Q.Explain the classification of companies on the basis of liability.

Not every company gives its members the same protection from the company's debts; the Companies Act, 2013 recognises three distinct liability patterns. …

The Companies Act, 2013 classifies companies according to the extent of liability their members bear for the company's debts, giving three distinct categories.

1. Company limited by shares: This is the most common type of company. Here, a member's liability is limited to the amount, if any, that remains unpaid on the shares held by that member. Once a member has paid the full face value of the shares subscribed, no further personal liability can be imposed for the company's debts.

2. Company limited by guarantee: In this type, each member agrees, through the Memorandum of Association, to contribute a specified amount towards the company's debts only if the company is wound up while that person is a member (or shortly after). Such companies do not usually have share capital raised for trading profit; this form is common for clubs, chambers of commerce, and non-profit or charitable bodies. …

Students sometimes assume ALL companies are 'limited' companies — the unlimited company category is often forgotten entirely, even t …