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Limited and Unlimited Companies

Company as a Business Entity

Company (or Corporation, as it is known in some jurisdictions) as a vehicle of business has been and continues to be one of the most successful form of business entities through out the world. Almost all the big business entities are "Companies" incorporated under the applicable laws of the respective countries of their origin. In India, the Companies Act, 1956 governs the incorporation and management of Companies. A Company is a juristic person (in the eyes of law it is a person). A Company can sue and it can be sued. It has its own name and a separate legal entity, distinct from its members who constitute it. A Company has its own property; the members (shareholders) cannot claim the property of the Company as their own property. A Company is a legal person but it is not a citizen. A Company can either limited by shares or by guarantee (undertaken by its members) or unlimited. A Company is well recognised as a business vehicle and the laws of India provide that certain businesses like Banking, Insurance, Merchant Banking and Market Intermediaries, Telecom etc can be carried on ONLY if the business entity is a Company. The most popular form of Company is the Company limited by Shares. Shares are the ownership rights in a Company with the help of which important business decisions are taken and Companies are governed and controlled. Foreign Direct Investments (FDI) is permitted (subject to applicable regulations of Reserve Bank of India) in Companies in India. Audit of a Company's accounts is compulsory in India.

Limited Liability Company

The unique feature of Company form of business entity is the option that is provided under the Company Law to limit the liabilities of its owners i.e., members unlike a Sole Proprietary or Partnership form of business where the liability of the Proprietor or Partner, as the case may be, is joint or several. Limited Liability means, if a member of a Company has not paid in full for the shares subscribed by him, he can be forced to pay by Law the balance monies remaining payable for the shares that he has subscribed. Hence if a member has paid in full, the value of the shares subscribed by him, he cannot be made to pay or account for the liabilities of the company any further. A Company's liability may be limited either by the shares or by guarantee of its members. In respect of a Company limited by Guarantee, the members undertake to pay a particular sum of money should there be any claim for liability which the Company is unable to settle. However no liability will accrue over and above the sum guaranteed to a member, irrespective of the quantum of the liability of the Company. However where there is a reduction of members below the statutory minimum (i.e., below two in case of a private company and seven in case of a public company) and if the Company continues to carry on business for more than six months, then the liability of every member of such a Company will become unlimited.

Unlimited Liability Company

A Company can be formed with Unlimited Liability, whereby the liability of its members towards the liabilities contracted by the such Company in the course of its business are unlimited. Hence this form of a Company is akin to a Partnership Firm where the liability of the Partners are joint and several.

Private Company

A Private Company is one which has a minimum of two members and maximum of 50 members (excluding of employees past and present and who are members). A Private Company is not permitted to issue shares to the pubic and invite public deposits. A Private Company enjoys lots of privileges under Companies Act, 1956 as regards its governance like right to restrict transfer of its shares, accepting deposits without any limit from its shareholders, directors and their relatives, payment of remuneration to its directors with out any limit or restriction etc. A Private Company can commence its business immediately upon its incorporation.

Public Company

A Public Company is one which has a minimum of seven members and three directors. There is no limitation on the number of members. A Public Company is permitted (subject to compliance of applicable law and regulations) to issue shares and collect deposits from Public. A Public Company can list its shares on the Stock Exchanges enabling its members to trade their shares in the open market. Shares of a Public Company are freely transferable. A Public Company is thoroughly regulated by the Companies Act, 1956 and rules and regulations made there under. A Public Company has to obtain Certificate of Commencement of Business after its incorporation to enable it to commence business.

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