Introducing different types of commercial companies and their differences

06 August 2020
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Since detailed defining and expressing commercial companies is very complex, commercial companies should be defined generally.

Generally, it can be stated that the commercial company is a group of several real persons and legal persons gathering in order to investment and share the profits and losses. In the following parts we are classifying different types of companies and introducing all of them.

Different types of companies

Different types of companies

As we mentioned earlier, the definition is too general so in order to better understanding of different types of companies, they should be classified in different groups. Classifying commercial companies has various types. There could be different types of classifications, according to that from which perspective you are looking at them and in which ways you want to categorize them. In the following part, we have tried to make it easier to identify commercial companies with understandable categorization.

Classifying commercial companies can be according to the nature of the company, responsibilities of the partners, the ability to sell the shares of the partners, the owners of the company, and the nationality of the company. We are going to describe all of them in detail in following.

Types of companies based on the nature and the way of organization

  1. Legal companies
  2. Practical companies

Types of legal companies

As it is obvious from their names, at the time of establishment these kind of companies go through all the legal steps and their details are legally registered with the relevant authorities, including commercial registries; so their process and procedure of establishing is completely legal and has its special framework. According to Article 20 of the Commercial Code, these companies are divided into several subsets such as Cooperative Partnership Companies, Relative Companies, Limited Liability Companies, Joint Stock Companies, Partnership Companies, and Cooperative Companies. In next parts there are the needed explanations about the specifications of each of them.

Cooperative Partnership Companies

These companies are based on partners’ trust in each other. According to the Commercial Codes character and capital are very significant in Cooperative Partnership Companies since in a condition such as bankruptcy or financial crises, it is possible for the bankrupts to claim their property directly from any of the partners and it is illegal for partners to violate this article; for example if the partners have agreed that only one of them is responsible for paying the property of the bankrupts, this contract has no legal value. These companies are often trusted by third parties since in the case of problems and inadequacies, they can withdraw their debts directly from partners and founders of the company.

As an example, if the amount of claims is 15 million Tomans and the company's capital is 11 million Tomans, paying the remaining 4 million Tomans are by the partners.

Relative Companies

As its name implies, in these companies, there is the issue of relativity in a way that the higher the share of each partner of a company is, the greater its responsibility for the payment of lost property is. In Cooperative Partnership Companies and Relative Companies with the agreement of partners at least one chairman is selected from among the partners or an out-of-organization person. If this person is not one of the partners and founders, his duty will be only in the form of management.

As an example, the claims are 15 million Tomans and the total capital of the company is 11 million Tomans and the Relative Company has four partners. Partner A owns half of the company's capital, partner B owns a quarter, and partner C and D together have a quarter of the shares. Partner A is required to accept half of the remaining 4 million claims (2 million) (relative to his share of total capital). Partner B 1 million and partners C and D must each pay 500,000 Tomans of claims.

Limited Liability Companies

These companies are exactly the same as General Partnership Companies and relative companies; however, if the creditors 'claims are higher than the company's income, the partners' private property will not be considered. It means that if the claims are more than company’s capital, the creditors cannot request the confiscation of the private property of partners and founders to pay their claims. So the partners can just use their share to repaying the claims and there is no paying out of the capital of the company.

Forexample, if the claims are 15 million Tomans and the total capital of the company is 11 million Tomans, none of the partners is responsible for paying the remaining 4 million Tomans.

Joint Stock Companies

These companies, as their name suggests, are divided into equal shares and these shares are traded. There are two types of Stock Companies:

  1. Public Joint Stock Companies
  2. Private Joint Stock Companies

The shares of Private Joint Stock Companies will be divided between a maximum of 3 partners and the partner with the largest share will have a greater responsibility. Public Joint Stock Companies sell a portion of their stock on the stock market to finance the company so that people can invest in the company by buying shares and share in the profits and losses. It is worth to mention that according to the Commercial Codes Joint Stock Companies are considered as commercial even if their activity is not commercial and they must follow the rules of commercial companies.

Joint Stock Companies

Partnership Companies

Actually these companies are a combination of two types of General Partnership Company and Joint Stock Company; it means that their partners are one or more guarantor partners and several joint stock partners. As you can guess, the leverage of joint stock partners is the same as their share of the company and in case of inadequacy of the company and financial problems, guarantor partners have the responsibility of repaying the claims. The authority of the joint stock partners depends on the amount of shares they have from the company. Partnership Companies are divided to two types:

1.    Joint Stock partnership company
2.    Limited Partnership Company

In Joint Stock Partnership Company, one or more guarantor partners and one or more joint stock partners are present (a combination of General Partnership Company and Private Joint Stock Company). Authorities and responsibilities of joint stock partner are limited to the shares they have from the company or the shares they have brought to the company. In contrast, guarantor partners must pay the claims claimed by the claimants if the debt is greater than the total capital. Liability laws apply to guarantor partners in exactly the same way as joint stock companies.

In Limited Partnership Companies, there are several guarantor powers with full authorities and several partners with limited powers. In this case, the company's stock will not be divided and the guarantor's stocks will be in the form of the partners' stock.

Co-Operative Company

As their name indicates, the reason for establishing these companies is to help and assist its members and to provide facilities for economic problems. Co-Operative Companies are not necessarily in the category of commercial companies and if their activity is not commercial they are not considered commercial. Depending on the purpose of their establishment, Co-Operative Company will have different types such as Production cooperatives, service cooperatives, free credit cooperatives, public joint stock cooperatives, industrial cooperatives, agricultural and livestock cooperatives, housing cooperatives and so on.

As mentioned earlier, Co-Operative Companies are different from commercial companies in their nature. But how different?

In commercial companies, members acquire authority and power in proportion to their share in the company and the only thing that matters and gives people authority is the amount of capital and their share of the company. It means that in the commercial companies the personality and the character of the people is not matter and to bring a new partner, current partners agree to join a new partner. Nevertheless, if the new partner wants to leave the organization or the company, it depends on the vote and agreement of other partners and the legal process must be followed. On the other hand, the partners try to minimize the company's original owners so most of the company's capital is available to a limited number of people which has different reasons.

What we mentioned was all about the characteristics of commercial companies that are all the opposite of co-operative companies. In co-operative companies, the efforts are to maximize the members and partners and make more people contribute to the company's profits and benefits. To new people entrance, it is enough for a person to buy the minimum set share, and unlike commercial companies, the characters of the members is more important than their capital. In these companies, the capital is just considered as a mean to help the members to achieve the main goal of establishing a company, namely cooperation and empathy.

Practical companies

As their name indicate, the illegal companies are the opposite of legal companies. Some economists have also called these companies practical. The records of practical companies are not registered in any of the business registry offices and their activity is illegal. Their laws may be in the form of domestic laws set by their owners. These kind of companies are established by several partners to benefit them or their subsets. The way of establishment may be inadvertent or intentional; it means that even the establishers are not aware of the fact that what they have established is not legally permissible and the consequences will befall them.

The remarkable issues here are the cases of bankruptcies and financial crises that arise for these companies. To deal with such companies, there are some Commercial Codes; for example in the case of bankruptcy, the law treats these companies like partnership companies, and each of the losers can claim their property directly from the original partners and establishers. In most cases, the activities of these companies are secret, but in some cases, secrecy is not part of their policies.

Types of commercial companies based on their ability to buy and sell shares and partners' powers

There is another classification of companies. This classification is based on the extent that the shareholders, founders and partners have the right to sell their shares in a company and whether the capital is more important or the investor. In this classification the companies are divided into two groups:

  1. Personal companies
  2. Joint stock companies

Personal companies   

In these companies, in addition to capital, the personality of the investor is very important. In some cases these companies are run as a family so that members are as close to each other as possible. In this case each partner has unlimited responsibility and if there is financial crises and bankruptcy, they will be required to pay the creditors. General Partnership Companies, Relative Companies, and Limited Partnership Companies are all personal companies. Another important thing is the right of buying and selling the stock. If one of the partners wants to transfer his share of the company to another person, this must be with the consent of all partners. If only one partner objects, the person will not be able to sell their share. Also, as mentioned earlier in the part of General Partnership Company, in personal companies, in the case of bankruptcy, properties restoration from any of shareholders is completely legal and permissible. Since the number of partners in personal companies are limited and they own the whole stock of the company, almost all the partners are aware of the company’s activity and have role in company’s decision makings.

Capital Companies

Capital Company are the opposite of Personal Company. Despite of the personal company, in which the personality of the partner is important, the one and only important thing in Capital Company is the capital of each partner. The responsibility of each partner is limited to his stock and in the case of bankruptcy, property restoration depends the stock of each stockholder. Public Joint Stock Companies, Private Joint Stock Companies, and Joint Stock partnership Companies are considered as Capital Companies. It is worth to say buying and selling stocks in these companies is very simple. If Public Joint Stock Company is approved in the stock market, shareholders can buy and sell shares in the same stock market. In Private Joint Stock Companies, each shareholder must obtain the consent of the majority of the partners to sell their shares but there is no need to obtain the consent of all of the partners. Since in the most cases, the Capital Companies have lots of partners (especially in Public Joint Stock), only the main partners who own the majority of the company's shares make decisions for the company.

Types of commercial companies based on capital ownership

Types of commercial companies based on capital ownership

In this case, depending on who owns the major capital, companies are divided into government-owned companies and private companies.

State-owned companies

The term state-owned refers to the companies with at least 50 percent of the capital available to the government and government agencies. According to the Commercial Code, "a state-owned company is a unit of a private organization established as a company with the permission of the law, and the government's share of its capital is more than 50 percent." State-owned companies can transfer up to 50 percent of their capital to the private part, but when it reaches 51 percent, the government share becomes 49 percent; In this case, the nature of the organization will no longer be state-owned. State-owned companies and institutions will be represented by the relevant ministers and the Minister of Economy. In State-owned companies, the shareholders may delegate some of their powers to the Minister of the Ministry. For example, Insurance companies, most of whose capital is owned by the government, are considered as state-owned, like Iran's central insurance.

Another point is related to when some part of state-owned companies’ capital is transferred to private companies. In this situation, the framework of special laws set by the private sector, if not accepted and approved by the public sector, the Commercial Codes of commercial companies must be followed. It is worth to state that the capital of the companies which are all state-owned is fully injected into these companies by the government.

Private companies

Private companies are the companies that at least 50 percent of their capital come from private sector. So not all capitalists are just legal and natural entities and in some cases, the government also acts as a shareholder in these companies.

Types of commercial companies based on corporation nationality

Considering corporation nationality, they are divided to two groups: 1.Domestic Corporation 2. Foreign Corporation Recently, there is another group is added which is called Multinational corporation.

Domestic Corporation

Corporations whose centrality is in Iran or have been established in Iran, are considered domestic. Of course, in this part corporation’s centrality is important since, despite of establishment of a branch abroad, if it is controlled from inside the country, it will still be considered domestic. Domestic corporations follow the Commercial Codes and according to the types mentioned earlier, they may have their own domestic laws too.

Foreign Corporation

As their names suggests, Foreign Corporations have centrality and establishers abroad. If the nature of the activities of these corporations does not contradict the domestic laws, they will be allowed to operate inside the country. Of course, this also depends on certain conditions, for example, the company must be completely legal and registered in its country of origin. After authentication of the corporation, a contract is registered between the foreign corporation and domestic institutions, according to which the foreign corporation will have the right to do some activities limited to the provisions of the contract.

Multinational Corporation

Despite being established in one country, these corporations have capital and reserves in several countries and through it, they can trade internationally.

Last word

Today, there are different types of companies involving in domestic and foreign commercials. Companies are divided to different groups according to the way of establishment, being legal or illegal, responsibilities and their activities. In this paper of Sindbad, we have tried to investigate different aspects of various types of commercial companies. We will be glad if you share your opinions and comments with us.

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