Types of Companies by Liability and Membership
Chapter Five
Syllabus topic 1.1, label: "Types of Companies"
Pages 23 to 28 of 830
In one line
Companies sort along two independent axes, and this chapter takes the first: how far the members can be made to pay, and how many of them there are.
In exam wording: under section 3(2) a company may be limited by shares, limited by guarantee or unlimited; and under section 2 it may be private, public, a One Person Company or a small company, according to its membership and its size.
Why the law has this at all
A company that is going to raise money from the public and a company that two brothers run between them need very different rules. If the law imposed the public company's rules on the brothers, nobody would incorporate a small business. If it let a company selling shares to strangers run on the brothers' rules, the strangers would be robbed.
So the Act sorts companies into classes and attaches a different weight of regulation to each. Almost every later chapter in this book has a sentence beginning "in the case of a public company", and this chapter is what makes those sentences mean something.
The two axes are independent and that is the thing students get wrong. "Private" and "limited by shares" are not alternatives; they are answers to different questions. A company can be private and limited by shares, which most Indian companies are, or public and limited by guarantee, or private and unlimited.
Some words this chapter uses
Paid-up share capital, section 2(64), is the money actually received by the company on its shares. Turnover is the value of what the company sold in a financial year. A subscriber is one of the first members who signs the memorandum. Winding up is the process of closing a company and distributing its assets. A joint holding is one share held by two or more people together.
Axis one: liability, under section 3(2)
Section 3(2) says a company formed under section 3(1) may be either a company limited by shares, or a company limited by guarantee, or an unlimited company. That is a closed list of three.
Limited by shares
Section 2(22): a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.
Four things follow. The limit is set by the memorandum. It is the unpaid amount, so a member with fully paid shares owes nothing more. The words "if any" matter, because if nothing is unpaid the liability is nil. And the limit attaches to the shares, so it travels with them.
This is the ordinary commercial company and the great majority of companies in India are of this kind.
Types of Companies by Liability and Membership
Limited by guarantee
Section 2(21): a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.
The differences from the first kind are worth spelling out because they are examined together. The member does not buy shares; he promises an amount. The promise is enforceable only in the event of winding up, so while the company is a going concern the members owe nothing at all. And the amount is whatever each member undertook in the memorandum, so different members may have undertaken different amounts.
That is exactly what a club, a trade association, a school or a research body needs. It wants members, not investors, and it does not want to hand out shares. A guarantee company may also have a share capital, in which case its members carry both liabilities.
Unlimited
Section 3(2)(c). The members' liability is not limited at all, and on a winding up they must contribute whatever is needed to pay the debts. It is rare, and it is chosen where members want to signal that they stand fully behind the business, or where the regulatory relief for unlimited companies is worth more than the protection given up.
Axis two: membership
Private company, section 2(68)
A private company is one having a minimum paid-up share capital as may be prescribed, and which by its articles:
- (i) restricts the right to transfer its shares;
- (ii) except in the case of a One Person Company, limits the number of its members to two hundred, joint holders being counted as a single member; and
- (iii) prohibits any invitation to the public to subscribe for any securities of the company.
About the capital. The words "of one lakh rupees or such higher paid-up share capital" were omitted by the Companies (Amendment) Act 2015 with effect from 29 May 2015. What survives is "as may be prescribed", and no minimum is prescribed. So a private company can be incorporated with a paid-up capital of one hundred rupees. Writing that a private company needs one lakh rupees is an error of live law.
About the two hundred. Note two things. The count is of members, not of shareholders as individuals, so joint holders of a share are one member. And the limit is on members, not on employees or former employees who became members while employed, who are excluded by the second proviso.
About the restriction on transfer. This is the clause that makes a private company private in practice. Read it alongside section 44, which makes shares transferable in the manner provided by the articles. Section 44 is what gives the articles the power that section 2(68)(i) then requires them to use.
Types of Companies by Liability and Membership
Public company, section 2(71)
A public company is one which:
- (a) is not a private company; and
- (b) has a minimum paid-up share capital as may be prescribed.
The definition is deliberately residual. A company is public because it is not private, not because of anything it does. The words "of five lakh rupees or such higher paid-up capital," were omitted by the same 2015 Act on the same day, so there is no capital floor here either.
The proviso is the sting, and it is heavily examined:
a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.
So a private company that is a subsidiary of a public company is treated as public, no matter what its own articles say. It keeps its restrictive articles and it loses its private status. Students almost always miss this.
One Person Company, section 2(62)
"One Person Company" means a company which has only one person as a member. Section 3(1)(c) allows it to be formed, and says it is a private company, so everything said about private companies applies to it except the two hundred member ceiling, which section 2(68)(ii) expressly disapplies.
The four provisos to section 3(1), covering the nominee, are set out in [What a Company Is] and are the distinctive feature: the memorandum must name a person, with prior written consent, who becomes the member on the subscriber's death or incapacity.
Small company, section 2(85)
A small company is a company, other than a public company, of which:
- (i) the paid-up share capital does not exceed fifty lakh rupees, or such higher amount as may be prescribed, which shall not be more than ten crore rupees; and
- (ii) the turnover as per the profit and loss account for the immediately preceding financial year does not exceed two crore rupees, or such higher amount as may be prescribed, which shall not be more than one hundred crore rupees.
Both limbs must be satisfied, because the clause says "and".
The proviso excludes three kinds outright, whatever their size: (A) a holding company or a subsidiary company; (B) a company registered under section 8; and (C) a company or body corporate governed by any special Act.
Note the drafting technique in the two figures. The section states a figure and then a ceiling on what may be prescribed, so the Government can raise the threshold by rule up to ten crore and one hundred crore but no further. Small company status is not a separate kind of company; it is a size label that switches on relief in later chapters, such as fewer board meetings and a simpler annual return.
Types of Companies by Liability and Membership
Pending reform, not law. The Corporate Laws (Amendment) Bill 2026 would raise these thresholds. It is before a Joint Parliamentary Committee, which reported on 3 August 2026, and it has not been passed or assented to. Answer on the figures above.
A worked example
Meera and Farhan want to open a design studio in Dadar.
They are two, so under section 3(1)(b) they may form a private company. They choose to be limited by shares under section 3(2)(a), so their liability will be limited to any amount unpaid on their shares, under section 2(22).
Their articles must, under section 2(68), restrict the transfer of shares, cap members at two hundred, and prohibit any invitation to the public. They put in a paid-up capital of ten thousand rupees, which is lawful, because the one lakh rupee floor was removed on 29 May 2015.
In its first year the studio's paid-up capital is ten thousand rupees and its turnover is eighty lakh rupees. Both are within section 2(85), it is not a public company, and it is not a holding or subsidiary company, a section 8 company or governed by a special Act. It is a small company and gets the reliefs that go with that.
Now change one fact. A listed public company buys sixty per cent of the studio. Two things happen at once. By the proviso to section 2(71) the studio is deemed to be a public company, even though its articles still restrict transfers. And by proviso (A) to section 2(85) it stops being a small company, because it is now a subsidiary. Its capital and turnover have not moved at all.
Distinctions that carry marks
| Private company | Public company | |
|---|---|---|
| Definition | Section 2(68), by what its articles must do | Section 2(71), residual: not a private company |
| Members, minimum | Two, section 3(1)(b); one for an OPC | Seven, section 3(1)(a) |
| Members, maximum | Two hundred, except an OPC | No limit |
| Transfer of shares | Articles must restrict it | Freely transferable |
| Public invitation | Articles must prohibit it | Permitted, under Chapter III |
| Minimum paid-up capital | None prescribed since 29 May 2015 | None prescribed since 29 May 2015 |
| Subsidiary of a public company | Deemed public, proviso to section 2(71) | Not applicable |
| Limited by shares | Limited by guarantee | Unlimited | |
|---|---|---|---|
| Section | 2(22) | 2(21) | 3(2)(c) |
| Measure of liability | Amount unpaid on shares | Amount undertaken in the memorandum | No limit |
| When payable | On call, at any time | Only on winding up | On winding up |
| Typical use | Trading and commercial | Clubs, associations, research bodies | Rare |
Types of Companies by Liability and Membership
What this does NOT mean
It does not mean "private" and "limited by shares" are alternatives. They answer different questions and every company has an answer to both.
It does not mean a private company is small. Some of the largest companies in India are private companies. Size is section 2(85); privateness is section 2(68).
It does not mean a small company is a separate kind of company. It is a label that attaches to a private company for as long as it stays under both thresholds, and it falls away the moment either is crossed or the company becomes a subsidiary.
It does not mean a One Person Company has one director. It has one member. Directors are a different question entirely.
Quick revision
- Section 3(2): limited by shares, limited by guarantee, or unlimited. A closed list.
- 2(22) unpaid on shares; 2(21) amount undertaken, payable only on winding up.
- 2(68) private: articles restrict transfer, cap members at two hundred except an OPC, prohibit public invitation. Joint holders count as one.
- 2(71) public: not a private company. Proviso: a subsidiary of a non-private company is deemed public.
- No minimum paid-up capital for either since 29 May 2015, Act 21 of 2015.
- 2(62) OPC: one member; a private company by section 3(1)(c).
- 2(85) small: not public, capital up to fifty lakh (prescribable to ten crore) and turnover up to two crore (prescribable to one hundred crore). Excludes holding and subsidiary companies, section 8 companies, and companies under a special Act.
- Section 464: unregistered associations above the prescribed number, capped at one hundred.
Test yourself
1. What are the three kinds of company by liability? Limited by shares, limited by guarantee, and unlimited: section 3(2).
2. What must a private company's articles contain? Under section 2(68): a restriction on the right to transfer its shares; a limit of two hundred members, except in a One Person Company; and a prohibition on any invitation to the public to subscribe for its securities.
3. What is the minimum paid-up capital of a public company? None. The words "of five lakh rupees or such higher paid-up capital," were omitted from section 2(71) by the Companies (Amendment) Act 2015 with effect from 29 May 2015, and nothing has been prescribed in their place.
4. A private company is a wholly owned subsidiary of a listed company. Its articles still restrict transfers. Is it private? No. By the proviso to section 2(71) it is deemed to be a public company for the purposes of the Act, even though it continues to be a private company in its articles.
Types of Companies by Liability and Membership
5. A company has paid-up capital of forty lakh rupees and turnover of one crore fifty lakh rupees, and is a subsidiary of another company. Is it a small company? No. Both numerical limbs of section 2(85) are satisfied, but proviso (A) excludes a subsidiary company outright.
6. In a company limited by guarantee, when does a member have to pay? Only in the event of the company being wound up, and then only the amount he undertook by the memorandum to contribute: section 2(21).
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.