B.com(H/P)|CH-3 Types of Companies | Company law | Sem-2/4th Sol Du NEP company law SOL DU Bcom

Name: B.com(H/P)|CH-3 Types of Companies | Company law | Sem-2/4th Sol Du NEP company law SOL DU Bcom
Uploaded: 2025-01-26T05:30:06.000Z
Duration: 1 h 22 min 39 s

Introduction to Company Law

Overview of the Series

This video is part of a series focused on Company Law, specifically designed for B.Com and B.Com (Honors) students. It may not be applicable for CA, CS, or CMA students unless they wish to revise the content.

Chapter Focus

The current chapter discusses "Types of Companies," exploring various classifications based on incorporation and membership. The aim is to understand how companies are formed and categorized.

Understanding Types of Companies

Basic Concepts

The discussion begins with foundational concepts learned in commerce classes, such as sole proprietorship, where a single individual runs a business independently. As one progresses in knowledge, they learn about partnerships involving two or more individuals collaborating in business ventures.

Transition to Corporations

The conversation transitions into larger entities where hundreds or thousands can collaborate under a company structure, emphasizing that as membership increases, so does the complexity of the organization. Understanding the distinction between partnerships and companies becomes crucial due to their similarities in having multiple members.

Differences Between Partnership and Company

Key Distinctions

A significant difference highlighted is that partnerships require less formal legal structure compared to companies; forming a partnership involves creating an agreement without extensive legal requirements. In contrast, establishing a company necessitates registration with regulatory bodies like the Registrar of Companies (ROC).

Liability Considerations

Liability varies significantly between these structures:

In partnerships, personal assets may be at risk if debts arise since partners are personally liable.

Conversely, company members enjoy limited liability; their financial responsibility typically extends only to their investment in the company’s shares rather than personal assets.

Legal Framework and Authority

Authority Structure

The authority within businesses differs:

In partnerships, authority is shared among partners based on agreements.

Understanding Authority and Structure in Partnerships and Companies

Authority Distribution in Partnerships

In partnerships, all partners share equal authority and responsibilities, acting as directors, owners, managers, and agents. This collective authority simplifies decision-making.

Unlike companies where authority is divided among shareholders, partnerships maintain a common authority structure among all partners.

Share Transferability

Shares in public companies can be freely traded on the stock market, allowing anyone to buy or sell shares easily.

In partnerships, transferring shares is complex; new partners must be accepted by existing members before any transfer occurs.

Membership Requirements for Companies

A minimum of two members is required to form a private company, while a public company requires at least seven members.

The maximum membership for private companies is capped at 200 members; however, public companies can have unlimited members.

Legal Formalities and Liabilities

Companies must adhere to extensive legal formalities including registration with the Registrar of Companies and regular audits due to their limited liability status.

Partnerships face fewer legal requirements since partners are personally liable for debts; thus they do not undergo rigorous checks like companies do.

Dissolution Processes

A company can only be dissolved through legal provisions; it remains operational despite changes in membership or death of partners.

Conversely, partnerships can dissolve if a partner dies or if all partners mutually agree to end the partnership.

Key Differences Between Companies and Partnerships

The differences between companies and partnerships are straightforward yet significant. Questions regarding these differences often appear in examinations but are generally easy to answer.

Types of Companies Based on Incorporation

Understanding Chartered and Statutory Companies

What is a Chartered Company?

A chartered company is defined as a type of company that existed in the past but is no longer found today, such as the East India Company and the Bank of England.

These companies were established by royal decree, meaning they received permission from kings or queens to operate under specific charters.

The formation of a chartered company involves a grant of charter by the crown, which also regulates its operations.

Examples like the East India Company illustrate how these companies operated under royal authority in historical contexts.

Transition to Statutory Companies

With the decline of monarchies, there are no longer kings or queens granting charters; thus, statutory companies have emerged.

A statutory company is created through an act passed by the central government, distinguishing it from chartered companies.

Examples include organizations like RBI (Reserve Bank of India), SBI (State Bank of India), and LIC (Life Insurance Corporation), which are established via governmental acts.

Registered Companies

Most common types of companies today are registered companies that individuals can establish after registering them according to relevant laws.

To register a company, one must comply with regulations set forth in acts such as the Companies Act 2013 or previous legislation.

Types of Registered Companies

Limited by Shares

A limited by shares company has liability limited to unpaid shares. For instance, if a company issues shares worth ₹1 crore but only collects ₹60 lakh fully paid up, ₹40 lakh remains unpaid.

Liability Implications

The liability for shareholders only extends to their unpaid shares; hence if losses occur, they are liable only for those amounts.

Limited by Guarantee

Understanding Unlimited Liability in Companies

Concept of Unlimited Liability

The speaker explains that in a company with unlimited liability, personal assets (like homes) can be at risk if the company faces financial issues.

The liability is limited to the unpaid shares; however, if the company requires funds during its operation, shareholders may need to contribute additional payments.

Payments are only required when the company is winding up, meaning shareholders must fulfill their guarantees based on their commitments.

Differences Between Unlimited Companies and Partnerships

Both unlimited companies and partnerships expose owners to unlimited liability; thus, personal assets can be claimed by creditors.

The speaker questions why someone would choose an unlimited company over a partnership since both have similar liabilities.

Creditor Rights and Legal Entity Distinction

Creditors can sue individuals in a partnership for unpaid debts, while they cannot pursue individual partners in an unlimited company due to its separate legal entity status.

This distinction provides some protection for individuals involved in an unlimited company as creditors will target the company itself rather than personal assets.

Types of Companies Based on Incorporation

Types of Corporations

Three types of companies are discussed: Chartered Company, Statutory Company, and Registered Company.

Classification Based on Members

Companies can also be classified based on membership into four categories: Private Company, Public Company, Small Company, and One Person Company (OPC).

Private vs. Public Companies

A private company requires a minimum of 2 members and has a maximum limit of 200 members. In contrast, public companies require at least 7 members with no upper limit.

Capital Requirements and Share Transferability

Private companies generally have lower capital requirements but restrict share transferability compared to public companies where shares can be easily bought or sold.

Identification Marks for Companies

Private companies often include "Private Limited" in their names (e.g., Ashok Private Limited), whereas public companies simply use "Limited" (e.g., Ashok Limited).

Profit Motive of Private Companies

Understanding Public and Private Companies

Motivations of Public vs. Private Companies

Public companies aim for social welfare alongside profit motives, while private companies primarily focus on profit.

Public companies are required to issue a prospectus detailing their operations, unlike private companies which do not have this obligation.

Funding Differences

Private companies cannot raise funds from the public, whereas public companies can solicit investments from the general public.

Investment in shares is possible for public company stocks but not for private company shares.

Director Requirements

A minimum of two directors is required for private companies, while public companies must have at least three directors.

Advantages of Private Companies

Private companies enjoy several advantages over public ones, such as limited liability and lower capital requirements to establish the business.

Legal formalities are less stringent for private companies compared to public ones, making them easier to set up and manage.

Conversion from Private to Public Company

There are three methods by which a private company can convert into a public company:

By Default: Sometimes a company's status changes without intention due to increased director numbers or capital investment.

By Operation of Law: Government mandates may require a company to transition from private to public status.

By Choice: The owners may decide voluntarily to convert their private company into a public one.

Importance of Understanding Company Types

Knowledge about small and one-person companies is also essential as they play significant roles in business structures.

How to Convert a Private Company to a Public Company

Steps for Calling a Board Meeting

The first step in converting a private company to a public company is calling a board meeting. Directors and shareholders must be invited to approve the conversion.

A notice must be sent out regarding the Extraordinary General Meeting (EGM), as per Section 101, which outlines the requirements for notifying members about the meeting.

Members need to send notices to their own private company, indicating the intention to convert it into a public company.

Filing Requirements and Forms

After sending out notices, forms must be filled out at the Registrar of Companies (RoC). Specifically, Form MGT-14 needs to be completed.

The final step involves filling out e-form INC-27, which is necessary for completing the conversion process from private to public.

Additional Steps for Converting Public Company Back to Private

If converting from public back to private, more steps are involved. A board meeting is required again for approval from directors and shareholders.

A representative must be appointed who will oversee all documentation related to the conversion process.

General Meeting and Application Process

A general meeting will be called where Form 117 needs to be filled out within 60 days. This form is crucial for applying for conversion back into a private entity.

Along with this application, details of creditors and debentures issued during its time as a public company should also be attached.

Finalizing Conversion with Additional Information

After submitting Form INC 25A for creating a new private company, additional information may require filling another form known as RDG NL5.

Understanding Small Scale Companies and One Person Companies

Definition of Small Scale Companies

A small scale company is defined as one that has a minimum capital investment of ₹50 lakhs or less.

The government can increase this limit, with the maximum potential being set at ₹2 crores in the future.

Criteria for Classification

To qualify as a small scale company, it must meet two conditions:

Capital should be ₹50 lakhs or less.

Turnover must not exceed ₹2 crores.

Exclusions from Small Scale Company Status

Certain companies cannot be classified as small scale:

Public companies are excluded from this classification.

Holding and subsidiary companies cannot be considered small due to their larger operational structure.

Non-Profit Organizations (NPOs), registered under Section 8, also do not qualify as small scale companies.

Features of Small Scale Companies

These companies typically have labor-intensive operations rather than relying heavily on machinery.

They are characterized by flexibility in operations, allowing for quick adjustments to business strategies.

What is a One Person Company?

Definition and Structure

A One Person Company (OPC) is established by a single individual who acts as both the member and director.

There is no minimum capital requirement; an individual can start an OPC without any financial constraints.

Nominee Requirement

An OPC must designate a nominee who will take over if the sole member becomes incapacitated. This ensures continuity in management.

Changing Nominees

The nominee can be changed through proper notice to the Registrar of Companies, ensuring that all legal requirements are met for such changes.

Eligibility to Form an OPC

Understanding Citizenship and Residency Requirements in India

Citizenship by Birth

Citizenship is granted to individuals born in the country, establishing a foundational requirement for being recognized as a citizen.

To qualify as a resident, one must have lived in the country for at least 182 days during the previous year.

Residency Criteria

If an individual cannot meet the residency requirement through continuous stay, their presence over the last ten years can be evaluated based on tax records.

A natural person who is both a citizen and resident can open a company and act as its nominee.

Company Formation Regulations

An example discussed involves "Atul Limited," illustrating that while an individual named Atul can establish a company, it must be done under specific legal definitions of citizenship and residency.

Non-resident Indians (NRIs), despite being citizens by birth, cannot form companies if they do not reside in India.

Nominee Eligibility

To serve as a nominee or to establish a company, one must be both a natural person and fulfill citizenship and residency requirements within India.

Conclusion and Engagement

The speaker emphasizes the effort involved in creating educational content and encourages viewers to engage with the video through likes, shares, and subscriptions.