In India, there are six different forms of business entities.
A business entity’s goals, and the local and central laws where it wants to establish its basis have to be aligned while choosing the correct legal structure. With well-defined objectives, an entity can choose the optimal legal form for achieving those objectives. For example, some businesses desire to take advantage of being a start-up in India. It is a legal necessity to be registered as a Private Limited Company or a Limited Liability Partnership for this reason.
The following are some of the most frequent forms of business structures found in India, along with their distinguishing characteristics that will help you choose the ideal legal structure:
1. Sole Proprietorships
One individual controls a sole proprietorship entirely. A business and its owner are not regarded as independent entities when operating under a sole proprietorship. Starting a firm as a sole proprietorship in India does not involve any formal registration. This entity is simple to register, and the proprietor is personally liable for all debts. There are numerous advantages to using this legal structure, including the fact that it is relatively inexpensive. Since decision-making is in the hands of the proprietors, there is some latitude in decision-making.
In India, Flipkart and Snapdeal were founded as sole proprietorships.
Two or more persons form a partnership firm to work together, gain money, and accomplish a common goal. A partnership deed describes each partner’s invested equity, profit-sharing percentages, and other aspects of firm operation and functioning. The partners bear all obligations, and there is no cap on how much they can be held liable for. It is not required but recommended to register a partnership. Apart from that, there are other advantages to forming a partnership, including the ease of raising funds compared to a sole proprietorship and the fact that obligations are shared, resulting in improved accountability.
The following companies are registered partnerships: Hindustan Petroleum, Mahindra & Mahindra, Maruti Suzuki, and Renault India.
3. Limited Liability Partnerships (LLPs)
The Limited Liability Partnership Act of 2009 establishes a limited liability partnership. In contrast to partnership firms, LLP partners are not bound by the business’s infinite obligations, and their liability for losses or obligations is limited to the investments they have made. A limited liability partnership and its partners are treated as separate legal entities in the eyes of the law. Furthermore, no partner is liable for the independent actions of other partners; therefore, individual partners are safe and protected from joint liabilities arising from the misbehaviour of another partner.
There is no minimum capital needed to form a Limited Liability Partnership; it can be started without it. In addition, legal requirements are less stringent compared to other types of businesses. There are more than one lakh LLP company registrations in India.
4. Private Company
A private company is defined as a ‘company with a minimum paid-up share capital as may be stipulated, and which by its articles,’ according to Section 2(68) of the Companies Act 2013.
It imposes restrictions on the transfer of its shares;
(ii) except in the case of a one-person corporation, a maximum of two hundred members
(iii) any public request to subscribe for any of the company’s securities is prohibited.’
The following advantages are available to a private limited company:
- Separate Legal Entity: Because a private limited business has its own legal existence, it can sue and be sued in its own name.
- Borrowing power: A private limited company has greater borrowing power than a public limited firm.• Simple Exit: Private limited firms can be sold or transferred to another individual or company, either partially or completely, without disrupting their ongoing operations.
• Perpetual Succession: Regardless of whether a member dies or resigns, the company continues to exist.
• Ownership of the Company’s Property: Shareholders cannot claim ownership of the company’s property. The corporation itself holds ownership.
• Dual relationship: A person can be a shareholder, employee, and director of a Private Limited Company at the same time.
5. Public Company
A public corporation is defined as one that is “not a private company” under Section 2(71) of the Companies Act. A public limited company comprises at least seven (seven) people and has a minimum paid-up capital. The corporation may be listed on a stock exchange, after which its shares are freely traded. This type of company is subject to additional legal constraints than a Private Limited Company.
Benefits of forming a public limited company include:
- Restricted Responsibility: Shareholders’ liability is limited to the amount they have invested. By not involving any shareholders, the company can be sued.
- Number of Shareholders: A minimum of seven shareholders is required, but the number of shareholders can be as large as desired.
- Perpetual Succession: The death of any member or shareholder does not affect the public limited company’s life span.
- Massive Capital: A Public Limited Company can benefit from a greater ability to raise capital through the stock market by issuing debentures and bonds to the general public.
Top Public Limited Companies in India include Reliance Industries and Bharti Airtel.
6. One-Person Companies
A “one-person company” is defined as a corporation with only one member, as defined by Section 2(62) of the Companies Act 2013. Although a single person can possess all of the shares, the firm must be registered with the help of a nominated director.
The incorporation of this notion of a company into the legal system is thought to promote economic growth and produce a significant number of job openings. The following are a few advantages of this structure:
- Payment of Interest in the event of a payment delay: Under the Micro, Small and Medium Enterprises Development Act 2006, a one-person company is eligible for all benefits. Because a one-person company is either a small or medium-sized business, it is entitled to interest at three times the bank rate in the event of a payment delay to the buyer or recipient.
- Sole Ownership: Only the owner has the authority to make business choices and govern the company without having to follow the lengthy processes and procedures used by a few other companies.
- Additional opportunities: This structure allows an individual to take more chances in a company without jeopardising personal assets.
OPCs are exemplified by Truffle House.
Edited by Prakriti Arora