The formation of companies in India is governed by the Companies Act, 2013, which modernized and replaced the earlier Companies Act, 1956. The Act, along with the Companies (Incorporation) Rules, 2014, provides the legal framework for the incorporation, governance, and management of companies in the country. According to Section 3 of the Act, a company may be formed for any lawful purpose by different groups of individuals depending on the nature of the company. Seven or more persons can form a public company, two or more persons can form a private company, and a single individual is permitted to form a One Person Company, which is essentially a type of private limited company.
In each case, the company is created by subscribing to the Memorandum of Association and meeting the prescribed requirements of registration. The law seeks to balance the ease of doing business with adequate regulation, ensuring transparency, accountability, and corporate discipline.
Importance of the Companies Act, 2013
The Companies Act, 2013, serves as the cornerstone of corporate regulation in India. It not only lays down the procedures for company formation but also specifies duties, responsibilities, and rights of stakeholders. The Act emphasizes corporate governance, shareholder protection, and the facilitation of entrepreneurial growth.
One of the notable features of the Act is its adaptability to various forms of business entities. From large-scale public companies to small-scale one-person enterprises, the Act provides a framework suitable for different business needs. In addition, the law incorporates provisions for specialized company structures such as producer companies, not-for-profit entities, and small companies.
Classification of Companies
Companies under the Act can be broadly classified on several bases. The most fundamental classification is into private companies, public companies, and One Person Companies. Beyond this, companies may also be categorized based on their incorporation, liability, and specific purposes.
Classification on the Basis of Incorporation
A company may be incorporated through statutory authority, royal charter, or registration. In India, incorporation is primarily governed through registration with the Registrar of Companies, following the procedures outlined in the Companies Act, 2013.
Classification on the Basis of Liability
Companies may also be categorized depending on the liability of their members. These include companies limited by shares, where liability is restricted to the unpaid amount on shares; companies limited by guarantee, where members contribute a specified amount in case of winding up; and unlimited companies, where members’ liability extends without limit.
Other Special Forms of Companies
Special forms include government companies, foreign companies, small companies, producer companies, and companies incorporated under Section 8 for charitable or not-for-profit purposes. Each of these categories is designed to address unique business objectives and social goals.
Private Companies in India
Among the different types of companies, private companies form the backbone of India’s corporate structure, particularly for small and medium enterprises. As defined under Section 2(68) of the Companies Act, 2013, a private company is one that restricts the right of its members to transfer shares, limits the number of its members to 200, and requires a minimum of two members for incorporation, except in the case of a One Person Company.
Private companies are distinguished by their relatively flexible structure and reduced regulatory burden compared to public companies, making them highly suitable for family businesses, start-ups, and ventures that do not require public investment at the outset.
Key Features of Private Companies
The structure of private companies reflects certain defining characteristics, which make them attractive for entrepreneurs and smaller business entities.
Membership
A private company can be started with a minimum of two members and allows a maximum of 200 members, excluding employees and former employees who continue to be shareholders. This limit ensures that private companies retain their closely held nature, distinguishing them from public companies that have no such restriction.
Limited Liability
The liability of shareholders in a private company is limited to the unpaid value of their shares. If the company incurs losses or debts, members are not required to contribute beyond their shareholding. This feature provides security to entrepreneurs and investors, as personal assets remain unaffected.
Restriction on Transfer of Shares
Private companies restrict the transfer of shares, thereby maintaining control within a closed group of investors or family members. This ensures stability in ownership and shields the company from hostile takeovers or unwanted external influence.
Separate Legal Entity
A private company enjoys a separate legal identity from its members. It can own property, enter into contracts, sue, and be sued in its own name. This independence strengthens its credibility and enables it to engage in business transactions with legal recognition.
Incorporation of Private Companies
The incorporation process for private companies underwent a significant transformation in February 2020 with the introduction of the SPICe+ web form. This system replaced the earlier SPICe form and integrated multiple government services into a single platform, thus simplifying procedures for entrepreneurs.
SPICe+ Web Form
SPICe+ stands for Simplified Proforma for Incorporating Company Electronically Plus. It is a web-based form that consolidates 11 different services provided by central and state government departments. The Ministry of Corporate Affairs, the Ministry of Labour, and the Department of Revenue under the Ministry of Finance, along with state governments such as Maharashtra, Karnataka, and West Bengal, provide services through this platform.
Key Services Offered through SPICe+
SPICe+ provides the following services:
- Reservation of company name
- Incorporation of the company
- Allotment of Director Identification Number
- Issuance of Permanent Account Number and Tax Deduction Account Number
- Registration under Goods and Services Tax, Employees’ Provident Fund Organization, and Employees’ State Insurance Corporation
- Professional Tax registration for certain states
- Mandatory bank account opening for the company
- Registration under Shops and Establishments Act
Supporting Forms
In addition to SPICe+ (INC-32), other forms include e-MOA (INC-33) for the Memorandum of Association, e-AOA (INC-34) for the Articles of Association, and AGILE-PRO-S (INC-35) for registrations relating to tax, employment, and banking.
Steps for Incorporation
- Apply for name approval.
- Prepare incorporation documents, including identity and address proofs.
- Complete SPICe+ form with required information.
- Provide details of PAN and TAN.
- Enter GST and Import Export Code details through AGILE-PRO-S.
- Draft the Memorandum and Articles of Association in electronic or physical form.
- Submit the incorporation forms through the MCA portal.
- Receive the Certificate of Incorporation.
Commencement of Business Requirements
After incorporation, private companies with share capital must comply with Section 10A of the Companies Act, introduced through the Companies (Amendment) Act, 2019. The company cannot commence operations or borrow funds until it files a declaration in Form INC-20A within 180 days of incorporation, confirming that all subscribers have paid for their shares.
The company must also verify its registered office by filing Form INC-22. Non-compliance leads to penalties, including a fine of fifty thousand rupees for the company and one thousand rupees per day on defaulting officers, subject to a cap of one lakh rupees. If the Registrar suspects that the company is inactive, it may initiate proceedings for striking off the company’s name from the register.
Professional Responsibilities During Incorporation
Professionals such as chartered accountants, company secretaries, and cost accountants play an important role in the incorporation process. They must take precautionary measures to ensure accuracy and compliance.
Key responsibilities include:
- Obtaining an engagement letter from subscribers.
- Verifying original records related to the registered office.
- Ensuring clarity and legibility of all attachments.
- Confirming that the registered office is operational for business.
- Handing over all original incorporation documents to the company, along with a declaration.
The Ministry of Corporate Affairs has issued guidelines to prevent omissions, misstatements, or fraudulent submissions. Professionals found guilty of misconduct may face disciplinary action from their institutes or prosecution under the Companies Act.
Privileges and Exemptions for Private Companies
The Companies Act grants certain privileges to private companies to ease compliance and encourage entrepreneurship. For instance, one person companies, small companies, dormant companies, and start-up private companies are not required to prepare a cash flow statement as part of their financial statements.
Further, certain group companies such as holding, subsidiary, associate, or investing companies are not treated as related parties for the purpose of Section 188, which deals with related party transactions. This provides flexibility in intra-group arrangements.
Additionally, Sections 43 and 47 of the Act, dealing with kinds of share capital and voting rights, may not apply to private companies if excluded by their articles of association. These exemptions allow private companies to customize their governance structures to suit their business needs.
Introduction to Public Companies
Public companies form an essential pillar of the Indian corporate framework. They represent entities that raise funds from the public through shareholding and provide opportunities for wide-scale investment. According to Section 2(71) of the Companies Act, 2013, a public company is defined as one that is not a private company and has the minimum prescribed paid-up share capital. A subsidiary of a public company is also treated as a public company, even if it continues to hold features similar to a private company in its articles of association.
Public companies provide an opportunity for large-scale business ventures and are typically structured to accommodate significant investments, transparency in operations, and compliance with rigorous statutory requirements. They are most suitable for industries requiring high capital and public participation.
Key Characteristics of Public Companies
The structure of a public company differs substantially from that of private companies, particularly in terms of governance, ownership, and compliance.
Minimum Membership Requirement
A public company must have at least seven shareholders. There is no maximum limit on the number of members, which allows companies to raise capital by offering shares to the general public.
Directors
Every public company must have a minimum of three directors. The maximum limit is fifteen directors, although this limit may be increased by passing a special resolution. Directors act as representatives of shareholders and are entrusted with the responsibility of policy-making, management, and strategic decision-making.
Limited Liability
Shareholders of public companies enjoy limited liability, restricted to the unpaid value of the shares they hold. Their personal assets remain unaffected even if the company faces financial crises, insolvency, or debt defaults.
Separate Legal Entity
Like other incorporated companies, a public company enjoys a separate legal identity. It can sue or be sued, own property, and enter into contracts in its own name. The legal status remains intact even when ownership changes hands through the transfer of shares.
Free Transferability of Shares
One of the most distinctive features of public companies is the free transferability of shares. Shareholders may transfer their shares without restriction, enabling liquidity and ease of investment. This feature promotes widespread participation from the public and ensures that companies can attract diverse investors.
Access to Capital Markets
Public companies are allowed to raise funds from the public through the issue of shares, debentures, bonds, and other securities. They can also list their securities on stock exchanges, providing transparency, liquidity, and visibility to investors. The ability to tap into public savings makes public companies highly suitable for large-scale projects.
Incorporation of Public Companies
The incorporation of a public company is more complex than that of a private company due to higher compliance requirements. The process is governed by the Companies Act, 2013, along with regulations from the Securities and Exchange Board of India (SEBI) for listed companies.
Minimum Requirements
To form a public company, the following minimum requirements must be fulfilled:
- At least seven shareholders
- At least three directors
- Minimum paid-up capital as prescribed by law
- Filing of incorporation forms and documents with the Registrar of Companies
Documentation and Procedures
The incorporation process follows the same SPICe+ web form procedure applicable to private companies but with additional compliance requirements due to the larger scale of operations. The following documents are essential for incorporation:
- Memorandum of Association specifying the objects of the company
- Articles of Association outlining internal governance
- Proof of identity and address of directors and subscribers
- Registered office address proof
- Declarations from professionals certifying compliance with the Act
Steps in Incorporation
- Apply for company name approval through SPICe+.
- Draft and file the Memorandum and Articles of Association.
- Complete SPICe+ form with information about directors and shareholders.
- Obtain Director Identification Numbers and Digital Signature Certificates.
- Apply for Permanent Account Number and Tax Deduction Account Number.
- File AGILE-PRO-S form for GST, EPFO, ESIC, and professional tax registrations.
- Submit all documents to the Ministry of Corporate Affairs.
- Receive the Certificate of Incorporation upon approval.
Role of Regulatory Authorities
Apart from the Ministry of Corporate Affairs, public companies are also regulated by SEBI if they intend to list their securities on stock exchanges. SEBI ensures that companies comply with disclosure norms, corporate governance standards, and investor protection measures.
Governance of Public Companies
Public companies are bound by strict corporate governance requirements, reflecting their responsibility toward a larger base of investors and stakeholders.
Board of Directors
The Board of Directors is central to the governance structure. It comprises executive directors, non-executive directors, and independent directors. Independent directors are mandatory for listed public companies to ensure transparency and prevent conflicts of interest.
General Meetings
Public companies must conduct annual general meetings where shareholders participate in major decisions such as appointment of directors, approval of financial statements, and declaration of dividends. Extraordinary general meetings may also be convened to address urgent business matters.
Disclosure and Reporting
Public companies must adhere to rigorous disclosure requirements. They are required to prepare annual financial statements, file annual returns with the Registrar of Companies, and maintain statutory registers. Listed companies must also comply with SEBI’s disclosure requirements, including quarterly reports and event-based disclosures.
Corporate Governance Norms
Corporate governance provisions under the Companies Act, 2013, and SEBI’s Listing Obligations and Disclosure Requirements Regulations ensure that public companies maintain transparency, accountability, and ethical conduct. This includes provisions for audit committees, nomination and remuneration committees, and risk management frameworks.
Advantages of Public Companies
Public companies offer several advantages that make them ideal for large-scale and capital-intensive projects.
Access to Large Capital
The ability to raise funds from the general public provides public companies with a significant advantage. Through initial public offerings and subsequent issues, they can mobilize large sums of money for expansion and development.
Enhanced Credibility
The compliance and disclosure requirements of public companies enhance their credibility with investors, lenders, and other stakeholders. Listing on stock exchanges further adds to their reputation and trustworthiness.
Liquidity for Shareholders
Free transferability of shares provides liquidity to investors, allowing them to buy and sell shares easily. This flexibility attracts a wide range of investors, from individuals to institutions.
Opportunities for Growth
With access to substantial capital and wider participation, public companies are better positioned to expand into new markets, invest in research and development, and achieve economies of scale.
Challenges Faced by Public Companies
Despite their advantages, public companies also face several challenges that arise from their size, structure, and responsibilities.
Compliance Burden
The stringent legal and regulatory framework imposes a heavy compliance burden. From maintaining statutory registers to filing detailed reports, public companies must dedicate significant resources to meet legal obligations.
High Costs
Incorporation and operational expenses are higher for public companies. Costs include legal fees, audit expenses, listing fees, and expenses related to maintaining governance standards.
Loss of Control
Since shares are widely held by the public, original promoters may lose significant control over decision-making. Shareholder activism and independent directors also influence governance, which can dilute the powers of promoters.
Disclosure Obligations
The requirement to disclose financial and operational details may expose the company’s strategies to competitors. Excessive transparency sometimes hampers business confidentiality.
Public Companies and Stock Exchanges
Listing on stock exchanges is a crucial step for many public companies, providing them with visibility and access to public funds. However, listing also brings with it a new set of responsibilities and challenges.
Initial Public Offering
A public company may issue shares to the public through an initial public offering. This requires compliance with SEBI regulations, preparation of a detailed prospectus, and approval from stock exchanges.
Benefits of Listing
Listing provides liquidity to shareholders, enhances the company’s market value, and improves its access to institutional investors and international markets. It also boosts public confidence in the company’s operations.
Obligations of Listed Companies
Listed companies must comply with SEBI’s continuous disclosure requirements, such as quarterly financial reporting, related-party transaction disclosures, and event-based filings. They must also adhere to corporate governance norms, including appointment of independent directors and establishment of board committees.
Public Companies and Foreign Investment
Public companies are often preferred by foreign investors due to their transparent governance structures and ability to raise significant capital. The Foreign Exchange Management Act and regulations by the Reserve Bank of India govern foreign direct investment into public companies. Sectors with automatic approval routes attract substantial overseas participation, enabling companies to expand and innovate.
Role of Public Companies in the Economy
Public companies play a vital role in economic development by mobilizing savings from individuals and channeling them into productive investments. They contribute to industrial growth, infrastructure development, and employment generation. Their ability to raise large-scale capital enables them to undertake projects that smaller entities cannot handle. Additionally, public companies promote financial inclusion by providing individuals with an opportunity to participate in wealth creation through equity ownership.
Introduction to One Person Company
The concept of the One Person Company was introduced in India under the Companies Act, 2013 to encourage entrepreneurs who wish to operate in a corporate structure without the need for partners. An OPC allows a single individual to form a private company, thereby combining the benefits of limited liability with complete control over the company’s operations. This model is particularly useful for sole entrepreneurs, professionals, and small-scale business owners who want to scale their activities within the protection of a corporate framework.
The OPC framework provides an option for individuals to shift from the traditional sole proprietorship model to an organized corporate entity. It bridges the gap between sole proprietorships and private companies by offering a simplified structure with reduced compliance requirements.
Salient Features of OPC
The OPC enjoys several unique characteristics that distinguish it from both private and public companies.
Single Member
An OPC can be formed by a single person who is both the shareholder and director of the company. This makes it easier for individuals to start and manage businesses without depending on partners.
Nominee Requirement
Every OPC must nominate a person who would become the member of the company in case of the subscriber’s death or incapacity. The nominee must consent in writing to act in this role, and their details are filed with the Registrar of Companies during incorporation.
Separate Legal Entity
Although an OPC is managed by a single individual, it enjoys a separate legal identity distinct from its owner. It can sue or be sued in its own name, own assets, and enter into contracts independently.
Limited Liability
The liability of the owner is limited to the value of shares subscribed. Personal assets of the owner are protected against liabilities arising out of business losses or debts of the company.
Minimum Compliance
OPCs benefit from simplified compliance norms compared to private and public companies. They are exempt from conducting annual general meetings and board meetings, although they must file annual returns and maintain proper records.
Incorporation of OPC
The process of incorporating an OPC is governed by the same rules as private companies with minor differences relating to membership and nominee requirements.
Requirements for Incorporation
- One shareholder who is an individual and an Indian resident.
- One director, who may also be the sole shareholder.
- One nominee who will assume control in case of the member’s death or incapacity.
- Minimum paid-up capital as prescribed by law.
- A registered office in India.
Documents Required
- Memorandum of Association and Articles of Association.
- Proof of identity and address of the member and nominee.
- Proof of registered office.
- Declaration by a professional confirming compliance with the Act.
Steps of Incorporation
- Apply for company name approval through the SPICe+ form.
- Draft the Memorandum and Articles of Association.
- File SPICe+, e-MOA, e-AOA, and AGILE-PRO-S forms.
- Submit details of the nominee with consent.
- Obtain the Certificate of Incorporation from the Registrar of Companies.
Advantages of OPC
The OPC provides multiple benefits to entrepreneurs and professionals seeking growth within a corporate structure.
Complete Control
The single-member ownership structure allows the individual to retain complete control over decision-making while enjoying the benefits of incorporation.
Flexibility
The structure is highly flexible and allows seamless transformation into a private or public company once business operations expand.
Access to Funding
Although OPCs cannot raise funds through public issues, they can access bank loans and private investments more easily compared to sole proprietorships, due to their recognized legal status.
Simplified Compliance
Reduced compliance requirements make OPCs an attractive option for small businesses. Exemptions from holding general meetings and complex reporting obligations reduce administrative burdens.
Limitations of OPC
Despite its advantages, OPCs also face certain limitations.
Restrictions on Business Activities
An OPC cannot carry out non-banking financial investment activities or convert into a Section 8 company.
Limited Fundraising Capacity
Since OPCs cannot invite public subscriptions, their capacity to raise funds remains restricted. Growth beyond a certain level may require conversion into a private or public company.
Mandatory Conversion
If an OPC’s paid-up share capital exceeds the prescribed threshold or its average annual turnover crosses the statutory limit, it must be converted into a private or public company.
International Perspective on OPC
The concept of OPC has been recognized in several other countries. For example, the United States allows single-member limited liability companies, while the United Kingdom provides sole shareholder companies. The introduction of OPC in India was inspired by global practices aimed at supporting small entrepreneurs with simplified corporate structures.
Classification of Companies by Incorporation
Apart from private, public, and one person companies, the Companies Act also recognizes classification based on the manner of incorporation.
Statutory Companies
These are companies established by special Acts of Parliament or state legislatures. Examples include the Reserve Bank of India and Life Insurance Corporation. Such companies operate under their respective statutes and enjoy special privileges and obligations.
Registered Companies
These are companies incorporated under the Companies Act, 2013, or earlier Companies Acts. They are the most common type of companies in India and include private, public, and OPCs.
Chartered Companies
Although not recognized in modern Indian law, historically some companies were established by royal charter during colonial times. They had privileges granted by the crown.
Classification of Companies by Liability
Liability is another important basis for classification of companies.
Companies Limited by Shares
The liability of members is limited to the unpaid amount on the shares held by them. This is the most common form of company structure in India.
Companies Limited by Guarantee
In such companies, members contribute a fixed sum of money toward the company’s liabilities in the event of winding up. These companies are usually formed for non-profit objectives, such as promoting commerce, art, science, or social welfare.
Unlimited Companies
In an unlimited company, members’ liability is not limited. Their personal assets may be used to meet company debts if necessary. This form is rare in practice due to the risks involved.
Classification of Companies by Control and Ownership
Companies may also be classified based on ownership and control.
Holding Companies
A holding company controls another company by owning a majority of its shares or controlling its board of directors. The controlled company is known as a subsidiary.
Subsidiary Companies
These are companies in which another company, known as the holding company, has significant control. Subsidiaries may be private or public.
Associate Companies
An associate company is one in which another company holds a significant influence but not majority control. Significant influence is typically defined as owning at least 20 percent of voting power.
Government Companies
A government company is one in which at least 51 percent of the paid-up share capital is held by the central government, state government, or jointly by both. Examples include Bharat Heavy Electricals Limited and Oil and Natural Gas Corporation.
Foreign Companies
A foreign company is one incorporated outside India but having a place of business in India through an office, branch, or agent. They are subject to specific provisions under the Companies Act, 2013.
Special Forms of Companies
The Companies Act also provides for certain special categories of companies to address specific purposes.
Section 8 Companies
These are companies formed for promoting charitable objectives such as education, social welfare, culture, or environment. Profits of such companies are not distributed among members but reinvested for their objectives. They enjoy several exemptions and tax benefits.
Small Companies
Small companies are private companies with limited paid-up capital and turnover as prescribed under the Act. They enjoy simplified compliance requirements, making them suitable for start-ups and small businesses.
Dormant Companies
A company that has not carried out any significant business activity for two consecutive financial years can apply to become dormant. This allows companies to remain legally registered without actively carrying on business, thereby reducing compliance burdens.
Producer Companies
Producer companies are formed by farmers, agriculturalists, or producers to engage in collective activities such as production, harvesting, procurement, and marketing. They help promote cooperative principles in agriculture and allied sectors.
Role of OPCs and Special Companies in Economic Development
OPCs and other special categories of companies play a significant role in India’s economic growth. OPCs empower individual entrepreneurs to participate in the corporate sector, reducing dependency on traditional proprietorship models. Small companies and producer companies help support rural and small-scale industries. Section 8 companies contribute to social development by focusing on education, health, and environmental initiatives.
Government companies and statutory corporations are instrumental in carrying out infrastructure and industrial projects that require state participation. Foreign companies bring investment, technology, and global practices into the Indian economy. Together, these classifications create a diverse corporate ecosystem that caters to varying business needs and socio-economic objectives.
Conclusion
The corporate framework under the Companies Act, 2013 provides a wide range of options for entrepreneurs, investors, and professionals to choose a business structure that matches their vision, resources, and growth aspirations. From private companies that allow close-knit ownership and management, to public companies that enable large-scale operations with access to capital markets, to one person companies that empower sole entrepreneurs, each form has its unique advantages, requirements, and limitations.
Classifications based on incorporation, liability, ownership, and purpose further add flexibility by accommodating diverse objectives. Statutory and government companies handle vital national interests, while Section 8 companies contribute to social welfare. Small, dormant, and producer companies provide innovative solutions for small-scale industries, inactive businesses, and cooperative models of production. Together, these structures ensure that both economic and social objectives are met under a regulated legal system.
The Indian corporate framework not only offers legal recognition and limited liability but also encourages entrepreneurship, innovation, and accountability. By ensuring simplified compliance for smaller entities and robust governance mechanisms for larger companies, the law strikes a balance between growth and regulation. As India’s economy continues to expand, the adaptability of these company forms will remain crucial in promoting business opportunities, attracting investment, and fostering sustainable development.
Ultimately, the diversity of company types empowers individuals and organizations to select the most suitable vehicle for their business journey, ensuring that the corporate sector remains a strong driver of economic progress and social transformation in the country.