Corporate and Other Laws · Preliminary

Classification of Companies under the Companies Act 2013

Updated 4 October 2026 · Fact-checked

Companies are classified by incorporation (registered or statutory), liability (limited by shares, by guarantee, unlimited), members (private, public, OPC), control (holding, subsidiary, associate) and ownership (government). To answer, name the basis, state the defining test, then apply it to the facts given.

Understand Classification of Companies

A company is not one fixed thing. The Companies Act, 2013 groups companies on different bases, and each group carries different rules. You must know the basis first, then the type.

By incorporation: a registered company is formed under the Act. A statutory company is created by a special Act of Parliament. By liability: a company can be limited by shares, limited by guarantee, or unlimited. A guarantee company's members pay only the amount they undertook to contribute if the company is wound up.

By number of members: a private company restricts the right to transfer shares, limits members (the Act sets a cap of 200, with exclusions) and cannot invite the public to subscribe to its securities. A public company is not a private company. A One Person Company (OPC) has one person as its only member. A small company is defined by paid-up capital and turnover limits, which are prescribed by rules and can be changed, so check the current figures in your study material. A dormant company is registered for a future project or to hold an asset or intellectual property and has no significant accounting transaction.

By control: holding, subsidiary and associate companies. By ownership: a government company is one where the Central or State Governments (alone or together) hold at least 51% of paid-up share capital.

A Section 8 company is formed for charitable and similar objects. It needs a licence from the Central Government. You will see how its rules differ from an ordinary company, and exams love this contrast.

Key rules to remember

Section 8 conditions: Objects (commerce, art, science, sports, education, research, social welfare, religion, charity, environment etc.) + profits applied only to objects + no dividend to members; All three must be satisfied to the Central Government's satisfaction. A licence is then issued, and the company may omit 'Limited' or 'Private Limited' from its name.
Section 8 alteration and conversion: Alter memorandum or articles only with previous Central Government approval; convert to another kind only after complying with prescribed conditions; Section 8(4). A firm may be a member (Section 8(3)). Such a company enjoys all privileges and obligations of limited companies (Section 8(2)).
Section 8 default penalty: Company: fine ₹10,00,000 to ₹1,00,00,000. Officer in default: fine ₹25,000 to ₹25,00,000; Section 8(11). If affairs were conducted fraudulently, every officer in default is liable under section 447.
Section 8 amalgamation and surplus assets: Amalgamate only with another Section 8 company having similar objects. Surplus assets on winding up go to a similar Section 8 company or are sold and proceeds credited to the Insolvency and Bankruptcy Fund; Section 8(10) and 8(9). The Tribunal may impose conditions on transfer of assets.
Directorship limits: Maximum 20 companies in all, and maximum 10 public companies; Section 165(1). Private companies that are holding or subsidiary of a public company count towards the public company limit. Dormant company directorships are not counted in the 20. Members may by special resolution fix a lesser number (Section 165(2)).
Penalty for breaching directorship limit: ₹2,000 per day after the first day, maximum ₹2,00,000; Section 165(6), for a person who accepts appointment in violation of the section.
Board meetings: general rule: First meeting within 30 days of incorporation; at least 4 meetings a year; gap between two meetings not more than 120 days; Section 173(1).
Board meetings: OPC, small and dormant companies: At least 1 meeting in each half of a calendar year; gap between the two meetings not less than 90 days; Section 173(5). Section 173 and section 174 do not apply to an OPC with only one director.
Lesser penalties: Penalty not more than one-half of the penalty specified, subject to maximum ₹2,00,000 for the company and ₹1,00,000 for an officer in default or other person; Section 446B. Applies to OPC, small company, start-up company and Producer Company, where the provision imposes a penalty.
Government company: Not less than 51% of paid-up share capital held by Central Government, State Governments, or both; Definition in section 2(45). Remember the percentage as 'at least 51%'.

How to solve Classification of Companies questions

Use this method for both theory questions and case-study questions on classification.

1Identify the basis of classification the question is testing: incorporation, liability, members, control or ownership.
2Write the definition or test of the company type in one or two lines, using the Act's wording.
3List the features that matter for the question, such as members, name, licence, capital, meetings or directorships.
4Apply the test to the facts. Tick each condition and say whether it is met.
5If the question compares two types, use a point-by-point format on the same heads for both.
6If a penalty or limit is asked, state the exact amount or number and the section.
7Finish with a one-line conclusion that answers exactly what was asked.

Quickest way: Basis, test, facts, conclusion

When to use it: Use it for the 70-mark written paper and for MCQs with a short fact situation.

For MCQs, find the key word in the fact pattern: 'charitable', 'one member', 'no dividend', '51%', 'future project'. It points straight to the company type.
Eliminate options that mix features of different types, for example a Section 8 company paying dividends.
For numbers, recall the fixed set: 20 and 10 for directorships, 120 days and 4 meetings, 90 days for small companies.
In written answers, use the format: Provision, Facts, Conclusion. Name the section first, because step marks go to the provision.
For differences, draw two columns mentally and write 4 to 6 pairs on matching heads. Do not list features of only one type.

Common mistakes in Classification of Companies

Saying a Section 8 company can pay dividends if profits are high.
Students treat it like any limited company.
Fix: Section 8 requires an intention to prohibit payment of any dividend to members. Profits are applied only to promoting the objects.
Thinking a Section 8 company can freely alter its memorandum or articles.
The rule for ordinary companies is a special resolution, so students carry it over.
Fix: For a Section 8 company, alteration needs the previous approval of the Central Government (Section 8(4)).
Counting a dormant company's directorship in the limit of 20.
Students remember the limit but forget the Explanation.
Fix: Explanation II to Section 165(1) says directorship in a dormant company is not included in reckoning the 20-company limit.
Applying the 4-meetings and 120-day rule to every company.
Section 173(1) is memorised without the relaxation for small companies.
Fix: OPC, small and dormant companies comply if they hold one meeting in each half of the calendar year with a gap of at least 90 days (Section 173(5)).
Defining a public company as one that has at least 7 members and trades its shares.
Students define it by features instead of by exclusion.
Fix: Write it as a company which is not a private company. Do not claim it must be listed, because a public company need not be listed.
Stating the Section 8 default penalty as imprisonment.
Older versions of the text had imprisonment for officers.
Fix: The words on imprisonment were omitted w.e.f. 21-12-2020. Now it is a fine of ₹25,000 to ₹25,00,000 for officers, with section 447 applying if fraud is proved.

Worked examples

Example 1

Jan Seva Foundation Private Limited wishes to promote education and uses all its surplus only for that purpose. Its members want to receive a yearly dividend. Advise whether it can be registered under Section 8 and whether it may drop 'Private Limited' from its name.

Show the solution

Provision: Under Section 8(1), the Central Government may license a company to register under Section 8 if it has objects such as education, intends to apply profits only to those objects, and intends to prohibit payment of any dividend to its members.
Facts: Objects of education and application of surplus to those objects satisfy clauses (a) and (b). The members' wish to receive dividend violates clause (c).
Application: All three conditions must be met. A company that wants to pay dividends cannot get the licence.
Name: Dropping 'Private Limited' is allowed only if the licence is granted. Without it the name must keep those words.
Alternative: If members drop the dividend plan and an existing company wants to convert, Section 8(5) lets the Central Government license it to register under Section 8 and omit the words from the name.

Answer: As framed, it cannot be registered under Section 8 because the members want dividends, which Section 8(1)(c) prohibits. It cannot drop 'Private Limited' unless the licence is granted. If the dividend plan is given up, it can seek a licence.

Example 2

Mr. Rao is a director in 8 public companies, 9 private companies that are not holding or subsidiary of a public company, and 4 private companies that are subsidiaries of public companies. None is dormant. Has he breached Section 165? If he continues, state the maximum penalty.

Show the solution

Provision: Under Section 165(1), a person cannot be a director in more than 20 companies, and not more than 10 may be public companies. Private companies that are holding or subsidiary of a public company are counted towards the public company limit.
Total companies: 8 + 9 + 4 = 21, which is more than 20.
Public company limit: 8 public + 4 private subsidiaries of public companies = 12, which is more than 10.
Conclusion: Both limits are breached.
Penalty: Under Section 165(6), a person who accepts appointment in violation is liable to ₹2,000 for each day after the first during which the violation continues, subject to a maximum of ₹2,00,000.

Answer: Yes. He holds 21 directorships against a limit of 20, and 12 count as public against a limit of 10. The penalty is ₹2,000 per day after the first day, up to a maximum of ₹2,00,000.

Exam tips

Practise the Section 8 conditions as a three-part list: objects, application of profits, no dividend. Examiners often hide one breach in the facts.
Memorise the numbers in Sections 165 and 173 and the Section 8 and 446B penalties as a single sheet. MCQs test them directly.
For 'distinguish between' questions, use matching heads such as minimum members, name, transfer of shares and public invitation. Four to six pairs are enough.
For small company thresholds, use the figures given in your current ICAI study material and amendments, since they are prescribed by rules and can change.
In case studies, count carefully. Add holding or subsidiary private companies to the public count before comparing with 10.

Practice questions from Preliminary

Classification of Companies: frequently asked questions

What is the difference between a private and a public company?

A private company restricts the transfer of its shares, limits the number of its members and cannot invite the public to subscribe to its securities. A public company is simply a company that is not a private company. Write the difference on heads such as members, name, transfer of shares and public invitation.

Can a Section 8 company pay dividends?

No. Section 8(1)(c) requires an intention to prohibit payment of any dividend to its members. Profits and other income can only be applied to promote its objects.

How many board meetings must a small company or OPC hold?

Under Section 173(5), it is enough to hold at least one meeting in each half of a calendar year with a gap of not less than 90 days between them. An OPC with only one director is not covered by Section 173 and section 174.

Are dormant company directorships counted in the 20-company limit?

No. Explanation II to Section 165(1) states that directorship in a dormant company is not included when reckoning the limit of twenty companies.