Quick Summary
- A company is a legal entity created and established to conduct business activities.
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Classification of companies includes Liability protection, Tax implications and Management structure.
- 4 different types of companies are Sole Proprietorship, Partnerships, Limited Liability Company and Corporation.
Table of Contents
A company is a legal entity created and established to conduct business activities. Shareholders own it as a form of business organization, and directors manage it. There are several types of companies in India, and choosing the right type of company is crucial as it determines the legal and financial obligations of the company, along with tax implications.
India’s corporate law recognizes various types of companies, such as sole proprietorship, partnership, limited liability partnership (LLP), private limited company, and public limited company. Each types of companies have its unique features and legal requirements, making it imperative for entrepreneurs to select the most suitable one for their business needs.
For instance, a sole proprietorship is easy to set up and has fewer legal requirements. However, the owner is personally liable for any debts or legal issues. On the other hand, an LLP provides limited liability protection to its owners, making it a popular choice for small business owners who want to protect their personal assets.
Therefore, it is essential to understand the different types of companies in India and their characteristics to make an informed decision about the type of company to establish. This guide will provide an overview of the various types of companies in India, their features, and their legal obligations.
How a Company Works?
The company is essentially an artificial person—also known as corporate personhood—in that it exists independently of the people who own, manage, and support its activities. Types of Companies are often created to generate a profit from their business activity, but some may be structured as nonprofit charity. Each country has its own hierarchy of firm and corporate structures, yet they have many similarities.
Pros and Cons of Starting a Company
Pros:
- Income diversification
- Creative freedom
- Flexibility
- Leaving a legacy
- Job creation
Cons:
- Higher financial risk
- Long hours.
- Health hazards from stress
- Responsibility for workers
- Regulation and taxation issues
Let’s Understand the Types of Companies
The following are some of the most common types of companies. Each type of company has its own advantages and disadvantages. Hence, it’s important to understand every type to choose the best structure for your business.
| Company Category | Description |
| Sole Proprietorship | Sole Proprietorship A business owned and run by one individual entitled to all profits and responsible for all debts. |
| Partnership | A business owned by two or more individuals who share the profits and losses of the business according to the terms of the partnership agreement. |
| Limited Liability Company (LLC) | A hybrid type of legal structure that combines the simplicity of a sole proprietorship or partnership with the liability protection of a corporation. |
| Corporation | A separate legal entity owned by shareholders who have limited liability for the company’s debts and losses. The corporation has a perpetual existence and can raise capital by selling stock. |
Classification of Companies-Types of companies
Choosing the right type of company for a business is important. A wrong decision affects various aspects, such as:
- Liability Protection
- Tax Implications
- Management Structure
For example, a small business owner who wants complete control over their business and doesn’t want to share profits or losses with anyone may choose to form a sole proprietorship. On the other hand, a group of individuals who want to share profits and losses equally may choose to form a partnership. A group of people who want limited liability may choose to incorporate a company.
1. Companies Based on Liabilities
Companies can be classified based on their liabilities. It refers to the amount of debt they owe to creditors. The different kinds of companies based on liabilities are:
i) Company Limited by Shares
A company limited by shares is the most commonly formed type of company. Here, the liability of shareholders is limited to the amount unpaid on their shares. Simply put, the shareholder’s personal assets are not at risk if the company becomes insolvent.
The company’s capital is divided into shares. So, the shareholders’ liability is limited to the amount they have invested in the company’s shares.
For example, if a shareholder has purchased 1000 shares of Rs. 10 each, their liability will only be limited to Rs. 10,000.
ii) Company Limited by Guarantee
The members, in a company limited by guarantee, guarantee the company’s debts. These members guarantee to pay a specific amount towards the company’s debts in the event of liquidation.
These companies do not have a share capital, and members are not considered shareholders. Instead, members guarantee to contribute a certain amount of money towards the company’s debts.
For example, if a company has 10 members, and each member has provided a guarantee of Rs. 10,000, then the total guarantee will be Rs. 1,00,000.
iii) Unlimited Company
In an unlimited company, there is no limit to the liability of the members. It means that the member’s assets are at risk if the company becomes insolvent. So, they are liable to pay the company’s debts with their personal wealth.
These companies are not very common, as they pose a higher risk to the members. For example, if an unlimited company has two members and the company has a debt of Rs. 10 lakhs. So, the members will have to pay the debt in proportion to their shareholding in the company.
2. Companies Based on Members–Types of companies
Companies can also be classified based on the number of members or owners. The different types of companies based on members are:
i) Sole Proprietorship
A single person with complete control over the business owns this type of company. The owner is also responsible for all profits and losses of the business.
ii) Partnership
This type of company is owned by two or more individuals who share the profits and losses of the business. Partners have equal control over the business, and decision-making is shared.
iii) Limited Liability Partnership (LLP)
Two or more partners with limited liability protection own this type of company. Partners have equal control over the business, and decision-making is shared.
iv) Limited Liability Company (LLC)
One or more members with limited liability protection own and operate this type of company. Members have equal control over the business, and decision-making is shared.
v) Private Limited Company (Pvt. Ltd.)
A group of shareholders, numbering a minimum of 2 and a maximum of 200, owns this type of company. The shareholders have limited liability protection, and the shares cannot be publicly traded.
vi) Public Limited Company (Ltd.)
A large number of shareholders, with a minimum of 7 and no maximum limit, own this type of company. The shares of a public limited company can be publicly traded on the stock exchange.
3. Companies Based on Control
This refers to who holds the power to make decisions and manage the company’s affairs. Based on the management’s level of control over the company, the two main types of companies are:
i) Holding Company
A holding company is a company that does not engage in any business activities of its own but owns the majority of shares of one or more other companies. The holding company has control over its subsidiary companies through its shareholding.
For example, Berkshire Hathaway is a holding company that owns multiple subsidiary companies. These subsidiaries include GEICO, Duracell, and Fruit of the Loom.
ii) Subsidiary Company
A subsidiary company is a company that is controlled by another company, known as the parent company. The parent company holds a majority of shares in the subsidiary company. Thus, giving the parent company the power to make decisions and manage its affairs.
For example, Jaguar Land Rover is a subsidiary of Tata Motors, a multinational automotive corporation based in India.
4. Other Types of Companies
Apart from the above-mentioned types of companies, there are also several other types of companies. Some of them are:
i) Joint Venture
A joint venture is a different business arrangement. In this, two or more parties pool their resources and expertise to achieve a specific goal or complete a specific project. The parties involved share profits and losses equally.
For example, Sony Ericsson was a joint venture between Sony Corporation and Ericsson, which produced mobile phones.
ii) Franchise
A franchise is a business model in which an individual or a company (the franchisee) is granted. The franchise is the right to use the brand name, products, and services of an established company (the franchisor) in exchange for a fee. The franchise business operates under the guidelines and regulations set by the franchisor. For example, McDonald’s has a franchise-based company.
iii) Non-Profit Company
A non-profit company is a type of company that is formed for charitable or non-profit purposes. It is also known as a Section 8 company in India. The main objective of a non-profit company is to promote:
- Science
- Art
- Commerce
- Religion
- Charity or any other useful purpose
These companies are not formed to make a profit. Instead, they serve society by providing goods and services at affordable prices. Examples of non-profit companies include NGOs, charities, educational institutions, hospitals, etc.
iv) Government Company
A government company is a type of company that the government wholly or partly owns. The majority of shares in a government company are held by the central or state government. These companies are formed to carry out activities that are of public interest and benefit.
v) Foreign Company
These companies are incorporated outside India but carry out business activities in India. These companies are required to register themselves with the Registrar of Companies (ROC) in India. Moreover, they have to comply with the laws and regulations of the country.
For instance, Amazon is a multinational e-commerce company that is registered in the USA. But Amazon also operates in India through its subsidiary, Amazon India.
vi) Producer Company
A producer company is a company formed by a group of farmers, artisans, or small-scale industries. These types of companies are formed to carry out agricultural or related activities.
The Ministry of Corporate Affairs governs these companies, which are registered under the Companies Act 2013.
The main objective is to:
- Improve the income and livelihoods of its members
- Providing its member’s access to credit, technology, and markets.
For instance, a group of farmers in a village can form a producer company to cultivate and sell crops collectively. The company can provide them with access to better seeds, fertilizers, and pesticides. It can also help them raise funds through equity or debt and give their members a share of the profits.
Stepwise Guide: Learn how to register a company
Takeaway
Knowing the different types of companies is essential. The type of company can affect legal obligations, taxation, management, liability, and other factors. Thus, before choosing a company type, one needs to consider various factors such as:
- Business objectives,
- Financing,
- Legal and tax implications,
- Management structure,
- Risk management,
- The number of members or shareholders, etc.
Only if you are well-versed in the fundamentals, you will be able to make the right business choice and earn easily. Just like earning up to INR 1 Lakh per month from Chegg.
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Frequently Asked Questions(FAQs)
How many types of companies are there?
There are 6 primary types of companies:
1. Private Limited Company
2. Public Company
3. Sole Proprietorship
4. One-Person Company
5. Partnership
6. Limited Liability Partnership (LLP).
What are the 4 main types of companies?
The 4 main types of companies are Sole Proprietorship, Partnerships, Limited Liability Company and Corporations.
What are a company and its types?
LLCs are the most commonly used company structure. They offer liability protection to partners, similar to general partnerships. However, unlike general partnerships, partners’ liability is limited.
Which is better Pvt Ltd or LLP?
A Private Limited Company is an ideal business structure for entrepreneurs seeking external funding and high turnover. On the other hand, if you want to limit your liability while starting a business, a Limited Liability Partnership may be your best option.
What are the 3 main types of business?
3 main types of business are Sole Proprietorship, Partnerships and Corporation.
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