The legal framework is an important component of running a business, whether you are on a well-planned growth path or are just getting started. The Companies Act 2013 mandates that every company in India be registered. To do this, every business must be aware of its alternatives. To operate business and succeed, one must select the appropriate legal structure from the available options.
The entity's goals and the local and central laws where it wishes to establish its foundation are aligned while choosing the correct legal structure. With well-defined objectives, the entity can choose the optimal legal form for achieving those objectives.
Certain businesses, for example, desire to take the advantages of being a startup in India. It is a legal necessity to be registered as a Private Limited Company or a Limited Liability Partnership for this reason.
Should the necessity arise, a registered firm can also be simply changed to a corporate organisation. In the event of losses or debts, several forms of businesses also protect the personal interests/assets of partners/directors.
The common forms of company structures found in India, as well as their distinguishing characteristics, are listed here to assist you in determining the optimal legal structure for your proposed entity.
Types Of Business Structures In India
1. Sole Proprietorships
A sole proprietorship is a business controlled entirely by one individual. Many entrepreneurs establish micro and small enterprises in their own names and operate them as single proprietorships. The proprietor of such a business and the establishment are not regarded different entities. In India, there is no official registration required to start a Sole Proprietorship business.
While registering this business is simple, the proprietor is responsible for all responsibilities. The practical implication of such an arrangement is that the sole proprietor's whole profit is in his or her hands.
There are no separate tax returns to file, for example, and the proprietor's income must be stated in the personal income tax filings themselves.
Benefits of Sole Proprietorships:
Economical: This legal structure is extremely cost-effective.
Decision-making flexibility: Because the decisions are exclusively dependent on the Proprietor, they are simple to make and implement.
2. Partnerships
Two or more persons form a partnership firm to work together and gain profits. A partnership deed describes each partner's invested stake and profit sharing ratios, as well as other aspects of firm functioning and operations.
There is no limit to the amount of liability that the partners are responsible for. When it comes to the registration of a partnership, it is not required, but it is recommended.
The following are some of the advantages of this form of corporate structure:
Financing: Raising financing in a partnership is easier than in a single proprietorship since financial institutions regard partnerships to be safer.
Partner's Shared Responsibility: This structure ensures that partners are held accountable and that they share responsibility.
3. Limited Liability Partnerships
The Limited Liability Partnership Act 2009 establishes a Limited Liability Partnership. In contrast to partnership firms, partners in an LLP are not bound by the business's unlimited obligations.
Their liability for losses or obligations is restricted to the investments they make. The partners in a limited liability partnership are regarded different legal entities.
Furthermore, no partner is liable for the autonomous actions of other partners, therefore individual partners are protected from joint liabilities arising from the misbehaviour of another partner.
No Minimum Capital Requirement: There is no minimum capital investment required to create an LLP.
Suitability: Compared to a private corporation, starting an LLP is a simple process with fewer legal requirements.
There are no restrictions on the number of business owners: In this legal framework, there might be two or more partners.
Cost of Registration is Lower: When compared to a private limited company or a public limited company, the cost of registration is lower.
LLPs are only required to produce two statements, namely Annual Return Statements and Statements of Accounts. As a result, compared to Private Limited Companies, the compliance standards are less stringent.
4. Private Limited Companies
A private company, according to Section 2(68) of the Companies Act 2013, is described as "a company with a minimum paid-up share capital as may be required, and which by its articles,
a. restricts the ability to transfer the company's stock;
b. except in the event of a one-person company, a maximum of two hundred members are allowed:
c. prohibits any public invitation to subscribe for any of the company's securities.'
In India, the majority of startups and businesses with higher goals pick a Private Limited Company as their corporate form. The following are some of the advantages of forming a private limited company:
Separate Legal Entity: A private limited company is considered a separate legal entity. An entity is defined as something that has a legal existence; as a result, the corporation can sue and be sued in its name.
Borrowing capacity: A private limited company has more borrowing capacity than an LLP since it has more debt-taking choices. Not only are bank loans simple to come by (in comparison to OPCs and LLPs), but there is also the option of issuing debentures and convertible debentures. Private limited businesses are much more welcomed by banks and other financial institutions than partnership entities.
Easy Exit: Private limited companies can be sold or transferred to another individual or company, in part or in whole, without disrupting the ongoing operation.
Suitability and the ability to sue: Suing implies to take legal action against someone; thus, a firm, as a separate legal entity, can sue and be sued in its name, just as one person can undertake legal action in its name against another in that person's name.
The company's continued existence is unaffected by the death or resignation of any of its members.
Complete Ownership of the Company's Assets: Shareholders cannot claim ownership of the company's assets. The proprietor of the firm is the company itself.
5. Public Limited Companies
A public company is defined as "a company which is not a private company" under Section 2(71) of the Companies Act.
A public limited company is consists of at least 7 (seven) persons and has a minimum paid-up capital.
The corporation may be listed on a stock exchange, after which its shares are freely traded. This sort of business is subject to greater legal constraints than a Private Limited Company.
The following are some of the advantages of a public limited company:
Restricted Liability: Shareholders' liability is limited to their investment. The company can be sued without the involvement of any shareholders.
Number of Members: A minimum of seven shareholders is required, but the number of members can be as large as the share capital allows.
The existence of a public limited corporation is unaffected by the death of any of its members or shareholders.
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.
6. One-Person Companies
According to Section 2(62) of the Companies Act 2013, a "one person company" is defined as a company with only one member. This is a relatively new invention that makes it easier for entrepreneurs to own and manage businesses on their own.
Even if all of the shares are owned by one individual, the company must be registered with the inclusion of a nominated director.
The inclusion of this notion of a company into the legal system is thought to not only promote economic growth but also provide a significant number of employment opportunities. The following are some of the advantages of using 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, they are entitled to interest at three times the bank rate in the event of a payment delay (receives payment after a certain period).
Sole Owner: 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 businesses.
Additional opportunities: This structure allows an individual to take more chances in company without jeopardising personal assets.
