Company Limited by Shares, Definition, Features, Formation, Types

Under Section 2(22) of the Companies Act, 2013, a Company Limited by Shares is defined as a company in which the liability of its shareholders is limited to the amount, if any, unpaid on their shares. This means that shareholders are only liable for the unpaid portion of their shares, and beyond that, their personal assets are not at risk if the company incurs debt or is liquidated.

For example, if a shareholder has purchased 100 shares at ₹10 each but has paid only ₹7 per share, their liability is limited to ₹3 per share. The company can ask the shareholder to pay the remaining ₹3 if the company faces liquidation.

Features of a Company Limited by Shares:

1. Limited Liability of Shareholders

The most significant feature of a company limited by shares is that the liability of shareholders is limited to the amount unpaid on their shares. This means that shareholders are not personally liable for the company’s debts or obligations, providing them with protection from financial risk beyond their investment in the company.

2. Separate Legal Entity

Company limited by shares is considered a separate legal entity from its shareholders. It can own property, enter into contracts, sue, and be sued in its own name. This separation provides the company with a distinct identity, independent of its shareholders or directors.

3. Perpetual Succession

Company enjoys perpetual succession, meaning that it continues to exist even if shareholders or directors change or pass away. The company’s existence is not affected by the death, insolvency, or retirement of its members, and it continues to operate as long as it is legally dissolved.

4. Free Transferability of Shares

In the case of a public company limited by shares, shares are freely transferable, allowing shareholders to sell or transfer their shares without any restrictions. This feature provides liquidity to shareholders, enabling them to exit their investment easily. However, private companies may have restrictions on the transfer of shares as per their Articles of Association.

5. Capital is Divided into Shares

The capital of a company limited by shares is divided into shares of fixed value. Each share represents a unit of ownership in the company, and the shareholders are issued a share certificate as proof of their ownership. Shareholders receive a portion of the company’s profits in the form of dividends, proportional to the number of shares they own.

6. Corporate Governance and Board of Directors

Company limited by shares is governed by a board of directors, who are responsible for making key decisions and managing the company’s affairs. The shareholders elect the board of directors, who, in turn, appoint senior management to run the day-to-day operations of the company. This governance structure ensures that the company operates efficiently and in the best interest of its shareholders.

7. Raising Capital Through Shares

One of the key advantages of a company limited by shares is its ability to raise capital by issuing shares. Companies can issue equity shares to investors, providing them with ownership rights in the company. Additionally, the company can issue preference shares or debentures to raise further capital. This feature enables companies to accumulate substantial funds for expansion and growth.

8. Compliance and Legal Framework

Companies limited by shares must comply with the regulations outlined in the Companies Act, 2013, which governs their formation, operation, and dissolution. These companies are required to file annual financial statements, hold general meetings, and adhere to rules related to corporate governance and disclosure.

Formation of a Company Limited by Shares:

The process of forming a company limited by shares in India involves a number of steps and is governed by the Companies Act, 2013. Below are the key steps involved in the formation process:

1. Minimum Members and Directors

To form a company limited by shares:

• A Private Company requires a minimum of 2 members and 2 directors.
• A Public Company requires a minimum of 7 members and 3 directors.

There is no upper limit on the number of shareholders in a public company, but a private company can have a maximum of 200 members.

2. Name Reservation

The first step in forming a company is to apply for name reservation with the Registrar of Companies (ROC). The proposed name must comply with the guidelines under the Companies Act and should not be similar to the name of any existing company. The name must end with “Private Limited” for a private company or “Limited” for a public company.

3. Drafting the Memorandum and Articles of Association

The Memorandum of Association (MOA) and Articles of Association (AOA) are key documents that must be drafted during the incorporation process. The MOA outlines the company’s objectives, while the AOA governs the internal management of the company.

4. Filing Incorporation Documents

The next step is to file incorporation documents with the ROC, including:

• Form SPICe+ (Simplified Proforma for Incorporating a Company Electronically).
• The MOA and AOA.
• Details of the directors and members, including their identification documents.
• The company’s registered office address.

5. Obtaining Certificate of Incorporation

Once the ROC reviews and approves the documents, the company is issued a Certificate of Incorporation. This certificate serves as proof that the company has been legally formed and includes details such as the company’s Corporate Identification Number (CIN) and the date of incorporation.

6. Capital Subscription

After incorporation, the company can begin issuing shares to its subscribers, who must pay for their shares. This capital is used to finance the company’s operations and expansion.

7. Commencement of Business

The company must file a declaration with the ROC confirming that the paid-up share capital has been deposited in the company’s bank account. Only after this declaration can the company legally commence its business operations.

8. Compliance with Post-Incorporation Requirements

Once formed, the company must comply with various post-incorporation requirements, such as:

• Holding an Annual General Meeting (AGM).
• Filing annual financial statements and annual returns with the ROC.
• Appointing an auditor within 30 days of incorporation.
• Ensuring compliance with other applicable regulations under the Companies Act, 2013.

Types of Companies Limited by Shares:

1. Private Limited Company

Private Limited Company is a company that restricts the transfer of its shares and limits the number of shareholders to 200. Private limited companies are commonly used for smaller businesses that want to limit the liability of their members while maintaining control over ownership.

2. Public Limited Company

Public Limited Company is a company that can offer its shares to the public and has no restriction on the number of shareholders. These companies are typically listed on stock exchanges and have to comply with more stringent disclosure and regulatory requirements. Public companies can raise substantial capital by issuing shares to the public.

3. Listed Company

Listed Company is a public limited company whose shares are listed and traded on a recognized stock exchange. These companies are subject to additional regulations by stock exchanges and regulatory bodies such as the Securities and Exchange Board of India (SEBI).

4. Unlisted Company

Unlisted Company is a public limited company that has not listed its shares on a stock exchange. While it can still raise capital from the public, it does so without the benefits and obligations of being listed on a stock market.