Companies Classified on Basis of Liability

# Classification of Companies Based on Liability

Under the Companies Act, 2013, companies can be classified into three types based on how much the members are liable to pay if the company runs into financial trouble.

## 1. Company Limited by Shares - Section 2(22)

• Members' liability is limited to the amount unpaid on their shares.
• The unpaid amount can be called anytime by the company.
• If shares are fully paid-up, the member has nothing more to pay.

Example: Mr. A holds 100 shares of Rs.10 each. He has paid Rs.6 per share (Rs.600). His maximum liability is the unpaid Rs.4 x 100 = Rs.400.

## 2. Company Limited by Guarantee - Section 2(21)

• Members' liability is limited to the guaranteed amount stated in the Memorandum of Association.
• This liability arises only at the time of winding up - NOT while the company is a going concern.

### Two Sub-Types:

(a) Guarantee company WITHOUT share capital:

• Initial and working funds come from sources like grants, endowments, fees, subscriptions.

(b) Guarantee company WITH share capital:

• Raises initial capital from members (share capital).
• Working funds from fees, charges, subscriptions.
• Members have TWO-FOLD liability:

1. Unpaid amount on shares (callable anytime)

2. Guarantee amount (payable only on winding up)

### Common Examples:

• Clubs
• Trade associations
• Societies for promoting different objects

## 3. Unlimited Company - Section 2(92)

• No limit on members' liability - extends to entire personal property.
• A member's liability ceases when he ceases to be a member.
• Members are NOT directly liable to creditors (unlike a partnership).
• During going concern: liable only to the company.
• On winding up: only the Liquidator can call on members to contribute.

## Comparison Table

## Key Distinction

In an unlimited company, members are protected from direct creditor claims - creditors deal with the company; only the liquidator can call on members.