The joint stock company and its classification

1. Meaning

Section 2(20) of the Companies Act, 2013 defines a company as “a company incorporated under this Act or under any previous company law.” The textbook definition is Lord Justice Lindley’s: an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit or loss arising from it. Chief Justice Marshall called a corporation “an artificial being, invisible, intangible, and existing only in contemplation of law.”

2. Features

1. Incorporated association: comes into existence only on registration and the issue of a certificate of incorporation.
2. Separate legal entity: distinct from its members (Salomon v. Salomon & Co. Ltd., House of Lords, 1897). It can own property, sue and be sued in its own name.
3. Limited liability of members, to the amount unpaid on their shares or the amount guaranteed.
4. Perpetual succession: members may come and go, the company continues.
5. Transferability of shares: freely transferable in a public company (section 44 treats shares as movable property), restricted in a private company.
6. Common seal: optional since the Companies (Amendment) Act, 2015; documents may be signed by authorised persons.
7. Separation of ownership and management: shareholders own, the board of directors manages.
8. Artificial legal person acting through human agents.

3. Merits and demerits

Merits: large capital from many investors; limited liability encourages investment; stability through perpetual succession; liquidity of investment through transferable shares; professional management; economies of large scale; public confidence because accounts are audited and published; scope for research and expansion.

Demerits: difficult and costly formation; heavy legal compliance (annual returns, audit, board meetings, filings with the Registrar); lack of secrecy; delay in decisions; separation of ownership and control, which lets managers act in their own interest; oligarchic management by a small group of directors; speculation in shares; and possible concentration of economic power.

4. Classification of companies

(a) On the basis of incorporation

• Chartered companies, created by a royal charter (the East India Company, 1600). None are formed now in India.
• Statutory companies, created by a special Act of Parliament or a State legislature (Reserve Bank of India, Life Insurance Corporation of India).
• Registered companies, formed by registration under the Companies Act, 2013 or an earlier Companies Act. Most companies are of this kind.

(b) On the basis of liability

• Company limited by shares (section 2(22)): liability limited to the amount unpaid on shares. The most common type.
• Company limited by guarantee (section 2(21)): members undertake to contribute a fixed sum on winding up. Used by clubs, chambers of commerce and research associations.
• Unlimited company (section 2(92)): members’ liability is unlimited. Rare.

(c) On the basis of number of members

• Private company (section 2(68)): restricts the right to transfer shares, limits members to 200 (excluding employee-members and former employees), and prohibits invitation to the public to subscribe to its securities. Minimum two members and two directors. Name ends with “Private Limited”.
• Public company (section 2(71)): not a private company; minimum seven members, no maximum; minimum three directors. A private company that is a subsidiary of a public company is treated as public.
• One Person Company (section 2(62)): a company with only one person as member, who must name a nominee. Only a natural person who is an Indian citizen can form it.

(d) On the basis of control

• Holding company (section 2(46)) and subsidiary company (section 2(87)): a company is a subsidiary where the holding company controls the composition of its board or controls more than one-half of its total voting power.
• Associate company (section 2(6)): one in which another company has significant influence (control of at least 20 per cent of total voting power) but which is not its subsidiary.

(e) On the basis of ownership

• Government company (section 2(45)): not less than 51 per cent of the paid-up share capital held by the Central Government, one or more State Governments, or both (SAIL, BHEL, ONGC).
• Non-government company: all others.

(f) On the basis of nationality

• Indian company, incorporated in India.
• Foreign company (section 2(42)): incorporated outside India and having a place of business in India, physically or electronically.

(g) Other classes

• Listed company (section 2(52)), whose securities are listed on a recognised stock exchange.
• Small company (section 2(85)), a private company within the paid-up capital and turnover limits prescribed by rules, which enjoys lighter compliance.
• Section 8 company: formed to promote commerce, art, science, sports, education, research, social welfare, religion, charity or environment protection, applying its income only to those objects and paying no dividend.
• Producer company (Chapter XXIA, inserted in 2020): formed by primary producers such as farmers.
• Dormant company (section 455), formed for a future project or holding an asset, with no significant accounting transaction.

5. Public company versus private company

6. Partnership firm versus joint stock company

How this is examined

“Explain the classification of companies” appeared in January 2026 (10 and 16 marks) and June 2025 (10 marks). June 2025 (100 marks) asked the difference between a public and a private company; February 2025 asked the difference between a partnership firm and a joint stock company. Draw the classification as a tree first, then explain each class with the section number.