On the basis of liability, the companies may be classified into three categories, i.e. (1) Companies limited by shares, (2) Companies limited by guarantee, and (3) Unlimited companies.
(1) Companies Limited by Shares:
A company in which the liability of the members is limited to the unpaid amount of shares held by them is called company limited by shares. In the event of the winding up of the company, a shareholder will be asked to pay only the unpaid amount on the shares held by him.
(2) Companies Limited by Guarantee:
Company limited by guarantee is a company in which the liability of each member is limited to such amount which the members undertake to contribute to the assets of the company in the event of its winding up. In this case, the shareholders shall be liable to pay the amount which remains unpaid on their shares plus the amount payable under the guarantee. The amount guaranteed is laid down in the Memorandum of Association of the company. This type of company is formed for promotion of art, culture, religion, sports, trade etc. and not for the purpose of earning profit.
(3) Unlimited Companies:
In such companies, the liability of a shareholder is unlimited like sole proprietor and partnership form of business. Members are held liable for the debts of the company in proportion to their interest in the company. Liability in such a case shall extend to the private property of the shareholders. There is rare existence of such companies these days. This form is not beneficial for entrepreneur.