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Meaning of Company and understanding Company Law

A company is an association of two or more persons in furtherance of a common business objective. A company is a “Separate Legal Entity” having its own identity distinct from its members. As a legal entity, a company can own a property in its own name, can sue and be sued in its own name and also enjoys perpetual succession, among others. However, since a Company, unlike a human being, is an artificial person, it can only act through its agents, namely, the Board of Directors.

The process of legally declaring a corporate entity as a separate legal entity distinct from its members is known as ‘Incorporation of a Company’. An association of persons in order to initiate its business as a company has to get a certificate of incorporation from the Registrar of Companies (ROC).

The law governing companies in India is the Companies Act, 2013, which was enacted for the first time in 1913. Later on, major amendments were introduced in the years 1960, 1962, 1963, 1964, 1965, 1966, 1967, 1969, 1974, 1977, 1985, 1988 and 1991. In 2008 Companies Bill was presented which is now the Companies Act, 2013, which is in force till now.

There are 7 types of entities recognized under the Indian Law namely Private Limited Company, Public Company, Sole Proprietorship, One Person Company, Partnership, Limited Liability Partnership (LLP). The type of entities are described in detail below.

Private Limited Company

A Private Limited Company is a company whose ownership is private. A private limited company can be formed with a minimum of 2 and maximum of 200 members. It cannot issue a prospectus in the open market nor can it make or accept deposits from the public. The shares in a private company are not freely transferable. According to the Companies Act, 2013, an investor can choose between the following types of a Private Limited Company in India;

  • Company Limited by shares
  • Company Limited by Guarantee
  • Unlimited Company

Public Company

Public Limited Company is a type of company whose securities are traded on a stock exchange. A Public Limited Company can be formed with a minimum of 7 members. There is no restriction on the transferability of  shares. A Public Limited Company requires more public disclosures and compliances from the government as well as other authorities like RBI(Reserve Bank of India), SEBI (Securities and Exchange Board of India) etc.

Sole Proprietorship

The sole proprietorship is the simplest form of business under which one can operate. The sole proprietorship is not a legal entity. The person who is the owner of the business becomes personally liable for the debts of the business. For taxation and legal liability purpose, the owner and the business are one and the same. The proprietorship is not taxed as separate entity.

One Person Company

The concept of One Person Company has been introduced by Companies Act, 2013 enabling a sole proprietor form of business to enter into the corporate framework. This allows a sole investor to form a company alone with limited liability. One Person Company structure is similar to that of a proprietorship concern without the ills generally faced by the proprietors. One of the most important feature of One Person Company is that the risks mitigated are limited to the extent of the value of shares held by such person in the company.

Partnership

The Indian Partnership Act, 1932, Section 4, defined partnership as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. The partnership is an association of two or more persons who have agreed to share the profits of a business which they run together. This business may be carried on by all or any one of them acting for all. The persons who own the partnership business are individually called ‘partners’ and collectively they are called as ‘firm’ or ‘partnership firm’. The name under which partnership business is carried on is called ‘Firm Name’. In a way, the firm is nothing but an abbreviation for partners. Unlike a company, a partnership is not a separate legal entity distinct from its members. It cannot own a property, incur debts or sue any party in its own name. Moreover, the partners of a partnership firm shall be personally and severally liable for the liabilities incurred by the firm.

Registration of Partnership Firm in India

Limited Liability Partnership (LLP)

Limited Liability Partnership Act, 2008 governs the principles of Limited Liability Partnership in India. It is a combination of a company and a partnership firm. Unlike partnership, the liability of the partners in an LLP is limited and no partner shall be held liable for the acts of the other. It is a separate legal entity, having a distinct entity of its own separate from its members. The main disadvantage of an LLP is that it cannot raise capital from public by issue of an IPO unlike a company.

Registration of Private Limited Company

As per Section 2(68) of the Companies Act, 2013, a Private Limited Company can be registered by having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital. The minimum number of the member required to incorporate A Private Limited Company is 2 and the maximum no. of members are 200. These companies are prohibited to raise funds through the issue of prospectus. They are of three types:

  • Company Limited by shares
  • A company limited by guarantee
  • Unlimited company

Registration of Public Limited Company

A Public Limited Company (other than a Public Sector Undertaking) There must be at least seven persons to form a public company. It is of the essence of a public company that its articles do not contain provisions restricting the number of its members or excluding generally the transfer of its shares to the public or prohibiting any invitation to the public to subscribe for its shares or debentures. Only the shares of a public company are capable of being dealt in on a stock exchange.

Conversion of one person company into Private Limited Company

As per the Companies (Incorporation) Rules, 2014, One Person Company has to be compulsorily converted into a private limited company within 6 months of the date of which the threshold limit of the paid-up share capital increase INR 50 lakhs or the last date of relevant period during which its average turnover exceeds INR 2 crores.

For more information on Companies Act, Company law in India and types of legal entities in India please write to us at info@ssrana.com or submit a query.

To know more about incorporation of company in India, Read below

Company Formation in India

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