Classification of companies

A thorough reflection on different kinds of companies

1. COMPANY LAW
Classification of Companies
ABSTRACT
The main purpose of this article is to reflect upon the
various kinds of companies existing in today’s word
and to know the nature and incorporation of different
kinds of companies
Author: Nasar Khan Sangeen
Department: Law and Shariah ,University of
Swat

2. CLASSIFICATION OF COMPANIES


INDEX
Topics Page no
-Abstract 1
-Introduction 1
-Classification of Companies 1
-Kinds of companies 1
-One Member company 1
-Private limited company 2
-General features of a Private company 2
-Public limited company 2
-Main Features of Public limited companies 2
-Classification on the basis of liabilities 3
-Company limited by shares 3
-Company limited by Guarantee 3
-Unlimited Companies 4
-On the basis of Control over the management 4
-Holding company 4
-Subsidiary company 4
-Foreign Company 4
-Listed Company 4
-Need of classification of Companies 4

3. CLASSIFICATION OF COMPANIES
Abstract:
The main purpose of this article is to reflect upon the various kinds of companies existing in today’s word
and to know the nature and incorporation of different kinds of companies

Introduction
The word „Company‟ has no strictly technical or legal meaning
1
. The word 'Company' is an amalgamation
of the Latin word 'Com' meaning "with or together" and 'Pains' meaning "bread". Originally, it referred to
a group of persons who took their meals together. A company is nothing but a group of persons who
have come together or who have contributed money for some common purpose and who have
incorporated themselves into a distinct legal entity in the form of a company for that purpose.
There would be no differ
1
ence in the term Company and Body Corporate or Corporation however
Companies Act 2017 defines the body corporate or corporation separately. We can generally say that the
word ‘company’ means a setup formed and registered under the company law and the body corporate
can be regarded as any company registered under any law
2

In generalized term, Company is an artificial person created by law and destroyed by law. It is an
association of person to start a business under a legal guidance, company is a separate legal entity apart
from its members.
3

Classification of Companies: Company forms of Business have become immensely popular over
the years. Their development has led to the creation of so many new types of companies.
Companies are to be classified on the basis of liabilities, members and on the basis of control
Kinds of companies: On the basis of members
One Member company:
1.One-person company: With increasing use of information technology and computers, emergence of the
service sector, it is time that the entrepreneurial capabilities of the people are given an outlet for
participation in economic activity. Such economic activity may take place through the creation of an
economic person in the form of a company. Yet it would not be reasonable to expect that every
entrepreneur who is capable of developing his ideas and participating in the market place should do it
through an association of persons. We feel that it is possible for individuals to operate in the economic
domain and contribute effectively. To facilitate this, the Committee recommends that the law should
recognize the formation of a single person economic entity in the form of „One Person Company
5

1
Buckley J in Stanley Re, (1906) 1 Ch. 131,134
2
Companies Act2017[Section 2(17)]
3
Manjeeth Kumar saho: Article in SSRN Electronic Journal · January 2012 DOI: 10.2139/ssrn.2191869
4
“Report of the expert committee on company law” available at
http://www.mca.gov.in/Ministry/chapter3.html Last updated on 16th Nov,2012
5
[Section 2(49)] of Companies act 2017 Pakistan

4. Private limited company: Private company is of two types; Single Member Company and other than
Single Member Company
Single Member Company – It is a company which consists of a single member who is also the director of
the company. These companies are governed by special rules implemented by Securities & Exchange
Commission of Pakistan for such companies. In these companies (SMC-PVT) Limited is added to the name
of the company
4

Private Company (Other Than Single Member Company) –
Such type of a company can be registered by at least two members and it restricts:
*The maximum number of members to fifty; members jointly holding shares shall be counted as one
member,
*The invitation of subscriptions from general public for its shares or debentures or Redeemable capital.
*The right to transfer the shares by its members,

General features of a Private company:
i) A private company restricts the right of transfer of its shares. The shares of a private
company are not as freely transferable as those of public companies. The articles generally
state that whenever a shareholder of a Private Company wants to transfer his shares, he
must first offer them to the existing members of the company. The price of the shares is
determined by the directors. It is done so as to preserve the family nature of the company’s
shareholders. ii)
ii) It limits the number of its members to fifty excluding members who are employees or ex-
employees who were and continue to be the member. Where two or more persons hold
share jointly they are treated as a single member. The minimum number of members to
form a private company is two.
iii) iii) A private company cannot invite the public to subscribe for its capital or shares of
debentures. It has to make its own private arrangement
5


Public limited company: In contrast to private companies, public companies allow their
members to freely transfer their shares to others. Secondly, they need to have a minimum of 7
members, but the maximum number of members they can have is unlimited
It can issue prospectus to general public and the audit is necessary
Main Features of Public limited companies
Main features of public companies are as follow,
--Can issue share to general public
--Liability of shareholder is limited to the extent of their shares
--Minimum 7 Members and there is no maximum limitation
--Members can freely transfer their shares to another person
--At least 7 Directors
--Can issue Prospectus to general public
---Audit isn’t necessary

5. Classification on the basis of liabilities: Companies are further divided on the basis of liabilities to
Companies limited by its shares, Companies limited by Guarantee and Unlimited companies,
Company limited by shares: Sometimes, shareholders of some companies might not pay the entire
value of their shares in one go. In these companies, the liabilities of members is limited to the extent of
the amount not paid by them on their shares.
Generally, the most common form of the company used for business ventures. Specifically, a limited
company is a "company in which the liability of each shareholder is limited to the amount individually
invested" with corporations being "the most common example of a limited company".
[9]
This type of
company is common in England and many English-speaking countries. A company limited by shares may
be a
6
 publicly traded company or a
 privately held company.
2



This means that in case of winding up, members will be liable only until they pay the remaining amount
of their shares.
Company limited by Guarantee: In some companies, the memorandum of association mentions
amounts of money that some members guarantee to pay.
In case of winding up, they will be liable only to pay only the amount so guaranteed. The company or its
accreditors cannot compel them to pay any more money.
Commonly used where companies are formed for non-commercial purposes, such as clubs or
charities. The members guarantee the payment of certain (usually nominal) amounts if the company
goes into insolvent liquidation, but otherwise, they have no economic rights in relation to the
company. This type of company is common in England. A company limited by guarantee may be with
or without having share capital.
7


5
Manjeeth Kumar saho: Article in SSRN Electronic Journal · January 2012 DOI: 10.2139/ssrn.2191869
6 Black law and lee Dictionary second pocket Edition Baryan
A. Garner, editor. West. 2001.

7
An article on Company on wikifidia

6. Unlimited Companies: Unlimited companies have no limits on their members’ liabilities. Hence, the
company can use all personal assets of shareholders to meet its debts while winding up.
Their liabilities will extend to the company’s entire debt.

On the basis of Control over the management: On the basis of management the companies are classified
as
--Holding company: It means a company or body corporate which holds (directly or indirectly) more than
fifty percent (50%) in the voting securities of any other company, or controls the composition of the
board of such other company. Holding company can be defined in context only of subsidiary company
_Subsidiary company: It means a company or body corporate whose more than fifty percent (50%)
voting securities are held or controlled (directly or indirectly), by some other company or such other
company controls the composition of the board of such company
8

Example: Holding company
Hill Limited shall be considered as a holding company of Stone Limited if; a. Hill limited owns more than
fifty percent of the voting shares of Stone Limited, b. Hill Limited controls the composition of board in
Stone Limited. How does Hill Limited controls the composition of the board? Usually the power to control
composition of board is associated with the holding of voting securities (ordinary shares). However, at
certain times the power to appoint or elect the directors may emanate from any contractual
arrangements with other shareholders or it may become available from the condition imposed or
privilege granted by any authority etc. Now if Stone Limited is a holding company of Stylish Stones
Limited then being the holding company of Stone Limited the Hill Limited shall also be considered as
holding company of Stylish Stones Limited
3


Foreign companies:
―foreign company means any company or body corporate incorporated outside Pakistan, which
— (a) has a place of business or liaison office in Pakistan whether by itself or through an agent, physically
or through electronic mode; or
--- (b) conducts any business activity in Pakistan in any other manner as may be specified
9
Listed company: means a public company, body corporate or any other entity whose securities are listed
on securities exchange;

Need of classification of Companies: The companies are classified as aforesaid for the purpose to
differentiate different business organisation to different kinds that their similarities and differences could
be understand easily and the things which looks identical to be separated and to abolish complexity
among various legal entities, by this way general public can easily access their business choose to invest
their respective capital and skills etc.


8: [Section 2 (68), (37)] of the Companies Act2017
9: [Section 35] of the Companies Act2017
10[Section 38] of the Companies Act2017