Different Types of Business

Entities and
COMPANIES ACT, 2013
 So how does it starts...some basics

Some preliminary aspects…

Type of
entity Private?
Sole Public?
Proprietor?
Firm?
Company?
LLP? Type of
y
securit

Family Equity?
Owned Preference?
Business Other
class?
Others???
LLLP
Business Entity(s)
Type Of Business Liability- Absolute Liability- Unlimited Assets Incorporated
Entity

Sole Proprietorship Yes Yes All No

Family Owned Yes Yes All No

Business

Partnership Firms Yes Yes Divided No, it’s a contract

LLP No No Divided Yes

Company No No In name of a Yes

company
Legal entities- Eligible for public offering...
Types of
entities

Sole
Partnership Private Co Public Co LLP
Proprietorship
• No registration • Formed by two • Formed by two • Hybrid between
• Separate Legal
required or more or more persons a company and
Entity
• Unlimited persons for for profits a partnership.
profits • Can sue and be
Liability • No partnership • Registered &
sued in its own
• Used for small • No partnership name consisting of formed under
business consisting of more than 20 LLP Act/Rules
more than 20 • The liability of persons shall be
• No separate the • Separate legal
persons shall formed entity – separate
legal entity be formed (10 shareholders
are limited to • Registration from its partners
for a banking
the extent of optional • Have more
company)
their • Unlimited flexibility than a
• Registration shareholding company – less
liability
optional compliance
• It can hold • No separate
• Unlimited property in its requirements
legal entity than
liability own name its owners
• No separate • One Person
legal entity Company
(OPC) Conversion of LLP
Conversion of into
4 Public Co
Pvt Co to Public ELIGIBLE FOR
Co LISTING
Distinction between Company and Partnership
 The principle points of distinction between a company and a partnership firm are as follows:
 (1) A company is a distinct legal person. A partnership firm is not distinct from the several persons who form the
partnership.
 (2) In a partnership, the property of the firm is the property of the individuals comprising it. In a company, it belongs to
the company and not to the individuals who are its members.
 (3) Creditors of a partnership firm are creditors of individual partners and a decree against the firm can be executed
against the partners jointly and severally. The creditors of a company can proceed only against the company and not
against its members.
 (4) Partners are the agents of the firm, but members of a company are not its agents. A partner can dispose of the
property and incur liabilities as long as he acts in the course of the firm’s business. A member of a company has no
such power.
 (5) A partner cannot contract with his firm, whereas a member of a company can.
 (6) A partner cannot transfer his share and make the transferee a member of the firm without the consent of the other
partners, whereas a company’s share can ordinarily be transferred.
Cont…
 (7) Restrictions on a partner’s authority contained in the partnership contract do not bind outsiders
whereas such restrictions incorporated in the Articles are effective, because the public are bound to
acquaint themselves with them.
 (8) A partner’s liability is always unlimited whereas that of shareholder may be limited either by shares or
a guarantee.
 (9) A company has perpetual succession, i.e. the death or insolvency of a shareholder or all of them does
not affect the life of the company, whereas the death or insolvency of a partner dissolves the firm, unless
otherwise provided.
 (10) A company may have any number of members except in the case of a private company which cannot
have more than 200 members (excluding past and present employee members). In a public company
there must not be less than seven persons in a private company not less than two. Further, a new
concept of one person company has been introduced which may be incorporated with only one person.
 (11) A company is required to have its accounts audited annually by a chartered accountant, whereas the
accounts of a firm are audited at the discretion of the partners.
Distinction between company and Limited Liability Partnership (LLP)

 LLP is an alternative corporate business form that gives the benefits of limited liability of a company and
the flexibility of a partnership.
 LLP can continue its existence irrespective of changes in partners.
 It is capable of entering into contracts and holding property in its own name.
 LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to
their agreed contribution in the LLP.
 Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus
individual partners are shielded from joint liability created by another partner’s wrongful business decisions
or misconduct.
 Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners
or between the partners and the LLP as the case may be.
 The LLP, however, is not relieved of the liability for its other obligations as a separate entity.
 Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is
called a hybrid between a company and a partnership.
 LLP is a body corporate and a legal entity separate from its partners, having perpetual succession.
 LLP form is a form of business model which :
(i) is organized and operates on the basis of an agreement.
(ii) provides flexibility without imposing detailed legal and procedural requirements
(iii) enables professional/technical expertise and initiative to combine with financial risk taking capacity in an
innovative and efficient manner.
 A basic difference between an LLP and a company lies in that the internal governance structure of a company
is regulated by statute (i.e. Companies Act) whereas for an LLP it would be by a contractual agreement
between partners.
 The management-ownership divide inherent in a company is not there in a limited liability partnership.
 LLP have more flexibility as compared to a company.
 LLP have lesser compliance requirements as compared to a company.
1. The word ‘company’ is derived from the Latin word (Com=with or together;
panis =bread), and it originally referred to an association of persons who took
their meals together.
2. In terms of the Companies Act, 2013 (Act No. 18 of 2013) a “company” means
a company incorporated under this Act or under any previous company law
[Section 2(20)].
3. In common law, a company is a “legal person” or “legal entity” separate from,
and capable of surviving beyond the lives of its members.
4. However, an association formed not for profit also acquires a corporate
character and falls within the meaning of a company by reason of a licence issued
under Section 8(1) of the Act.
A company is a Voluntary Association for
profit with capital Divisible into transferable
shares with limited liability having a distinct
corporate entity and a common seal with
perpetual succession
COMPANIES ACT,
2013

470 Sections 29 Chapters

New
7 Schedules
33 Definitions
Facts about the
Act

Substantial Part of the Act in form of Rules (418 places it has prescribed word)

11
COMPANIES ACT, 2013

Contemporary

Business Easy
Oriented Understandability

Self Regulatory Preventive

Investor
Adaptable
Protective

12
Characteristic features of a company:

1. Incorporated association
2. Artificial person (A company cannot be a citizen, yet it has nationality, domicile and residence)
3. Separate legal entity
4. Limited liability
5. Separate property
6. Transferability of shares
7. Perpetual existence
8. Common seal
9. Company may sue and be sued in its own name
Explanation

 Incorporated association- The incorporation of a company refers to the legal process

that is used to form a corporate entity or a company. An incorporated company is a
separate legal entity on its own, recognized by the law. These corporations can be
identified with terms like 'Inc' or 'Limited' in their names.
 Artificial person- a company is an entity created by law and given certain legal rights and
duties of a human being. It can be real or imaginary and for the purpose of legal reasoning
is treated more or less as a human being.
Separate Legal Entity:

 Under Incorporation law, a company becomes a separate legal entity as compared to its
members.
 The company is distinct and different from its members in law. It has its own seal and its
own name, its assets and liabilities are separate and distinct from those of its members.
 It is capable of owning property, incurring debt, and borrowing money, employing people,
having a bank account, entering into contracts and suing and being sued separately.
 Doctrine of lifting of corporate veil

 Separate Corporate Entity  (Independent corporate existence)- the outstanding feature of a company is its independent
corporate existence.
 By registration under the Companies Act, a company becomes vested with corporate personality, which is independent
of, and distinct from its members. A company is a legal person. The decision of the House of Lords in Salomon v.
Salomon & Co. Ltd- is an authority on this principle:
      One S incorporated a company to take over his personal business of manufacturing shoes and boots. The seven
subscribers to the memorandum were all his family members, each taking only one share. The Board of Directors
composed of S as managing director and his four sons. The business was transferred to the company at 40,000 pounds. S
took 20,000 shares of 1 pound each n debentures worth 10,000 pounds. Within a year the company came to be wound up
and the state if affairs was like this: Assets- 6,000 pounds; Liabilities- Debenture creditors-10,000 pounds, Unsecured
creditors- 7,000 pounds.
      It was argued on behalf of the unsecured creditors that, though the co was incorporated, it never had an independent
existence. It was S himself trading under another name, but the House of Lords held Salomon & Co. Ltd. must be
regarded as a separate person from S.
 Lifting/Piercing of Corporate Veil

 Where the corporate veil has been used for commission of fraud or improper conduct. In such a situation, Courts
have lifted the veil and looked at the realities of the situation.
 Where a corporate facade is really only an agency instrumentality.
 Where the conduct conflicts with public policy, courts lifted the corporate veil for protecting the public policy. In
Daimler Co. Ltd. v. Continental Tyre & Rubber Co.it was held that a company will be regarded as having enemy
character, if the persons having de facto control of its affairs are resident in an enemy country or, wherever they
may be, are acting under instructions from or on behalf of the enemy.
 Where it was found that the sole purpose for which the company was formed was to evade taxes the Court will
ignore the concept of separate entity and make the individuals concerned liable to pay the taxes which they would
have paid but for the formation of the company. Sir Dinshaw Manakjee Petit
 Cont…

 Separate property –A company is a distinct legal entity. The company's property is its own. A
member cannot claim to be owner of the company's property during the existence of the
company.
 Transferability of shares – as private company has no access to public funds, there is a strict
restriction on transferability of a private company. However shares in public company are freely
transferable, subject to certain conditions, such that no share-holder is permanently or necessarily
wedded to a company.
 When a member transfers his shares to another person, the transferee steps into the shoes of the
transferor and acquires all the rights of the transferor in respect of those shares.
 Cont…

 Perpetual Succession:
A company does not cease to exist unless it is specifically wound up or the task for which it was formed has been
completed. Membership of a company may keep on changing from time to time but that does not affect life of the
company. Insolvency or Death of member does not affect the existence of the company.

Separate Property:
A company is a distinct legal entity. The company's property is its own. A member cannot claim to be owner of the
company's property during the existence of the company.

Transferability of Shares:
Shares in a company are freely transferable, subject to certain conditions, such that no share-holder is permanently or
necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the
shoes of the transferor and acquires all the rights of the transferor in respect of those shares.
 Cont….
 Common Seal:
A company is an artificial person and does not have a physical presence. Thus, it acts through its Board of Directors for
carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company.
The common seal is the official signature of the company. The name of the company must be engraved on the common
seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal
force.

Capacity to sue and being sued:

A company can sue or be sued in its own name as distinct from its members.

Separate Management:
A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are
simply the holders of the shares in the company and need not be necessarily the managers of the company.
 Lee Vs Lee Air Farming Ltd

One Share-One Vote:

The principle of voting in a company is one share-one vote i.e. if a person has 10 shares, he has 10 votes in the company.
This is in direct distinction to the voting principle of a co-operative society where the "One Member - One Vote"
principle applies i.e. irrespective of the number of shares held, one member has only one vote.
Lifting of Corporate Veil

 Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43

 Daimler Co. Ltd. Vs Continental Tyre & Rubber Co.,
 Re. Sir Dinshaw Manakjee Petit
 Vodafone Ltd Vs Income Tax Department
Transfer Pricing
Arms Length
VARIOUS TYPES OF COMPANIES ENTITIES UNDER THE ACT

Entity Structure Recognized under the law

Access to Others
Members Control Liability Size Activity
Capital

Holding Small Dormant Nidhi

Listed OPC Limited Unlimited
Company Company Company Company

Subsidiary Foreign
Unlisted Private Shares
Company Company
company

Producer
Public Associate Company
Guarantee
company Company
Government
Company

22
Classification of Companies

 On the basis of Liability- Limited and unlimited, unlimited

 On the basis of incorporation-
 Chartered,
 Statutory Company
 Registered
 Foreign Company
 Producer Company
 Classification of Companies – explained

 The Companies Act, 2013 classifies companies on the basis of their number of members into One Person Company, private
company and public company.
 As stated above, a private company requires a minimum of 2 members. In other words, a One Person Company is a kind of
private company having only one member.
 As per section 2(62) of the Companies Act, 2013, “One Person Company” means a company which has only one person as
a member.
 Section 3(1)(c) lays down that a company may be formed for any lawful purpose by one person, where the company to be
formed is to be One Person Company that is to say, a private company. In other words, one person company is a kind of
private company.
 A One person company shall have a minimum of one director. Therefore, a One Person Company will be registered as a
private company with one member and one director.
 By virture of section 3(2), an OPC may be formed either as a company limited by shares or a company limited by
guarantee; or an unlimited liability company.
SMALL COMPANY
As per section 2(85) ‘‘small company’’ means a company, other than a public company,—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as
may be prescribed which shall not be more than five crore rupees; or
(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees o
such higher amount as may be prescribed which shall not be more than twenty crore rupees:
Provided that nothing in this definition shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
Salient features of a small company
 Only a private company can be classified as a small company.
 Holding company, subsidiary company, charitable company and company governed by any Special Act cannot
be classified as a small company.
 For a small company, either the paid up capital should not exceed Rupees fifty lakhs or the turnover as per last
statement of profit & loss should not exceed rupees two crores.
 The status of a company as “Small Company” may change from year to year. Thus the benefits which are
available during a particular year may stand withdrawn in the next year and become available again in the
subsequent year.
 Private Company

Sec 2(68) “private company” means a company which by its articles,—

(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two
hundred

a. Sony TV Pvt Ltd, Flipkart Pvt Ltd, Ola Pvt Ltd, Snapdeal Pvt Ltd, Carat Lane Pvt Ltd, Zoom Car Pvt
Ltd are all  private companies.
b. MakeMyTrip and Infibeam are among the first Indian start-ups to have gone public.
c. InterGlobe Aviation Ltd started its operations in India as a pvt company.
d. Tata Sons Pvt Ltd- Tata Sons Private Limited is the principal holding company of the Tata group
PUBLIC COMPANY
 Section 2(71), a public company means a company which:
 is not a private company;
 Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to
be public company for the purposes of this Act even where such subsidiary company continues to be a private
company in its articles
 As per section 3 (1) (a), a public company may be formed for any lawful purpose by seven or more persons, by
subscribing their names or his name to a memorandum and complying with the requirements of this Act in
respect of registration.
Examples of Public Companies
 Bharat Heavy Electricals Ltd.
 Bharat Petroleum Corporation Ltd.
 Coal India Ltd.
 Hindustan Petroleum Corporation Ltd.
 Indian Oil Corporation Ltd.
 NTPC Ltd. ...
 Oil and Natural Gas Corporation Ltd (ONGC )
 Air India Ltd
 Infosys Ltd
 Wipro Ltd
 Punjab National Bank.
Basis for Comparison Public Company Private Company

Meaning Public Company is owned and traded publicly on the stock A Private Company is owned and traded privately.
exchange.

Use of Suffix Limited can use after the public company name (Example- Private Limited can be used after the private company name.
ABC Limited). (Example- ABC Private Limited).

Min. Members Minimum 7 members must be required to form a public Minimum 2 members must be required to form a private company.
company.

Max Members There is no maximum limit of the member in public The maximum limit of the member in a private company is 200.
company

Min Directors At least 3 directors are required in a public company. At least 2 directors are required in a Private company.

Start of Business Certificate of incorporation and commencement of business The only certification of incorporation is required to start the
is required to start the business. business.

Public Subscription of Shares Public subscription of share is allowed in public companies. Public subscription of share is not allowed in private companies.

Quorum at AGM 5 members should be present personally at AGM. 2 members should be present personally at’ AGM.

Statutory Meeting The statutory meeting is compulsory. The statutory meeting is Optional.

Issue of Prospectus It is their mandate to issue the prospectus. It is not required in a private company.

Shares Transferability Share can be transferred freely in public companies. Transfer of share is restricted in private companies.
As per section 3(2), a company formed under this Act may be either

(a)a company limited by shares; or

(b) a company limited by guarantee or
(c) an unlimited company.

The term 'Limited Company' means a company limited by shares or by guarantee.

The liability of the members, in the case of a limited company, may be limited with reference
to the nominal value of the shares, respectively held by them or to the amount which they
have respectively guaranteed to contribute in the event of winding up of the company.

Accordingly, a limited company can be further classified into:

(b) Company limited by shares

(c) (b) Company limited by guarantee
Unlimited company
 As per section 2(92), “unlimited company” means a company not having any limit on the liability of its
members.
 Thus, the maximum liability of the member of such a company, in the event of its being wound up, might
stretch up to the full extent of their assets to meet the obligations of the company by contributing to its assets.
 However, the members of an unlimited company are not liable directly to the creditors of the company, as in
the case of partners of a firm.
 The liability of the members is only towards the company and in the event of its being wound up only the
Liquidator can ask the members to contribute to the assets of the company which will be used in the discharge
of the debts of the company.
 An unlimited company may or may not have share capital.
Government Company
 Section 2(45) defines a “Government Company” as any company in which not less than fifty one per cent. Of
the paid-up share capital is held by the Central Government, or by any State Government or Governments, or
partly by the Central Government and partly by one or more State Governments, and includes a company
which is a subsidiary company of such a Government company.
 Notwithstanding all the pervasive control of the Government, the Government company is neither a
Government department nor a Government establishment
Foreign Company
 As per section 2(42), “foreign company” means any company or body corporate incorporated outside India
which—
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode;
and
(b) conducts any business activity in India in any other manner
 Sections 379 to 393 of the Act deal with such companies.
HOLDING, SUBSIDIARY COMPANIES AND ASSOCIATE
COMPANIES
 On the basis of control companies can be classified into holding, subsidiary and associate companies.
 Holding Company - As per Section 2 (46), holding company, in relation to one or more other companies,
means a company of which such companies are subsidiary companies.
 Subsidiary Company – As Section 2 (87) provides that subsidiary company or subsidiary, in relation to any
other company (that is to say the holding company), means a company in which the holding company—
 (i) controls the composition of the Board of Directors; or
 (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or
more of its subsidiary companies:
 Provided that such class or classes of holding companies, shall not have layers of subsidiaries beyond the
prescribed limit.
Associate Company
 As per Section 2(6), “Associate company”, in relation to another company, means a company in which that
other company has a significant influence, but which is not a subsidiary company of the company having such
influence and includes a joint venture company.
 Explanation to section 2(6) provides that “significant influence” means control of at least twenty per cent. Of
total share capital, or of business decisions under an agreement.
 To add more governance and transparency in the working of the company, the concept of associate company
has been introduced. It will provide a more rational and objective framework of associate relationship between
the companies.
INVESTMENT COMPANIES
An investment company is a company, the principal business of which
consists in acquiring, holding and dealing in shares and securities.
The word ‘investment’, no doubt, suggests only the acquisition and holding
of shares and securities and thereby earning income by way of interest or
dividend etc.
But investment companies in actual practice earn their income not only
through the acquisition and holding but also by dealing in shares and
securities i.e. to buy with a view to sell later on at higher prices and to sell
with a view to buy later on at lower prices.
PROMOTER
 Section 2 (69) of the Companies Act, 2013 defines the term ‘promoter’ as under:-
“Promoter” means a person—
(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in
section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or
otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is
accustomed to act.
Provided that sub-clause (c) shall not apply to a person who is acting merely in a professional capacity.
By virtue of above definition, persons in accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act are also treated as promoters.
SEBI On definition of a Promoter
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, “promoter” includes:
(i) the person or persons who are in control of the issuer;
(ii) the person or persons who are instrumental in the formulation of a plan or programme pursuant to which
specified securities are offered to public;
(iii) the person or persons named in the offer document as promoters.
Legislative Framework …

Companies Act, 2013

(notified provisions ) and
from the rest Companies
Act 1956

SEBI* Act &

ICDR
Principal Securities Contracts
Regulations** legislation (Regln.) Act/Rules

Applicable to  Regulates Stock

following issues: exchanges and

 Public issue Intermediaries

Right issue  Requirement for listing

Preferential issue Provisions relating to

Listing
Bonus issues norms/Guidelines public offering and

QIP placement of NSE/BSE minimum public offer

Conditions precedent for
listing
* SEBI – Securities Exchange Board of India

**ICDR stands for Securities and Exchange Board of India (Issue of Capital &Disclosure Requirements)
regulations, 2009
Members and shareholders

2(55) “member”, in relation to a company, means—

(i) the subscriber to the memorandum of the company who shall be
deemed to have agreed to become member of the company, and on
its registration, shall be entered as member in its register of
members;
(ii) every other person who agrees in writing to become a member
of the company and whose name is entered in the register of
members of the company;
(iii) every person holding shares of the company and whose name is
entered as a beneficial owner in the records of a depository;
How to become a member

 By subscribing to memorandum
 Qualification Shares
 By allotment
 By Transfer
 By Transmission