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
- Section 8 Company
- Joint-Venture Company
- Non-Government Organization (NGO)
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 partners 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.
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
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.
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.
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 a nominee for the sole member to register this form of business.
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.
Section 8 Company
A Section 8 Company or we may also call it a Non-profit Company, can be incorporated under the provisions of the Companies Act, 2013 having the status of limited company without the addition to its name of the word “Limited” or “Private Limited” for the purpose of promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object and the Company shall use its profits or other income in promoting its objects only and prohibit the payment of any dividend to its members as well.
Section 8 company shall enjoy all the privileges and be subject to all the obligations of limited companies. A firm may also be a member of section 8 company.
Eligibility to apply for Section 8 Company License
An individual or an association of individuals are eligible to be registered as Section 8 Company if it has below-mentioned objectives. The objectives must be confirmed to the satisfaction of the Central Government.
- When the company intends to promote science, commerce, education, art, sports, research, religion, charity, social welfare, protection of the environment or alike other objectives;
- When the company holds an intention to invest all the profits (if any) or any other income generated after incorporation in the promotion of such objects only;
- When the company does not intend to pay any dividend to its members.
Any failure to meet the prescribed norms formulated by the Central Government may lead to the closure of the Company on the orders of the Central Government.
The Companies registered under the Section 8 of Companies Act, 2013 enjoy the following advantages:
- Access to Tax benefits: Since Section 8 companies are charitable institutions, they have access to the various exemptions available under the Income Tax Act. Section 80G of the Income Tax Act renders plenty of tax-related benefits to these companies.
- Zero Stamp Duty: The Section 8 Companies are not liable to pay stamp duty on the Memorandum of Association (MOA) and Articles of Association (AOA), unlike other entities incorporated under the Companies Act, 2013.
- Minimal share capital: Unlike private limited, public limited, or OPC, a Section 8 company can be set up without the requirement of having minimum paid-up share capital of the Company.
- Exempted from any name: Section 8 companies do not have the compulsion to affix the term like Limited or Private Limited in their name. These entities are registered with limited liability.
- Separate legal entity: Section 8 company possesses a distinct legal status which implies that entity’s existence is independent of its members. The section 8 entity has perpetual existence.
- Improved Credibility: The flexible and transparent constitutional framework of Section 8 companies allows them to garner better credibility than other types of NGOs such as Society and trust.
Reliance Foundation, Infosys Foundation, TATA Foundation, Reliance Research Institute are some commendable examples of successful Section 8 companies registered in India.
Joint Venture Company
Joint Venture (“JV”) under the Companies Act 2013, means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
In other words, a joint venture may be defined as any arrangement whereby two or more parties co-operate in order to run a business or to achieve a commercial objective. This co-operation may take various forms, such as equity-based or contractual JVs. It may be on a long-term basis involving the running of a business in perpetuity or on a limited basis involving the realization of a particular project. It may involve an entirely new business, or an existing business that is expected to significantly benefit from the introduction of the new participant. A JV is, therefore, a highly flexible concept. The nature of any particular JV will depend to a great extent on its own underlying facts and characteristics and on the resources and wishes of the involved parties. Overall, a JV may be summarized as a symbiotic business alliance between two or more companies whereby the complimentary resources of the partners are mutually shared and put to use.
Formation of joint venture is an effective business strategy for enhancing marketing, positioning and client acquisition which has stood the test of time. The alliance can be a formal contractual agreement or an informal understanding between the parties.
Joint ventures in India are used across sectors; however, they are more prevalent in high-technology, high-capital or high-technical skills sectors. For example, joint ventures are very prevalent in insurance, asset management, oil and gas, and infrastructure sectors, and following the liberalisation of the defence sector, we are also seeing some movement in defence sector joint ventures. In addition to joint venture parties working together to increase synergy, some of these joint ventures are governed by the rules prescribed under a particular statute and generally, as prescribed by exchange-control laws.
The following are the main advantages for a foreign investor choosing a JV structure while entering India:
- Access to the established distribution and marketing channels of the Indian partner;
- Access to the available financial resources of the Indian partners; and,
- Access to the established contacts of the Indian partners, which will help ease the process of setting up operations in India.
Some examples of successful JVs in India are Bharti-AXA General Insurance Co. Ltd. (Joint Venture between Bharti Enterprises and insurance major from France, AXA), Mahindra-Renault Ltd. (Joint Venture between Mahindra & Mahindra and world-renowned vehicle maker, Renault SA of France), Tata Starbucks Pvt. Ltd (Joint Venture between Tata Global Beverages, a division of Tata Sons and Starbucks Corporation, USA) and Tata SIA Airlines Ltd (With the brand name Vistara), a JV between Tata Sons and Singapore Airlines (SIA).
Non-Governmental Organizations or NGO are the organizations which are formed with the objective of managing different types of activities which aim to benefit the society at large especially for the underprivileged people. NGOs could be formed in various forms of organizations and every form of organization has a different kind of requirements for its formation. NGOs can be in the form of Trust, registered under Trust Act 1882, Society to be registered under Societies Registration Act, 1860, or Section 8 Company to be registered under Companies Act, 2013. Apart from the big manufacturing units and Multi-National Companies, NGOs are also contributing to the social development of India. Therefore, the Role and Functions of NGOs in India are very important for the growth of the country as a whole.
Roles and Functions of NGO
NGOs are Non-Governmental Organizations that are involved in carrying out a wide range of activities for the benefit of underprivileged people and the society at large. They work for the welfare of society at large. Following are some of the functions of an NGO:
- Eradication of Poverty
- Promote Education
- Protection of Environment
- Environment Conservation
- Wildlife Conservation
- Awareness about human rights
- Providing Health and Nutrition
- Providing Food and Shelter
- Old Age homes
- Adoption homes
- Homes for Women
- Sanitation and Hygiene
- Animal Rights
- Disease Control and Others
- Women Empowerment
The members of NGOs work with the objective of charitable motive only, there is no self-interest involved, as the main aim of NGOs in India is to serve the underprivileged people. However, these organizations have to comply with the rules and regulations as are framed by the Government of India.
The functions of non-governmental organizations (NGOs) play an important role in advancing our country’s socio-economic development. However, due to its enormous democracy, there are still a number of challenges and millions of individuals that require access to exercise their rights.
Benefits of establishing a NGO are as follows:
- Tax waiver from tax authorities.
- Status of autonomous legal identity.
- Access to government funding as well as funds of private avenues.
- No minimum capital requirements.
- Ease of transferring ownership or title.
- Serves long service life.
- National and Cross border collaborations.
CRY (Child Rights and You), Smile Foundation, Goonj and Helpage India are examples of some prominent NGOs working for social welfare in India.
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. How many shareholders can a private limited company have?
The maximum no. of shareholders, a Private Limited Company can have is 200 (Two hundred).