MBA

1. THE BUSINESS SCHOOL
UNIVERSITY OF JAMMU
REPORT ON - “CLASSIFICATION OF COMPANIES”
SUBMITTED BY:
RADHIKA GUPTA
ROLL NO – 32- Mba -14

2. A company can be defined as an "artificial person", invisible, intangible, created by or under Law, with a
discrete legal entity , perpetual succession and a common seal. It is not affected by the death, insanity or
insolvency of an individual member.
Section 3 (1) (i) of the Companies Act, 1956 defines a company as “a companyformed and registered under
this Act or an existing company”. Section 3(1) (ii) Of the act states that “an existing company means a
company formed and registered under any of the previous companies laws”.
Classification of companies -Companies under the Companies Act, 1956 may be classified on various
grounds as under:
Business activities undertaken:
 Manufacturing - It is the production of goods for use or sale using labor and machines, tools,
chemical and biological processing or formulation.
 Services-It is a business that sells services directly to consumers or other businesses. Services are
intangible in nature, only appearing when required by the consumer, which makes the nature of this
type of business very different from that of others. Some examples include the hospitality sector,
consulting, appliance repair, computer support, health care, utilities, business services, real estate,
legal services, and education.
 Non Banking Organisation- These are financial institutions that provide banking services without
meeting the legal definition of a bank, i.e. one that does not hold a banking license.
 Banking Organisation- A banking organisation is an association of banks, bankers, or central
banks established to achieve certain goals or objectives that are of benefit to members, as well as the
banking community and society
 Non Profit Making (Section-25)- It is an organization that uses surplus revenues to achieve its
goals rather than distributing them as profit or dividends
 Producer (Section 581)- It is a company where there are ten or more individuals, and each of them
is a producer in any two or more producer institutions.
Types of companies :
 Incorporated Companies: These are the association of persons who contribute money to a

3. common stock known as capital of the company. They have existence independent of its members.
 Unincorporated Companies: These are the mere collection of persons who have agreed to join in
partnership to run a business and share the profits.
A . On the basis of incorporation
 Chartered Companies: The ‘Crown’ in the exercise of the royal prerogative has power to create a
corporation by the grant of a charter to persons assenting to be incorporated. Such companies or
corporations are known as chartered companies. These are incorporated under a special charter by a
monarch. The East India Company and The Bank of England are examples of chartered
incorporated in England. The powers and nature of business of a chartered company are defined by
the charter which incorporates it. A chartered company has wide powers. It can deal with its

4. property and bind itself to any contracts that any ordinary person can. In case the company deviates
from its business as prescribed by the charted, the Sovereign can annul the latter and close the
company. Such companies do not exist in India.
 Statutory companies: These are the companies which are created by a special Act of the legislature
e.g. RBI, SBI, LIC, etc. These are mostly concerned with public utilities as railways,tramways,gas
and electricity companies and enterprises of national level importance. Such companies do not have
any memorandum or articles of association. They derive their powers from the Acts constituting
them and enjoy certain powers that companies incorporated under the Companies Act have.
Alternations in the powers of such companies can be brought about by legislative amendments.The
provisions of the Companies Act shall apply to these companies also except in so far as provisions
of the Act are inconsistent with those of such Special Acts .These companies are generally formed
to meet social needs and not for the purpose of earning profits.
 Registeredcompanies:These are the companies which are formed and registered under the
Companies Act,1956 .. Such companies come into existence only when they are registered under the
Act and a certificate of incorporation has been issued by the Registrar of Companies. This is the
most popular mode of incorporating a company.
B. On the basis of liabilities of the members and directors:
 Limited Liability Company- It is a flexible form of enterprise that blends elements of partnership
and corporate structures. It is a legal form of company that provides limited liability to its own
 Limited Shares Company- These are those companies in which the capital is divided into shares
and liability of members (share holders) is limited to the extent of face value of shares held by them.
This is the most popular class of company. Where the liability of the members of a company is
limited to the amount unpaid on the shares ,it is known as company limited by shares. If the shares
are fully paid, the liability of the members holding such shares is nil. It may be a public or a private

5. company. These types of companies have a share capital and the liability of each member or the
company is limited by the Memorandum to the extent of face value of share subscribed by him. In
other words, during the existence of the company or in the event of winding up, a member can be
called upon to pay the amount remaining unpaid on the shares subscribed by him. Such a company
is called company limited by shares. A company limited by shares may be a public company or
a private company. These are the most popular types of companies.
 Limited By Guarantee- Where the liability of the members of a company is limited to a fixed
amount which the members undertake to contribute to the assets of a company in the event of its
being wound up, the company is called a company limited by guarantee. These types of companies
may or may not have a share capital. Each member promises to pay a fixed sum of money specified
in the Memorandum in the event of liquidation of the company for payment of the debts and
liabilities of the company [Sec 13(3)] This amount promised by him is called ‘Guarantee’. The
Articles of Association of the company state the number of member with which the company is to
be registered [Sec 27 (2)]. Such a company is called a company limited by guarantee. Such
companies depend for their existence on entrance and subscription fees. They may or may not have
a share capital. The liability of the member is limited to the extent of the guarantee and the face
value of the shares subscribed by them, if the company has a share capital. If it has a share capital, it
may be a public company or a private company. The amount of guarantee of each member is in the
nature of reserve capital. This amount cannot be called upon except in the event of winding up of a
company. Non- trading or non-profit companies formed to promote culture, art, science, religion,
commerce, charity, sports etc. are generally formed as companies limited by guarantee.
 Unlimited Liability Company- A company not having any limit on the liability of its members as
in the case of a partnership or sole trading concern is an unlimited company. If such a company
goes into liquidation, the members can be called upon to pay an unlimited amount even from their
private properties to meet the claim of the creditors of the company. Section 12 gives choice to the
promoters to form a company with or without limited liability. A company not having any limit on
the liability of its members is called an ‘unlimited company’ [Sec 12(c)]. An unlimited company
may or may not have a share capital. If it has a share capital it may be a public company or a private
company. If the company has a share capital, the article shall state the amount of share capital with

6. which the company is to be registered [Sec 27 (1)] The articles of an unlimited company shall state
the number of member with which the company is to be registered.
C. On the basis of membership :
 Public-It is a limited liability company that offers its securities (stock/shares, bonds/loans, etc.) for
sale to the general public, typically through a stock exchange, or through market makers operating
in over the counter markets. A public company means a company which-
(a) has a minimum paid-up capital of Rs. 5 lakh or such higher paid-up capital, as may be prescribed;
(b) is a private company which is a subsidiary of a company which is not a private company;
Every public company, existing on the commencement of the Companies Act, 2000, with a paid-up capital
of less than Rs. 5 lakh, within a period of two years from such commencement, enhance its paid-up capital
to Rs. 5 lakh.
 Private - It is a business company owned either by non-governmental organizations or by a
relatively small number of shareholders or company members which does not offer or trade its
company stock (shares) to the general public on the stock market exchanges, but rather the
company's stock is offered, owned and traded or exchanged privately. A company which has a
minimum paid-up capital of Rs 1,00,000 or such higher paid up capital as may be prescribed, and by
its articles
a. Restricts the right to transfer its shares, if any
b. Limits the number of its members to 50.
c. Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company,
d. Prohibits any invitation or acceptance of deposits from persons other than its members, directors or
their relatives.
 Government-It is a legal entity created by a government and controlled by it to serve the larger
public interest, and undertakes commercial activities on behalf of the government. A government
company means any company in which not less than 51% of the paid-up share capital is held by-

7. a) The central government, or
b) Any state government, or governments, or
Partly by central government and partly by one or more state government.It includes a company subsidiary
to a government company. The share capital of a government company may be wholly or partly owned by
the government, but it would not make it the agent of the government . The auditors of the government
company are appointed by the government on the advice of the Comptroller and Auditor General of
India. The Annual Report along with the auditor’s report are placed before both the House of the
parliament. Some of the examples of government companies are - Mahanagar Telephone Corporation Ltd.,
National Thermal Power Corporation Ltd., State Trading Corporation Ltd. Hydroelectric Power
Corporation Ltd. Bharat Heavy Electricals Ltd. Hindustan Machine Tools Ltd. etc.
D. On the basis of location:
 Indian Company -Incorporated in India. These companies are registered in India under the
Companies Act. 1956 and have their registered office in India. Nationality ofthe members in their
case is immaterial
 Foreign Company - Company incorporated out of India but possesses a place of business in India.
It means any company incorporated outside India which has an established place of business in
India.Where a minimum of 50% of the paid up share capital of a foreign company is held by one or
more citizens of India or/and by one or more bodies corporate incorporated in India, whether singly
or jointly, such company shall comply with such provisions as may be prescribed as if it were an
Indian company.
E. On the basis of control over the management:
 Holding Company- A holding company is a company or firm that owns other companies
outstanding stock. The term usually refers to a company which does not produce goods or services
itself rather its purpose is to own shares of other companies. A company is known as the holding
company of another company if it has the control over that other company. A company is deemed
to be the holding company of another if, but only if, that other is its subsidiary. A company is

8. known as the holding companyof another company if it has control over the other company.
A company may become a holding company of another company in either of the following three ways :-
a) by holding more than fifty per cent of the normal value of issued equity capital of the company; or
b) By holding more than fifty per cent of its voting rights; or
c) by securing to itself the right to appoint, the majority of the directors of the other company , directly or
indirectly.
The other company in such a case is known as a “Subsidiary company”. Though the two companies remain
separate legal entities, yet the affairs of both the companies are managed and controlled by the holding
company. A holding company may have any number of subsidiaries. The annual accounts of the holding
company are required to disclose full information about the subsidiaries.
 Subsidiary Company -Is a company that is completely or partly owned and partly or wholly
controlled by another company that owns more than half of the subsidiary's stock. A company is
known as a subsidiary of another company when control is exercised by the holding company over
the former called a subsidiary company. A company is know as a subsidiary of another company
when its control is exercised by the latter (called holding company) over the (25) former called a
subsidiary company. Where a company (company S) is subsidiary of another company (say
Company H), the former (Company S) becomes the subsidiary of the controlling company
(company H).
SUMMARY:
Company may be defined as group of persons associated together to achieve some common
objective. A company formed and registered under the Companies Act has certain special
features, which reveal the nature of a company. These characteristics are also called he
advantages of a company because as compared with other business organizations, these are in
fact, beneficial for a company. Companies can be classified into five categories according to the
mode of incorporation on the basis of number of members, on the basis of control, on the basis of
ownership and on the basis of nationality of the company