Accountancy · Ch 5 — Accounting for Share Capital
Kinds of Companies
Kinds of Companies
Companies are classified in two main ways: by the liability of their members, and by the number of members. Each classification tells you something different about the company's structure and the risk its owners carry.
Classification on the Basis of Liability
This classification answers the question: How much can a member (shareholder) lose if the company goes into debt?
1. Companies Limited by Shares
This is the most common type of company, especially for businesses that want to raise capital from the public. The liability of each member is limited to the nominal value (face value) of the shares they hold.
Here is the key point: if a member has already paid the full face value of their shares, they owe nothing more — even if the company has huge debts. Creditors cannot touch the member's personal property. However, if a member has not paid the full amount (e.g., they bought a ₹10 share but only paid ₹7), the company can demand the unpaid ₹3 during its lifetime or during winding up (closing down). This liability can be enforced at any time.
In a company limited by shares, a member's maximum loss is the unpaid amount on their shares. Once the shares are fully paid up, the member has zero further liability.
2. Companies Limited by Guarantee
These are usually formed for non-profit purposes (clubs, charities, research societies). Here, the members' liability is limited to a fixed amount they guarantee to contribute only if the company is wound up. During the normal running of the company, members have no liability at all. The guarantee amount is specified in the company's memorandum.
3. Unlimited Companies
In this type, there is no limit on the members' liability. If the company's assets are insufficient to pay its debts, creditors can claim the shortfall from the members' personal property. While the Companies Act permits such companies, they are practically non-existent in India because of the extreme risk to members.
Classification on the Basis of Number of Members
This classification answers the question: How many people can own this company, and who can they be?
1. Private Company
A private company is defined by restrictions in its Articles of Association (its internal rulebook). The key features are:
- Restriction on transfer of shares: You cannot freely sell your shares to anyone; the company's approval is usually needed.
- Minimum members: At least 2 members (except for a One Person Company).
- Maximum members: Cannot exceed 200 members (excluding employees who are also members).
- It cannot invite the general public to subscribe to its shares or debentures.
2. Public Company
A public company is simply defined as any company that is not a private company. Its key features are:
- It can invite the public to buy its shares and debentures (through a prospectus).
- Its shares are freely transferable.
- Minimum members: At least 7.
- No maximum limit on members.
A subsidiary of a private company is also treated as a private company, even if it otherwise meets the criteria of a public company.
3. One Person Company (OPC) …