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. Many small and medium enterprises rely on an MSME loan to support such growth initiatives effectively.
Features of a company
A company possesses several structural and legal characteristics that distinguish it from other business formats in India. These features, governed by the Ministry of Corporate Affairs (MCA), make the corporate structure one of the most reliable and scalable options for modern entrepreneurs.
Core features of a registered company
| Feature | Legal and structural explanation |
|---|
| Separate legal entity | A company exists as a "legal person" entirely independent from its shareholders. |
| Limited liability | Members are financially liable only to the extent of the unpaid amount on their shares. |
| Perpetual succession | The company’s legal existence remains uninterrupted, regardless of any changes in ownership or the death of a director. |
| Transferability of shares | In public companies, ownership can be easily transferred through the sale of shares on the stock exchange. |
| Corporate governance | The entity is professionally managed by a Board of Directors, ensuring a clear division between ownership and management. |
| Statutory registration | To exist legally, the entity must be incorporated under the Companies Act, 2013, and receive a Certificate of Incorporation (COI). |
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.
- Private company: A private company in India is a business with a minimum of two members and a maximum of 200. Its shares are not available to the general public. It is formed under the Companies Act, 2013
- General partnership: A general partnership involves two or more individuals who share ownership and responsibility for the business. The partners share both profits and liabilities equally unless agreed otherwise
- One Person Company (OPC): A One Person Company is a type of private company where a single individual is the sole owner and operator. It offers the benefits of a private company with limited liability but with just one member
- Corporation: A corporation is a legal entity separate from its owners. In India, this would typically refer to large public or private companies formed under the Companies Act, 2013
- Limited Liability Company (LLC): In India, a Limited Liability Company, usually a private limited company, offers protection to its shareholders. Shareholders are not personally responsible for the company’s debts beyond their shareholding
- Nonprofit: A nonprofit organisation in India is set up to serve public interest, rather than to generate profit. It is typically registered under the Societies Registration Act or as a Section 8 company under the Companies Act, 2013
- Subsidiary: A subsidiary is a company that is controlled by another company, called the parent company. The parent owns the majority of the subsidiary’s shares
- Unlimited company: An unlimited company in India is one where the liability of members is not limited. In the case of debt, the members may be personally responsible for the company's obligations
- Holding company: A holding company is a parent company that owns enough voting stock in another company to control its policies and decisions, though it may not necessarily operate the subsidiary
- Foreign corporation: A foreign corporation in India refers to a company that is incorporated outside of India but does business within India. It operates under the rules of the Foreign Exchange Management Act (FEMA)
- Associate companies: An associate company is a company where another company holds a significant amount of shares (between 20-50%) but does not have full control
- Charitable companies: Charitable companies in India are set up to promote charitable activities and are typically registered under Section 8 of the Companies Act, 2013. They are non-profit and exempt from taxes
- Cooperative: A cooperative in India is a business organisation owned and operated by its members who share the profits or benefits. It is often set up to promote the welfare of its members, such as in agriculture or housing
- S corporation: In India, there is no direct equivalent to an S Corporation as in the USA. However, small businesses with limited liability can enjoy tax benefits similar to an S Corporation if they meet certain criteria
- Community Interest Companies: A Community Interest Company (CIC) in India is a non-profit company that aims to benefit the community rather than making profits for its members. This model is mostly used for social enterprises
- Public company: A public company in India is a company that has more than 7 shareholders, and its shares are available to the public. It is listed on the stock exchange and governed by the Securities and Exchange Board of India (SEBI)
- Section 8 company: A Section 8 company in India is a non-profit organisation formed to promote charitable purposes such as education, art, science, religion, or social welfare. It enjoys tax exemptions under the Income Tax Act
- Listed company: A listed company in India is one that is officially listed on a stock exchange like the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). Its shares are publicly traded
- Government company: A government company in India is a company in which at least 51% of the shares are owned by the government, either central or state. It operates like any other company but with the government as the majority shareholder
Classification of different types of companies
Classification by liability of members:
- Company limited by shares: Members are responsible only for the unpaid amount on their shares.
- Company limited by guarantee: Members’ liability is limited to the amount they have promised to pay if the company is closed.
- Company with unlimited liability: Members are personally responsible for all the company’s debts.
Classification by number of members:
- Private company: Has a small number of members (less than 200), is closely held, and does not allow public shareholding.
- Public company: Has many members, can raise money from the public, and its shares can be listed on stock exchanges.
Classification by mode of incorporation:
- Statutory company: Created by a special law passed by Parliament or state government.
- Registered company: Formed under the Companies Act.
- Chartered company: Created long ago by royal charter (mostly historical now).
Other important classifications:
- One Person Company (OPC): A private company with just one member.
- Government company: Mostly owned by the government.
- Holding company: Owns and controls one or more other companies.
- Foreign company: Incorporated outside India but doing business in India.
- Section 8 company: Set up for social or charitable purposes and does not pay dividends to members.
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. Many micro businesses seek micro loan options to fund their initial capital needs without heavy collateral demands.
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
Companies can be classified based on the number of members involved in their ownership and management. One Person Companies (OPCs) are owned and operated by a single individual, combining the simplicity of sole proprietorship with the benefits of limited liability. Private companies consist of a small group of members, usually family or close associates, and restrict the transfer of shares to maintain control and privacy. Public companies, on the other hand, have a large number of members and offer shares to the general public, allowing for wider ownership and access to capital markets. Each type serves different business needs and scales of operation.
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.
Advantages of a Company
Companies offer multiple structural and financial benefits that support long-term growth and investor confidence:
- Limited liability protection: Shareholders are only liable for the unpaid amount on their shares, shielding personal assets from business liabilities.
- Stable business continuity: Companies continue to operate despite changes in ownership, ensuring long-term stability and uninterrupted operations.
- Efficient management structure: Decisions are made by a designated board or management team, enabling strategic alignment and professional governance.
- Ownership transfer flexibility: Company shares can be transferred or sold without disrupting day-to-day operations, ensuring smooth ownership transitions.
- Enhanced fundraising ability: Companies can issue shares or borrow funds, giving them broader access to capital for growth and expansion.
- Favourable tax provisions: Many jurisdictions offer tax incentives or deductions, improving the company’s financial efficiency and shareholder returns.
- Increased brand credibility: Strong brand identity helps attract customer loyalty, market recognition, and competitive advantage over time.
Disadvantages of a Company
Despite its strengths, the company structure comes with legal and operational complexities that require careful navigation:
- Heavy compliance burden: Companies must follow strict statutory requirements such as regular filings, disclosures, and governance norms.
- Double taxation issue: Corporate income is taxed at the company level, and dividends are again taxed in the hands of shareholders.
- Reduced owner involvement: Centralised management limits the direct participation of owners in daily decision-making, reducing flexibility.
- Bureaucratic decision process: Layers of approval and structured management can slow down responsiveness, especially in dynamic environments.
- Public disclosure pressure: Listed companies face constant scrutiny from regulators, investors, and media, affecting decision-making freedom.
Check your pre-approved business loan offer to get started with funding that matches your business goals without delay.
Company vs. corporation
Within the Indian business ecosystem, the terms Company and Corporation are often used interchangeably, yet they carry distinct legal and structural implications under the Companies Act, 2013.
Key differences: company vs corporation
| Aspect | Company | Corporation |
|---|
| Legal definition | A broad term for a business entity formed to conduct trade or commerce. | A specific legal entity, often a large-scale company or a statutory body. |
| Ownership structure | Can vary from a single owner (OPC) to multiple partners or shareholders. | Primarily owned by shareholders through the issuance of capital stock. |
| Regulatory framework | Compliance depends on the specific type (Private, Public, or Section 8). | Typically highly regulated with stringent disclosure norms for the ROC. |
| Examples | Local SMEs, private limited firms, and partnership-based ventures. | Large multinational entities, Public Sector Undertakings (PSUs), or banks. |
Public vs. private companies
Choosing between a public limited company and a private limited company is a defining decision for any Indian enterprise. While both are governed by the Companies Act, 2013, their operational scales and compliance burdens under the Ministry of Corporate Affairs (MCA) differ significantly.
Public company vs private company: key differences
| Feature | Public company | Private company |
|---|
| Ownership structure | Owned by public investors; must have at least seven members. | Owned by private shareholders; limited to a maximum of 200 members. |
| Capital raising | Can raise funds from the general public via the stock market (IPO). | Restricted to private funding, such as angel investors or promoters. |
| Regulatory framework | Strict compliance; subject to SEBI norms and rigorous quarterly disclosures. | Moderate compliance; enjoys several exemptions from the ROC. |
| Share transferability | Shares are freely tradable on a recognised stock exchange. | Shares are not freely transferable; subject to the Articles of Association (AoA). |
Documents required to register a company
Documents required include:
- PAN card of directors
- Aadhaar card
- Address proof
- Registered office proof
- Memorandum of Association
How to start a company?
Starting a company in India involves a structured process regulated by the Ministry of Corporate Affairs (MCA). The most efficient method is via the SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) portal, which integrates several registrations into a single digital application.
This guide outlines the step-by-step journey from your initial business concept to legal incorporation, including essential post-incorporation formalities.
The step-by-step incorporation process
- Select your company structure: Decide between a Private Limited, Public Limited, or One Person Company (OPC) based on your business goals.
- Obtain a Digital Signature Certificate (DSC): Secure a Class 3 DSC for the proposed directors to sign electronic documents securely.
- Apply for a Director Identification Number (DIN): Ensure all intended directors have a unique DIN issued by the MCA.
- Reserve your company name: Use the RUN (Reserve Unique Name) service within the SPICe+ portal to ensure your brand name is available.
- File for incorporation: Submit the integrated SPICe+ form, which includes the Memorandum of Association (MoA) and Articles of Association (AoA).
- Obtain the Certificate of Incorporation (COI): Once approved, the Registrar of Companies (ROC) will issue your COI, which includes your Corporate Identity Number (CIN), PAN, and TAN.
- Open a corporate bank account: Use your COI and PAN to set up a dedicated business account to manage your company’s finances.
Company registration cost in India
Typical company registration cost in India ranges from ₹6,000 to ₹30,000, depending on company type, professional fees, and government charges.
Major costs include:
- Digital Signature Certificate
- Director Identification Number
- Registration fees
- Professional service charges
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 business loan interest rates range from 14% to 25% 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.
Helpful resources and tips for business loan borrowers
