4 - Kinds Of Companies

Kinds of Companies I.

UNLIMITED COMPANIES ➢ Main advantage of Company to trade with limited liability ➢ Yet you can set up Company with unlimited liability ➢ Section 12 “Seven or more persons or where the Company to be formed will be a Private Company any two or more persons may form an incorporated Company with or without limited liability” ➢ A Company with no limit on its liability is an unlimited Company  very rare ➢ Suitable  Where heavy liability not likely  And advantages of separate corporate personality required ➢ To have  Articles of Association -> stating number of members and share capital  To be registered ➢

Disadvantage  Members liable like in partnership  But creditors cannot go directly to members can ask only to contribute

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Advantages  Need not have share capital  Reduce or increase its capital  Purchase its own shares

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Unlimited Company may at anytime convert itself as Limited Company

II. GUARANTEE COMPANIES ➢ Limited liability means a) Limit liability by shares b) Or by Guarantee ➢ Section 13(3) “The Memorandum of a Company limited by Guarantee shall... state that each member undertakes to contribute to the assets of the Company in the event of its being wound

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up, for payment of the debts and liabilities of the Company, such amount as maybe required not exceeding a specified amount” Not necessary to have share capital If it has share capital a) Subject to restriction applicable to Company with shares b) No liberty to purchase own shares Only members have right to participate in divisible profits of Company Division of capital into units is shares

III. FOREIGN COMPANIES ➢ Means a Company incorporated outside India ➢ Section 591 Company though incorporated outside India, has a place of business in India ➢

Place of business a) Substantial activity is carried on b) Business like operations are carried on or a reasonably long period of time c) Summons is within jurisdiction

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Documents and particulars to be furnished to Registrar within 30 days 1. Of state of principal business 2. Registrar at New Delhi i. Certified copy of Charter, Statute or Memorandum of Association or Instrument constituting Company ii. Full address of registered or principal office of Company abroad iii. List of Directors and Secretary and all relevant particulars regarding them iv. Details of Company Secretary v. Name and address of person resident in India to accept summons on behalf of Company vi. Particulars of office of Company in India If branch is opened – only accounts of branch office to be included

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Foreign Company also bound by following obligations i. To exhibit outside every office or place of business the country of incorporation in English letters and in regional language To show liability of members is limited ii. All correspondence of Company to show the above  Failure or above not to invalidate the document but cannot sue

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Accounts of Foreign Company  Same as Indian Company

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Prospectus of Foreign Company  Same as that of Indian Company  Additional particulars i. Instrument containing or defining the Constitution of the Company ii. Provisions of Law under which Company was incorporated iii. Address in India where above Instrument may be inspected iv. Date and country of incorporation v. Address of principle office of business in India if any

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If 51% of share capital in Foreign Company is owned by Indians, all the provisions applicable to companies in India to be applicable Various provisions of Act to apply to Foreign Companies

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IV. GOVERNMENT COMPANIES ➢ Section 617 For the purposes of this Act, government companies means a Company in which not less than 51% of the paid up share capital is held by Central Government or by any State Government or Governments or partly by the Central Government or partly by one ore more State Governments and includes a Company which is a subsidiary of a Company as thus defined ➢ Takeover by Central government of Company under Industries Development and Regulation Act, 1951 does not mean Company is converted to Government Company

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Special provisions relating to Government Companies a. Auditor to be appointed for re-appointed by Comptroller and Auditor General of India b. Comptroller and Auditor General of India  Auditing as per his instructions  Can conduct supplementary or test audit of Companies  To call for report from Auditor c. Central Government to prepare and submit report within three months of Annual Meeting and to be submitted to House of Parliament  Also applicable to Government Company in liquidation Generally Act to apply to Government Companies but application subject to notification by Central Government in other matters

HOLDING COMPANY AND SUBSIDIARIES (SECTION 4) ➢ When one Company has control over another Company

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Holding Company Subsidiary Company Control is by three ways: a. Controls composition of Board  That is can remove or appoint directors to board  Can remove under the following three cases:  Can be appointed only by the exercise of power of Holding Company  Directors of Subsidiary Company mainly because he holds position in Holding Company.  Nominated by Holding Company b. Holds majority of shares, that is, more than ½ of the equity share capital of Company c. Holding Company subsidiary of another Company Eg. A B C D Therefore D is subsidiary of A and A also

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Accounts of Holding Company  Balance sheet of holding Company documents of Subsidiary Company

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Balance sheet of Subsidiary Company Profit/loss Account Of Subsidiary Company Copy of report of Board of Directors iv. Copy of report of Auditors v. Statement of Holding Companies interest in Subsidiary Company vi. Unable to obtain above information – report of Board of Director’s to that effect vii. Non coincidence of financial year – report for in between period i. ii. iii.

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Inspection of Subsidiary’s books of account  Holding Company by resolution to appoint inspector to inspect books of account of Subsidiary Company

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Investment in Holding Company  Subsidiary Company not to have shares in Holding Company  Not applicable i. Where subsidiary is Legal Representative of deceased member of Holding Company ii. Where subsidiary is Trustee  During amalgamation Subsidiary to buy shares of Holding Company

VI. ILLEGAL ASSOCIATIONS ➢ Section 11(2)  Association of more than 20 members  10 members in banking business  Should be Company ➢

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Conditions of Illegality 1. Membership is more than 20 10 in case of banking 2. Association formed for purpose of business 3. Object to earn profits for itself and its members 4. Not registered as Company Not applicable to Hindu Undivided Family (HUF) Consequences of Illegality 1. Unlimited liability/ Personally liable  Members punishable with fine which extends upto Rs. 10,000/2. Cannot sue on contract

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Cannot be wound up No suit between members for partition or dissolution

VII.PRIVATE COMPANIES ➢ Section 3(1)(iii) It means a Company which in its Articles of Association contains following restrictions i. Minimum paid up capital  Of Rs. 1 lakh  Or as prescribed by Articles of Association ii. Restriction on transferability of shares  Restriction in such a way that maximum limit of members of fifty  Restriction cannot be applicable to Private Company not being limited by shares iii. Restriction on membership  50 members  Exclusive of employees  Joint shareholders to be treated as single member iv. Prohibition on Issue of Prospectus  Company to prohibit invitation to public to subscribe to shares or debentures of the Company  2000(A)  Should prohibit invitation or acceptance or deposits from persons other than members, directors or relatives  To increase capital to Rs. 1 lakh in two years  Failure results in striking off from Register of Companies, that is, as a Default Company  Compulsory to have Articles of Association ➢

Advantages of a Private Company  Act to apply to all Private Companies except where exempted  Advantages 1. Subscription  2 members  Therefore a close knit group – for eg. Family or friends 2.

Exemption from Prospectus – Provisions  Public participation by issue of Prospectus prohibited

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Therefore exempt from all restrictions relating to Prospectus No need to file Statement in Lieu of Prospectus Allot shares without waiting for minimum subscription Start business on incorporation – need not wait for obtaining certificate for commencement of business

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Directors  Beneficial exemptions  Minimum two directors  Directors can be permanent life Directors  No retirement on rotation  Number of Directors cannot be increased beyond the permissible maximum in Articles of Association  Directors of Public Companies can’t act as Directors of Private Companies unless consent to Registrar within 30 days of appointment  Not applicable to Private Company Directors  Restriction on remuneration not applicable

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Statutory Meeting  Private Company exempted from requirement of holding statutory meeting and filing statutory report

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Further issue of Capital  Further issue of capitol need not be only to existing shareholders, can be offered to outsiders

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Company an Undisclosed Principal  Formalities of Undisclosed Principal applicable in case of Private Company

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Disclosure of interest  Interested Directors can participate and vote