Explain the classification of Companies by Liability of Members

The Companies Act, 1956 provides for registration of different kinds of companies in India.

The companies can be classified in terms of the liability of its members :

1.    Limited companies

                  2.    Unlimited liability of the members
                  3.    Limited by guarantee

Companies can have different degrees of liabilities for its members. Limited companies are companies where the liability of the members is limited to the share contribution. Limited liability companies are also called share companies.

A company, however, can be created with the memorandum of association providing for unlimited liability of the members. Even in these companies, creditors cannot approach the shareholders directly and claim from their assets, for the fulfillment of the company’s obligations.

The creditor only has a right to ask for the dissolution of the company and claim its assets towards the repayment of his loan. In such a situation, that is, winding up of the company, the company can lay claims to the personal assets of the shareholders to meet its liabilities.

Another from of company with respect to liability is a company limited by guarantee. In such companies, the subscribers to the memorandum of association undertake to contribute a specified amount to the company so as to meet its liabilities in the case of winding up.

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