The Companies Act of 2013 defines a company as an organisation incorporated under the provisions of the Act, or any other previous related Acts. A company is an association of persons, who contribute money that constitutes the Company’s capital. Such associated people are called members, and the money that they contribute is called the common stock – share capital. The proportion of the member’s contribution is entitled in shares.
A company can either be a private or public company. The significant difference between the two is that, in a public company, the shares can be traded in the market. The stocks of a public company are listed in a stock exchange. On the other hand, in a private company, the shares are held by a close-knit group of members. A private company can become public after an IPO issue of shares.
More: Difference between private and public limited company
When a company is incorporated under the Companies Act, it can either be incorporated as a limited or an unlimited company. The difference between the two is in the burden of the company's liability on the members/owners in the event of debt or losses. In a limited company, the liability of the members is limited to the shares they hold. However, in an unlimited company, there is typically no share capital, and the owner/members/directors of the company are personally liable for all the debts of the company.
Broadly speaking, a limited company can fall under any of the following heads:
Also Read: Types of Companies in India
Example: Most private and public are limited by shares and its the most popular form of business in India. Companies like Reliance, Infosys and Tata are all public companies limited by shares. Facebook and Google operate in India with shares, however, they have been incorporated as private entities.
Example: Open Source Pharma Foundation is a private limited company which is limited by guarantee
However, the owners of the company undertake a nominal amount as their minimum guarantee, which they will pay in the event of debt, winding-up or dissolution. They are called guarantors of the company, and they usually elect to become the directors of the company as well. Since guarantee limits the company's liability, the owners/founders are not personally held liable for the debts of the company, if any, apart from the amount of the guarantee undertaken by them.
If the initial funding comes from the funds of the owners, it would constitute the share capital of the company. In such a case, the liability of the owners has a two-fold effect. Their liability will be limited to both the guarantee amount specified by them and a portion of their unpaid shares.