A company is a legal entity formed by individuals to conduct business and make a profit. It can be structured in various ways, such as a sole proprietorship, partnership, corporation, or LLC, each offering different legal and tax benefits.
What is a company
A company is a legal entity formed by a group of individuals to engage in and operate a business enterprise. Companies are recognised as separate legal entities from their owners, offering limited liability protection, meaning shareholders are typically not personally liable for the company's debts.
Companies can raise capital by issuing shares, and they have perpetual succession, continuing to exist even if ownership changes. They are governed by a board of directors and must adhere to various regulatory and legal requirements. Companies can be public or private, with public companies trading shares on stock exchanges, allowing for broader investment opportunities.
How does a company work
A company operates as a separate legal entity from its owners, managed by a board of directors elected by shareholders. It raises capital by issuing shares or debt. The board sets policies and oversees management, which runs day-to-day operations. Companies produce goods or services for profit, reinvesting earnings or distributing dividends to shareholders.
They comply with regulatory requirements, including financial reporting and taxes. Decisions are made through structured governance processes, ensuring accountability and strategic alignment. Companies can expand by acquiring other businesses, entering new markets, or innovating products, aiming for sustainable growth and increased shareholder value.
Types of companies
- Public limited company: A public limited company company type can offer shares to the public and is listed on stock exchanges. It has stringent regulatory requirements and allows for broad capital-raising opportunities through public investors.
- Private limited company: Owned by a small group of shareholders, a private limited company does not trade shares publicly. It offers limited liability protection and is easier to manage than public companies, with fewer compliance obligations.
- Limited liability partnership (LLP): A limited liability partnership combines the benefits of a partnership and a company, providing limited liability to partners while allowing them to manage the business directly. It is ideal for professional services firms.
- Sole proprietorship: The simplest business form, sole proprietorship, owned and managed by one individual. It offers complete control but comes with unlimited personal liability for business debts.
Classification of different types of companies
Here’s a classification of different types of companies
- Companies based on liabilities
- Companies limited by shares
- Companies limited by guarantee
- Unlimited companies
- Companies based on members
- One person companies
- Private companies
- Public companies
- Companies based on control
- Holding and subsidiary companies
- Associate companies
Different types of companies based on size
The MSME Act classifies companies based on their size to give benefits provided by the government for MSMEs. The differentiation of companies based on size to obtain MSME benefits is as follows:
Micro companies
A micro company is a company whose investment in plant and machinery does not exceed Rs.1 crore, and the annual turnover does not exceed Rs.5 crore.
Small companies
A small company is a company whose investment in plant and machinery does not exceed Rs.10 crore, and the annual turnover does not exceed Rs.50 crore.
However, the Companies Act, 2013, also provides many benefits to small companies. A company with a paid-up share capital of below Rs.4 crore and an annual turnover of below Rs.40 crore is considered a small company under the Companies Act.
Medium companies
A medium company is a company whose investment in plant and machinery does not exceed Rs.50 crore, and the annual turnover does not exceed Rs.250 crore.
Different companies on the basis of members
a) One Person Companies (OPCs)
These companies consist of a single individual as the sole shareholder. Unlike sole proprietorships, OPCs are considered separate legal entities, distinct from their single member. Additionally, OPCs do not require any minimum share capital.
b) Private Companies
Private companies have restrictions in their articles of association that prevent the free transfer of shares. They must have between 2 and 200 members, including current and former employees who own shares.
c) Public Companies
Public companies differ from private companies by allowing members to freely transfer their shares to others. They require at least 7 members, with no upper limit on the number of members.
Different companies on the basis of liabilities
When considering the liabilities of members, companies can be classified as limited by shares, limited by guarantee, or unlimited.
a) Companies limited by shares
In some cases, shareholders may not pay the entire value of their shares at once. In such companies, the liabilities of members are limited to the amount unpaid on their shares. This means that if the company is wound up, members will be liable only for the unpaid portion of their shares.
b) Companies limited by guarantee
Some companies have a memorandum of association that specifies the amounts members guarantee to pay. If the company is wound up, members will only be liable for the amount they guaranteed. The company or its creditors cannot compel members to pay more than this amount.
c) Unlimited companies
In unlimited companies, there are no limits on the members' liabilities. In the event of debts, the company can use all personal assets of shareholders to meet its obligations. The liabilities will extend to the company’s entire debt.
Different companies on the basis of control or holding
When discussing control, companies can generally be classified into two types:
a) Holding and Subsidiary Companies
In some situations, a company’s shares may be fully or partially owned by another company. The company that owns these shares is referred to as the holding or parent company, while the company whose shares are owned by the parent is called the subsidiary.
Holding companies exert control over their subsidiaries primarily by determining the composition of their board of directors. Additionally, a parent company often holds more than 50% of the shares in its subsidiary, further solidifying its control.
b) Associate Companies
Associate companies are those where another company has substantial influence, typically through owning at least 20% of the shares. This influence can also extend to making business decisions under specific agreements or through joint venture arrangements.
Different types of companies based on listing
Companies are categorised into listed and unlisted based on their access to capital. While all listed companies must be public, the reverse is not necessarily true, as an unlisted company can be either private or public.
Listed Company
A listed company is one that is registered on recognised stock exchanges, either within or outside India. Shares of listed companies are traded freely on these exchanges and are subject to regulations set by the Securities and Exchange Board of India (SEBI). To list its shares, a company must issue a prospectus inviting the public to subscribe to its debentures or shares. This process can be done through an Initial Public Offering (IPO), and an already listed company may further raise capital through a Follow-on Public Offering (FPO).
Unlisted Company
An unlisted company is not registered on any stock exchange, meaning its shares are not available for public trading. These companies typically raise capital through funds from friends, family, relatives, financial institutions, or private placements. If an unlisted company wishes to become publicly traded, it must convert to a public company and issue a prospectus to list its securities on the stock exchanges.
Company vs. corporation
| Aspect | Company | Corporation |
| Legal Status | A broad term encompassing various business entities, including partnerships, llcs, and corporations. | A specific type of company with a distinct legal identity, offering limited liability to shareholders. |
| Ownership | Ownership can vary; includes sole proprietorships, partnerships, llcs, and corporations. | Owned by shareholders who elect a board of directors. |
| Regulation | Varies based on type; corporations face more regulations. | Subject to stringent regulatory and reporting requirements. |
| Capital raising | Options vary; corporations can issue stocks. | Can raise capital by issuing shares publicly. |
| Management | Management structures vary. | Governed by a board of directors and managed by officers. |
Public vs. private companies
| Aspect | Public Companies | Private Companies |
| Ownership | Shares are traded publicly on stock exchanges. | Shares are held by a small group of private investors. |
| Capital | Can raise substantial capital from the public. | Capital raised from private investors or owners. |
| Regulation | Subject to strict regulatory and reporting requirements. | Fewer regulatory requirements compared to public companies. |
| Transparency | Must disclose financial information regularly. | Financial information is kept private. |
| Management | Governed by a board of directors representing shareholders. | Typically managed by owners or a small group of stakeholders, allowing more control and flexibility. |
How do you start a company?
Starting a company involves several key steps:
- Business idea: Develop a unique and viable business idea.
- Business plan: Create a detailed business plan outlining goals, strategies, market analysis, and financial projections.
- Legal structure: Choose a legal structure (e.g., sole proprietorship, partnership, LLC).
- Registration: Register your business name with the relevant authorities.
- Employer identification number: Obtain an employer identification number (EIN) from the IRS for tax purposes.
- Licenses and permits: Secure necessary licenses and permits for your industry.
- Bank account: Open a business bank account.
- Funding: Arrange for startup capital through loans, investors, or personal savings.
- Launch: Set up operations and launch your business.
Advantages and disadvantages of starting a company
The advantages of starting a company are:
- Control: Full control over business decisions and direction.
- Profit: Potential to earn substantial profits.
- Growth: Opportunity to scale and grow the business.
- Creativity: Freedom to innovate and implement new ideas.
- Legacy: Building a legacy and creating long-term value.
The disadvantages of starting a company are:
- Risk: High financial risk and potential for business failure.
- Workload: Significant time and effort required.
- Liability: Personal liability for business debts, unless incorporated.
- Funding: Difficulty in securing initial funding or a business loan.
- Uncertainty: Market competition and economic instability.
Conclusion
Starting a company offers numerous advantages, including control, profit potential, and growth opportunities, but also comes with challenges such as financial risk, workload, and funding difficulties. Weighing these factors carefully can help aspiring entrepreneurs make informed decisions about their business ventures. Securing a business loan can alleviate some financial pressures, aiding in successful business initiation.
Here are some of the key advantages of Bajaj Finserv Business Loan:
- Rapid disbursement: Funds can be received in as little as 48 hours of approval, allowing businesses to respond promptly to opportunities and needs.
- High loan amount: Businesses can borrow funds up to Rs. 80 lakh, depending on their needs and qualification.
- Competitive interest rates: The interest rates for our business loans range from 14% to 30% per annum.
- Flexible repayment schedules: Repayment terms can be tailored to align with the business's cash flow, helping manage finances without strain. You can choose a tenure ranging from 12 months to 96 months.
