Types of Companies on the Basis of Control

Types of Companies on the Basis of Control

Over the years, company forms of business have grown in popularity. Their evolution has resulted in the formation of a plethora of new types of businesses. Companies will be classified based on their liabilities, members, and control.

Types of Companies on the Basis of Control

(a) Holding Companies

A holding company is a company, which holds all, or the majority of the share capital in one or more companies so as to have a controlling interest in such companies. In some cases, a company’s shares might be held fully or partly by another company. Here, the company owning these shares becomes the holding or parent company. The relationship of holding or subsidiary companies is established either with the control of the Board of Directors or control of share capital. A company will be a holding company of another in the following scenarios:

  • Controls the composition of the Board of Directors of the other company.
  • Exercises or controls more than 50% of the total share capital either on its own or together with one or more of its subsidiary companies.

(b) Subsidiary Company

A company, which operates its business under the control of another company (i.e holding company), is known as a subsidiary company. If a company has significant influence over another company, the latter will be the subsidiary company of the first company. Significant influence is derived either from the control of at least 20% of the total share capital or of business decisions under an agreement. A company is known as a subsidiary company when –

  • the composition of its Board of Directors is controlled by another company; or
  • the other company holds majority of its equity shares; or
  • the other company controls more than half of its voting rights; or
  • it is a subsidiary of another subsidiary company.

Holding companies exercise control over their subsidiaries by dictating the composition of their board of directors. Furthermore, parent companies also exercise control by owning more than 50% of their subsidiary companies’ shares.

(c) Associate Companies

Associate companies are those in which other companies wield significant power. This “significant influence” equates to owning at least 20% of the associate company. Under an agreement, the other company can exert control over the associate company’s business decisions. Under joint venture agreements, associate companies can also exist.

 (d) Government Company:

A Government company is defined as any company in which the Central Government, any State Government or Government, or a combination of the Central Government and one or more State Governments owns at least 51% of the paid-up share capital, and includes a company that is a subsidiary of the Government company.