# Companies Classified by Liability of Members

Under the Companies Act, 2013, companies are classified into three types based on the liability of members:

## 1. Company Limited by Shares

Liability of members is limited to the unpaid amount on the shares held by them.
Once shares are fully paid up, members have no further liability.
The limited liability protection applies to shareholders, NOT to the company itself (the company always has unlimited liability for its own debts).

## 2. Company Limited by Guarantee

Members' liability is limited by the MOA to the amount they undertake to contribute to the company's assets in the event of winding up.
Common form for non-profit / charitable organisations (clubs, professional associations).
May or may not have share capital — if it does, members are liable for unpaid shares + the guarantee amount.

## 3. Unlimited Company

No limit on the liability of members — members can be personally liable for the company's debts.
Generally formed as private companies.
Members' liability arises only on winding up, not during the company's life.

## Summary Table

Type	Extent of Liability	Trigger
Limited by shares	Unpaid amount on shares	Always (during life or winding up)
Limited by guarantee	Amount undertaken in MOA	At winding up
Unlimited	No limit — personal assets at risk	On winding up

Worked example

### Example 1

Example 1 — Limited by shares: Mr. R holds 1,000 shares of ₹10 each, on which ₹6 per share is paid up. On winding up, his maximum liability is ₹4 × 1,000 = ₹4,000 (unpaid amount).

### Example 2

Example 2 — Limited by guarantee: A members' club is registered as a guarantee company. Each member guarantees ₹500 in MOA. On winding up, each member can be called upon to contribute a maximum of ₹500, regardless of how long they've been members.

### Example 3

Example 3 — Unlimited company: ABC Unlimited Pvt Ltd is wound up with liabilities of ₹2 crore exceeding assets by ₹50 lakh. → Members can be required to contribute proportionately to make good the deficit — their personal assets are at risk.

⚠️ Common exam mistakes

Believing the company itself enjoys limited liability — the company always has unlimited liability for its own debts; it is the members who get the protection.
Confusing 'company limited by guarantee' as one having no liability at all — the guarantee amount becomes payable on winding up.
Forgetting that an unlimited company is permitted under the Companies Act — many students assume all incorporated companies must be limited.

Reference:

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