Whether you are on an organized growth trajectory or are just starting, the legal structure would serve as an essential part of running a business. Every company in India must be registered under the Companies Act 2013. For this purpose, every establishment must understand its options and have a legal structure that is permitted by the Indian government. One must choose the best legal structure from permitted models to do business and achieve success.
Choosing the right legal structure is aligned to the goals of the entity and the local and central laws where it desires to establish its base. Well-defined goals enable the entity to pick up the best legal structure for the fulfilment of such goals.
For instance, certain firms want to avail the benefits of being a startup in India. For this purpose, it is a mandatory requirement to be registered either as a Private Limited Company or a Limited Liability Partnership.
A registered firm can also be transferred easily to a corporate entity, should the need arise for the same. Certain types of companies also protect the personal interest/assets of Partners/Directors in case of losses or debts.
Following are the common types of business structures prevalent in India and their notable features to help decide the best legal structure for your proposed entity.
Types of Business Structures in India
- Sole Proprietorship
- Limited Liability Partnership
- Private Limited Companies
- Public Limited Companies
- One-Person Companies
1. Sole Proprietorships
A Sole Proprietorship is an enterprise that is wholly controlled by one person. Many entrepreneurs start small businesses in their names and continue as sole proprietors. Such an establishment and its owner are not considered separate entities. There is no formal registration required to start a business in India under Sole Proprietorship.
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.
For example, there are no separate tax returns that are to be filed and the income incurred by the proprietor must be disclosed in the personal income tax returns itself.
Many small businesses are recommended to and opt for this legal structure for the following benefits that it provides:
- Cost-Effective: This kind of legal structure barely involves any cost; however conducting a business in a separate area would require certain specific registrations like Shops and Establishment Registration and others.
- Flexibility in decision making: The decisions are solely dependent on the Proprietor, therefore they are easy to make and implement.
- Workplace Relationship: It is essential to maintain relationships with employees and customers in Sole Proprietorship; the proprietor is capable of ensuring strong one on one relations with both, respectively.
Facts: Flipkart and Snapdeal started their business as sole proprietorship companies in India
In a partnership firm, two or more people come together to work and earn profits. There is a partnership deed that specifies the invested interest of each partner and their profit sharing ratios along with other terms of business functioning and operations.
The partners are responsible for all liabilities and there is no limit to it. When it comes to the registration of a partnership it is not mandatory but suitable to get it registered. This type of business structure provides the following benefits:
- Fund Raising: It is easier to raise funds in a partnership as financial institutions consider them safer than sole proprietorships.
- Shared Responsibility: This structure provides for better accountability of the shareholders and enjoys a shared responsibility amongst them.
- Mutual trust: There is a sense of trust and faith among the partners in the Partnership setup. All partners can act collectively or any one of the partners and act on behalf of others.
Facts: Hindustan Petroleum, Mahindra and Mahindra, Maruti Suzuki, Renault India are registered under the 1932 act of Indian Partnership Act.
3. Limited Liability Partnerships
A Limited Liability Partnership is incorporated under the Limited Liability Partnership Act 2009. As opposed to partnership firms, partners in an LLP are not burdened with unlimited liabilities caused by the business.
Their responsibility towards losses or debts is limited to investments made by them. A limited liability partnership and its partners are considered separate legal entities.
Further, 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.
- Suitability: It is an easy process to start an LLP as compared to a private company, along with lesser legal requirements.
- No limitation on the number of business owners: There can be two or more partners in this form of legal structure.
- Less Registration Cost: The cost of registration is lesser as compared to a private limited company or public limited company.
- Less Compliance: LLP’s are obligated to submit only two statements i.e. Annual Return Statements and Statements of Accounts. Therefore, the compliance requirements are comparatively less than in Private Limited Companies.
Facts: There are more than one lakh LLP company registrations in India
4. Private Limited Companies
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 with higher ambitions choose Private Limited Company as a suitable business structure. A Private Limited company enjoys the following benefits:
- Separate Legal Entity: A private limited company is said to be a separate legal entity. An entity means something which has a legal existence; therefore the company can sue and can also be sued under its name.
- Borrowing capacity: A private limited company enjoys the privileges of borrowing more funds than LLPs as it has more options for taking on debt. Not only are bank loans easy to obtain (relative to OPCs and LLPs), the option of issuing debentures and convertible debentures are always available. Even banks and other financial institutions welcome private limited companies better than partnership entities.
- Easy Exit: Private limited companies can be sold or transferred, either partially or in full, to another individual or entity without any disruption to the current business.
- Ability to sue and can be sued: To sue means to carry legal proceedings against a person, similarly just as one person can bring legal proceedings in its name against another in that person’s name, a company being a separate legal entity can sue and be sued in its name.
- Continuous Existence: The company’s existence remains unaffected by the death or resignation of any member.
- Complete Possession of Property: The shareholders cannot claim to be owners of the property of the company. The company itself is the owner.
- Dual relationship: A person in a Private Limited Company can be a shareholder/employee/director at the same time.
Facts: Anand Automotive Pvt. Ltd. and Parle Products Pvt. Ltd. are examples of famous private limited companies in India.
5. Public Limited 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.
A public limited company enjoys the following benefits:
- Limited Liability: The liability of the shareholders is limited to their stake only. The business can be sued by not involving any shareholders.
- Number of Members: There is a minimum requirement of seven shareholders and can exceed any limitless number of members as its share capital can occupy.
- Continuous existence: The life span of the public limited company is not affected by the death of any member or shareholder.
- Huge Capital: Public Limited Company can relish an increased ability to raise capital through the stock market by issuing debentures and bonds from the public.
Facts: Reliance Industries and Bharti Airtel are examples of top Public Limited Companies.
6. 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.
The introduction of this concept of a company under the legal system is believed to not only cater to economic growth but also create a good amount of employment opportunities. Some benefits of choosing this structure are as follow:
- Payment of Interest on any delay in payment: One Person Company can avail all benefits under the Micro, Small and Medium Enterprises Development Act 2006. One Person Company is either a small or medium entity, therefore in case of any delay of payment (receives payment after a specific period) to the buyer or the receiver they are entitled to receive interest thrice as much as the bank rate.
- Sole Owner: Only the owner is entitled to make business decisions and control the business without complying with the long processes and measures as adopted by few other companies.
- Additional opportunities: Through this structure, an individual can take a higher amount of risks in business without causing damage to personal assets.
Facts: Truffle House and Akhan Diary are examples of OPCs.
This article provides a brief overview of different legal structures. However, regardless of which business entity you think best suits you, a qualified lawyer is most suitable to address such questions.
Nowadays more and more entrepreneurs decide to settle for do-it-yourself legal websites or the ones that incorporate structures in bulk, which are forbidden from giving legal advice, for a reason and this creates difficulties for business owners at a later stage.
Therefore, it is advised to find a suitable lawyer or a law firm with expertise in startup and incorporation services to ensure the proper legal structure is followed for your business.
Frequently Asked Questions (FAQs)
1. Which company model allows for unlimited fund infusion?
A public limited company is best for getting as much capital as required.
2. How can one protect personal assets from business losses?
Starting an LLP or a Private Limited Company can limit investors’ liabilities.
3. Which is the most hassle-free business structure?
A sole proprietorship has minimal legal obligations to follow.
4. Is there any restriction on the continuance of a one-person company?
For an OPC, its turnover cannot cross INR 20 Cr (Indian Rupees Twenty Crores) and the paid capital should be limited to INR 2 Cr (Indian Rupees Two Crores)
5. How many shareholders can a private limited company have?
The maximum no. of shareholders, a Private Limited Company can have is 200 (Two hundred).