FORMS OF BUSINESS ENTITIES PREVALENT IN INDIA
Whether you are on an organized growth path or just planning to start out, legal structure is an integral part of running a business. Any company in India must be registered under the Companies Act 2013. To this end, each entity must understand its options to start its business and have a legal structure approved by the Government of India. The best legal form must be selected from the permissible models in order to do business and achieve success.
The choice of the appropriate legal form depends on the goals of the company and the local and central laws in which you wish to establish your registered office. Well-defined goals allow the company to choose the best legal form to meet those goals.
For example, certain companies want to reap the benefits of being a startup in India. For these purposes, it is mandatory to be registered as a private limited company or limited liability company.
A firm can also easily be converted into a company if required. Certain types of companies also protect the personal interests/assets of partners/directors in the event of loss or indebtedness.
Listed below are the types of business structure prevalent in India and their notable characteristics, merits and demerits to help you decide on the best legal structure for your proposed company.
Types of Business Organizations-
1. Sole Proprietorship
3. Limited Liability Partnership
4. Co-operative Society
5. Company (Regulated by Companies Act 2013)
1. SOLE PROPRIETORSHIP
Sole Proprietorship is a form of business entity in which an individual introduces his own capital, uses his own skills and intelligence in the management of its affairs and is solely responsible for the results of its operations.
While it is easy to register this entity, the proprietor must bear responsibility for all liabilities. The practical implication of such an agreement is that the entire profit made by sole proprietor is in the hands of the owner. Many small businesses are recommended to and opt for this legal structure.
a. Easy formation
b. Full control
c. Direct motivation
e. Simple dissolution
a. Limited resources
b. Not suitable for large scale operations
c. Unlimited liability
d. No checks and controls
e. Limited managerial capability
Facts: Flipkart and Ola started their business as sole proprietorship companies in India.
A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested carried on by all and any one of them acting for all.
There is a partnership deed which sets out each partner's invested interest and profit sharing rate along with other terms and conditions and transactions.
Partners are responsible for all liabilities and have no limit. When it comes to registering a firm, it is not necessary to do under law but it is advisable to register.
Indian Partnership Act 1932 regulates the working of partnership firms.
a. Easy to set up
b. More capital can be brought into the business.
c. Partners bring new skills and ideas to a business
d. Decision making can be much easier with more brains to think about a problem
Facts: Hindustan Petroleum, Mahindra and Mahindra, Maruti Suzuki, Renault India are registered under the 1932 act of Indian Partnership Act 1932.
3. LIMITED LIABILITY PARTNERSHIP
LLP is an incorporated partnership formed and registered under the Limited Liability Partnership Act, 2008 with limited liability and perpetual succession. The Act came into force w.e.f. 1st April, 2009.
It is a body corporate with distinct legal entity and perpetual succession. It is interesting to note that it is applicable to any trade or business. As against partnership firms, partners in an LLP aren't pressured with limitless liabilities because of the business.
Their duty toward losses or money owed is constrained to investments made via way of means of them. An LLP and its partners are taken into consideration separate legal entities.
Moreover, no partner is liable on account of the independent actions of other partners, thus individual partners are safe and shielded from joint liabilities upon commission of another partner’s misconduct. No Minimum Capital Requirement: An LLP can be started with no minimum amount of capital contribution.
1. No limitation on the number of business owners: There can be two or more partners in this form of legal structure.
2. Less Registration Cost
3. Less Compliance
Facts: There are more than one lakh LLP company registrations in India.
4. CO-OPERATIVE SOCIETY
A Co-operative society is an association of persons who join together on a voluntary basis for the furtherance of their common economic interests.
Types of Co-operative Societies
a. Consumer Cooperatives
b. Housing Cooperatives
c. Credit cooperatives
d. Farming Cooperatives
As per Sec 2(20) of Companies Act 2013, Company means a company registered under this Act (2013) or any of the previous Companies Law.
General meaning, as defined by Justice Lindley is as follows-
• A Company is an association of persons,
• These persons contribute money or money’s worth to a common stock
• The common stock so contributed is denoted in money and is called as the capital of the company.
• The persons who contribute the capital are called the members of the company
• The capital is employed in some common trade or business
• The members share the profit or losses arising from such business.
• The proportion of capital to which each member is entitled is called his share.
• The shares are always transferrable though the right to transfer is often more or less restricted
Characteristics of a Company
1. A Company is a legal and separate person in the eyes of law having its own rights and obligations and distinct from its members.
Case law- Saloman v. Saloman & Co. Ltd.
2. Perpetual Succession- Death, insolvency or insanity of any members does not affect the continuity of the Company, it does not depend upon the life of its members.
3. Common seal- It is the official signature of the Company. It is optional now.
4. Transferability of shares- Shares are movable property. They are transferable in the manner provided in the Articles.
- Public Company- shares are freely transferable.
- Private Co. - restriction on transfer of shares.
TYPES OF COMPANIES
a. Private Company- As per Section 2(68) of the companies Act 2013, A private company is defined as a ‘private company means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
(iii) prohibits any invitation to the public to subscribe for any securities of the company.’
Most Startups and businesses in India prefer Private Limited Company as a suitable business structure.
b. Public Companies- As per Section 2(71) of the Companies Act, a public company means “a company which is not a private company”.
A public limited is formed by a minimum of 7 (seven) persons with a minimum paid-up capital.
The company may get listed in the stock exchange and thereafter shares of the same are traded openly. There are more legal restrictions on this type of establishment than a Private Limited Company.
Facts: Reliance Industries and Bharti Airtel are examples of top Public Limited Companies.
c. One-Person Companies-
As per Section 2(62) of the Companies Act 2013, “one person company” means a company that has only one person as a member. This is a recent invention to facilitate entrepreneurs to own and manage companies alone.All the shares can be owned by one person but there must be an additional nominee director to register this firm.