private or a

public company, company limited by guarantee or a
company having a share capital, or a community interest
company.
 The Companies Act 2013 of India defines a
company as-

A registered association which is an artificial legal person,

having an independent legal, entity with a perpetual
succession, a common seal for its signatures, a common
capital comprised of transferable shares and carrying
limited liability.
 An Association of Persons
 Incorporated Association
 Artificial Legal Person
 Distinct Legal Entity
 Perpetual Succession
 Limited Liability
 Transferability of Shares
 Diffused Ownership
 Separation of ownership and management
 Common Seal
 Corporate Finance
 Object clause of Business
 Publication of Accounts
 Important points

• Legal Person: A legal person could be human or a non-

human entity which is recognised by law as having legal
rights and is subject to obligations.

• A person or a group of persons: It is no more required to

be an association of persons to form a company. A
company can also be started as a single person company
(one-person company).
 TYPES OF COMPANIES
On the basis of Incorporation

Chartered Statutory Registered

Companies
Companies Companies
• Established by a
• Incorporated under a Special Act of the •Formed and
special royal charter Parliament to State registered under the
issued by the king or Legislature Indian Companies Act,
head of the state 1956
•E.g. The East India • May not use Ltd. •E.g. Infosys, Wipro
Company, Bank of etc.
England, Hudson's Bay •E.g. RBI, IFCI, IDBI,
Company LIC etc.
• Royal Chartered Companies
• These companies are formed under a special charter by the monarch or by a special order of a
king or a queen. Few examples of royal chartered companies are BBC, East India Company, Bank
Of England, etc.

• Statutory Companies
• These companies are incorporated by a special act passed by the central or state legislature.
These companies are intended to carry out some business of national importance. For example,
The Reserve Bank of India was formed under RBI act 1934.

• Registered Or Incorporated Companies

• These companies are formed/incorporated under the companies act passed by the
government.  These companies come into existence only after these are registered under the act
and the certificate of incorporation is passed by the Registrar of companies.
 TYPES OF COMPANIES

On the basis of Liability

Limited Companies Unlimited Companies

Limited by Limited by Unlimited

Shares Companies
Guarantee
•Liability of members • Liability of members is
(share holders) is •Liability of members unlimited. They have
limited to the extent is limited to a fixed to pay the liabilities of
of face value of shares amount which they the company from
held by them have guaranteed on their personal assets
• Companies Limited By Shares
These companies have a defined share capital and the liability of each member is
limited by the memorandum to the extent of the face value of shares subscribed by
him.

• Companies Limited By Guarantee

These companies may or may not have a share capital and the liability of each
member is limited by the memorandum to the extent of the sum of money s/he had
promised to pay in the event of liquidation of the company for payments of debts
and liabilities of the company.

• Unlimited Companies
There is no formal restriction to the amount of money that the
shareholder/member of the company has to pay in the event of the liquidation of
an unlimited company.
 TYPES OF COMPANIES
On the basis of No. of Members

Private Companies Public Introduced in

Companies Act 2013
•Restricts the rights of the
members to transfer shares •A public company is •One-Person-
one which is not a
•Limits the number of private company Company
members to 200 (Act 2013)
excluding past or present •To form a company at •Dormant
employees of the company least 7 members and
there is no limit
•Prohibits any invitation to Company
the public to subscribe for its •Has to use the word
shares, debentures and 'Limited' at the end of
public deposits its name
• Public Company (Or Public Limited Company)

• A public company is a corporation whose ownership is open to the public. In other words,
anyone can buy the shares of a public company. There are no restrictions to the number of
members of a public company or to the transferability of shares. However, there are some
other restrictions:

• (In UK) A public limited company should have at least 2 shareholders and 2 directors, have
allotted shares to the total value of at least £50,000, be registered with company house, and
have a qualified company secretary.

• (In India) A public company should have at least 7 members and 3 directors, and issue a
prospectus or file a statement in lieu of prospectus with the Registrar before allotting shares.
 Private Company (Or Private Limited Company)
• A private company cannot be owned by the public; it restricts the number of
members, the right to transfer its shares and prohibits any invitation to the
public to subscribe for any shares or debentures of the company.

• (In UK) A private company is a separate legal entity with a suitable company
name, an address, at least one director, at least one shareholder, and
memorandum of association and article of association.

• (In India) A private company is a separate legal entity with a suitable

company name, an address, at least 2 members and at most 200 members,
and at least two directors with one being an Indian resident.
 One Person Company

• A one-person company is an Indian private limited

company which has only one founder/promoter. The
founder should be a natural person who is a country
resident. There is also a threshold of paid-up capital (₹ 50
lakh) and average turnover (₹ 2 crores in 3 immediate
preceding financial years) for a one-person
 DORMANT COMPANY
• The idea of a dormant company was not there in the companies Act 1956 and it is a new
concept introduced in the Companies Act 2013.This idea is imported from united Kingdom.

• Section 455 of companies Act speaks about the dormant company. The meaning of Dormant
company means inactive or inoperative. The basic idea of dormant company is for the
benefit of a company to start a future project or hold an asset/intellectual property without
having significant accounting transactions.

• On the other hand if a company has not filed its annual returns for two consecutive years
then such a company will also be called as a dormant company. Companies may apply for a
dormant status if the company is incorporated for a future project, incorporated for holding
an asset or intellectual property, company which has not filed Financial Statement and
Annual Returns during the last two financial years and the company which is not carrying out
any business or has made any significant accounting transactions
 TYPES OF COMPANIES
On the basis of Ownership and
Control

Govt. Holding Subsidiary

Companies Companies Companies

• Owns more than •Controlled by a

•Not less than 51% holding company
50% of nominal
of the share capital value of equity share since it owns less than
of the company capital of another 50% nominal value of
owned by the Govt. company or is equity share capital
controlling the
•E.g. Reebok, Audi,
(Central/State/toge composition of the
board of directors of TCS
ther)
another company

• E.g. Tata Group

 On the basis of Nationality

Foreign
Companies
Domestic Companies
The company which is
Is a company that is
incorporated outside India
incorporated in the
but has a place of business
country(India)
in India through its
branches or agencies is
known as foreign company
It mainly consists of three levels of management.
They are as follows:

1) TOP LEVEL MANAGEMENT

2) MIDDLE LEVEL MANAGEMENT
3) LOWER LEVEL MANAGEMENT
 Top-level management consists of boards of directors, presidents,
vice-presidents, CEOs, general managers and senior managers,
etc.

 They develop goals, strategic plans, and company policies and make
decisions about the direction of the business.

 Top managers need to have more conceptual skill than technical skill.
They understand how competition, world economies, politics, and social
trends affect organizational effectiveness.
 Middle management is at the center of a hierarchical organization, subordinate to
the senior management but above the lowest levels of operational staff.

 They are accountable to top management for their department's function. They
provide guidance to lower-level managers and inspire them to perform better.

 Middle-management functions generally revolve around enabling teams of

workers to perform effectively and efficiently and reporting these
performance indicators to upper management.
 Low-level managers focus on controlling and
directing. They serve as role models for the
employees they supervise.
 Assigning employees tasks.
 Guiding and supervising employees on day-to-day
activities.
 Ensuring the quality and quantity of production.
 RESIDENCE OF ASSESSEES
• Taxable income of an assesse is determined with reference to his residence in India during the PY.
• Incidence of tax has nothing to do with the citizenship.
• A person may be resident in more than one country for the same previous year.

Types of Residents

Resident Non-Resident

Ordinarily Not Ordinarily

Resident Resident
 Resident
 Basic Conditions:- (Atleast any one of the following
conditions should be satisfied)

(a) Stay in India in the P.Y. for a period of 182 days or more,

OR

(b) Stay in India for at least 365 days during the 4 years
preceding the P.Y. and is in India for at least 60 days during the
 Solution
• Since X comes to India only for 53 days in the previous
year 2005-06,
he does not satisfy any of the basic conditions laid
down in section 6(1).
He is, therefore, non-resident in India for the assessment
year 2006-07.
Residential Status Of A Company [Section 6(3)]
Determination of total income of a company depends upon its residential status during the relevant previous year. The residential status of the company is determined
either
1.on the basis of its incorporation (Registration ) ; or
2.on the basis of the control and management of its affairs.
On the basis of Residential Status, companies can be classified in to’ two categories
A.Resident Companies
B.Non Resident Companies.
(A) Resident Companies [Section 6(3)]
A company is said to be resident in India in any previous year
i.It is an Indian Company ; or
ii.during the relevant previous year the control and management
of its affairs is situated wholly in India.
Observations
1.An Indian company is always a resident company for income
tax purposes even if the control and management of its affairs is
saturated outside India
2.A non-Indian company or a foreign company will be treated
as resident of India for any previous year only if the entire
control and management of affairs of such company, during the
relevant previous year is situated in India.
For example :
i.A company is incorporated in India but has head office in
Dacca,
ii.A company is incorporated in Bangladesh but has head office
in Kolkata 
In first case it is incorporated in India and situation of its head
office is immaterial, as such it is resident company. In second
case though it is incorporated outside India but its control and
management is wholly situated in India hence it is resident
company.
(B) Non Resident Company [Section 2(30)]
A Company will be a non-resident in any previous year if:
1.it is not an Indian company and
2.its place of effective management, in that year, is not in India.
It means a foreign company whose control and management is
situated wholly or partially outside India will be a non-resident
company. For example an American company holds 8 meetings
in India out of total of 12 meetings held during the previous
year such company will be non-resident for income tax
purposes for such previous year.