Overview,the,Business,Entity,T business, insurance Overview of the Business Entity Types in India

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'Overview of the Business Entity Types in India'The following is the general concept of the different typesof business entities that are allowed in India, providing an overview of eachtype and their advantages and dis advantages or drawbacks. India is one of the fastest growing economies of the world.In line with the globalization and liberalization trends it has beenfacilitating the growth of enterprise and entrepreneurship by institutingseveral reforms and adapting a pro-enterprise approach. It has readily embracednew and evolving corporate vehicles, such as Limited Liability Partnership,while retaining certain vehicles that are inherent to its heritage. The scopeof the guide is limited to commercial businesses and does not include vehiclescovering non-commercial activities.Indian legal framework allows for several types of business entities, such asProprietorshipPartnership firmLimited Liability PartnershipPrivate Limited CompanyPublic Limited CompanyIn addition to the above legal entities, the following typesof entities are available for foreign investors/foreign companies doingbusiness in India:Wholly owned Subsidiary CompanyJoint Venture CompanyLiaison Office/Representative OfficeProject OfficeBranch OfficeOther forms of business entities which are beyond the realmsof this guide areCo-operativesJoint Hindu Family BusinessProprietorshipsIt is an archaic form of business entity and also theeasiest form to set up and most common entity in India. This however does notmean an ideal type of entity for all businesses. As a one-man organization theowner of the entity is the be-all, do-all and an end-all of the business. Thisdoes not even require a formal registration with the Registrar of Companies(ROC) however trade related licenses that are mandatory have to be obtained.The businesses usually involve less risk, small market, small capital and inturn have limited growth potential. It is the preferred type of entity amongfreelancers, small traders, people who ply their skills and craftsmanship suchas tailors, bakers, etc.Relatively, there is less compliance burden on the owner andas a sole owner can exercise complete authority and control. It providescomplete confidentiality. The business owner and the business are one and thesame; there is no legal distinction between the two. This is a major drawback,as there is no protection for the personal assets of the proprietor, in case ofpayment defaults, creditors can make claims against the personal assets of theowner. This form of entity is less attractive to investors or financialinstitution as it has no long term vision or transferability or transparency.It is very difficult to raise capital hence this entity will have limitedgrowth potential.Partnership FirmPartnership firm is formed by an agreement between two ormore people to own and run the business. This arrangement enables enterprisingindividuals to pool their resources to establish and expand a business.Collectively the individual partners become a firm. This type of entity issuitable for team of people rendering professional services such as lawyers,charted accountants, management consultancies, doctors etc. This is also anideal setup for small scale companies which require pooling of capital andmanagement expertise for running the business.The law relating to a partnership firm is contained in theIndian Partnership Act, 1932. It does not require compulsory registration offirms. It is optional for partners to register the firm and there are nopenalties for non-registration. A partner of an unregistered firm cannot file asuit in any court against the firm or other partners for the enforcement of anyright conferred by a contract or the Partnership Act. Likewise the unregisteredfirm cannot seek legal action in the court of law against any third partyhowsoever it does not limit a third party from suing the firm. In order toavail legal privileges a partnership firm must be registered with the Registrarof Firms. It is not necessary to register at the time of formation. A firm maybe registered at any time by filing an application with the local Registrar ofFirms.Partnership Firms in India can have a minimum of twopartners and a maximum of 20 partners, notably the banking businesses areallowed a maximum of 10 partners only. Like proprietorship the firm also doesnot have a separate identity, the partners and the firm is one and the same. Inthe event of the assets and property of the firm is insufficient to meet thedebts of the firm, the creditors can recover their loans from the personalproperty of the individual partners.There are restrictions on transfer of rights; no partner cantransfer his individual rights to another third party without the unanimousconsent of all the partners. The firm must be dissolved on the retirement,lunacy, bankruptcy, or death of any partner.All partners have a right in management of the activities ofthe business and the extent of the rights of each partner may be clearlydetermined in an agreement. Usually the rights, liabilities and duties of thepartners are laid out in an agreement in a professionally administeredpartnership firm. When the written agreement is duly stamped and registered, itis known as “Partnership Deed”. If the deed does not enlist the rights, dutiesand liabilities the provisions of The Indian Partnership Act, 1932 will apply.Generally a partnership deed contains the followingparticulars:-Name of the firmNature of the business to be carried outNames of the partnersThe town and the place where business will be carried onThe amount of capital to be contributed by each partnerLoans and advances by partners and the interest payable on themThe amount of drawings by each partner and the rate of interest allowed thereonDuties and powers of each partnerAny other terms and conditions to run the businessOther than the ease of formation and ease of pooling capitaland expertise, partnership firm has several drawbacks such as, unlimitedliability, limited lifespan, restrictions on transfer of rights, lack ofunanimous authority, and more importantly liability for the acts of otherpartners.Limited Liability Partnership (LLP)It was introduced in India through Limited LiabilityPartnership Act, 2008. Limited Liability partnership provides all the benefitsof an incorporated company as well as the flexibility of a partnership. In anLLP, all partners have limited liability, similar to that of the shareholdersof a limited company, and are relieved from the liability for the acts of otherpartners. Unlike the shareholder of a company, the partners have the right tomanage the business directly. An LLP also limits the personal liability of apartner for the errors, omissions, incompetence, or negligence of the LLP’semployees or other agents.Unlike a partnership firm there is no restriction on thenumber of partners. Any two or more persons, associated for carrying on alawful business with a view to profit, may by subscribing their names to anincorporation document and filing the same with the Registrar, may form aLimited Liability Partnership. At least one of the partners should be an Indianresident.It has a unique legal identity and is separate from thepartners. It also has perpetual succession. The liability of the partners islimited to their agreed contribution in the LLP. However the liabilities of theLLP and partners, who are found to have acted with intent to defraud creditorsor for any fraudulent purpose, shall be unlimited for all or any of the debtsor other liabilities of the LLP.There is no minimum capital requirement. The mutual rightsand duties of partners of an LLP inter se and those of the LLP and its partnersshall be governed by an agreement between partners or between the LLP and thepartners subject to the provisions of the LLP Act 2008. The LLP is required tomaintain proper accounts. Annual statement of accounts and solvency shall befiled by every LLP with the Registrar.The relative ease of setting up an LLP, limited liability,perpetuality and minimal compliance requirement and cost makes it increasinglypopular among small businesses involving professionals. Moreover this type ofentity is also internationally recognized and a relative newcomer in many ofthe forward looking business jurisdictions which are keen on encouragingenterprise growth. This international recognition also adds to the merits ofthis type of business entity.Private Limited CompanyThe governing provisions for a Private Limited Company arecontained in The Companies Act, 1956. A private limited company must beappropriately incorporated with the Registrar of Companies (ROC). India being avast country with several provinces, ROCs are located across the states andUnion Territories. A company incorporated in any state of India can do businessall over India.The minimum paid up capital at the time of incorporation ofa Private Limited Company is INR 100,000. It can be increased any time, bypayment of additional stamp duty and registration fees. A Private LimitedCompany must have a minimum of two and a maximum of 50 members as itsshareholders. It must have minimum of two directors and maximum of 12directors. Where the paid-up capital is equal to or exceeds INR 50 million acompany secretary must be appointed. The shareholders and directors need not belocals.The liabilities of the share holders are limited to theshares subscribed by them. A Private Company is prohibited from inviting thepublic to subscribe for any shares or debentures of the company. It is alsoprohibited from inviting or accepting deposits from persons other than its members,directors or their relatives. The shares can be transferred only among itsmembers and it involves some restrictions.A Private Limited Company has a separate legal identity. Itis perpetual. Although the liabilities of the shareholders are limited, attimes, the liability of a Director/Manager can be unlimited. Under theCompanies Act several regulatory exemptions are granted to a Private LimitedCompany, such as exemption from filing prospectus with the Registrar, exemptionfrom obtaining Certificate for Commencement of business, exemption from holdingstatutory meeting and statutory report, etc. Similarly the directors of aprivate limited company do not face restrictions as those of the Public LimitedCompany.A Private Limited Company is easy to set up and there arerelatively less compliance requirements than a public limited company, howeverthere are some limitations such as restrictions on share transfer. Notably thelimited liability clause is undermined by the bankers and financial institutions,which are increasingly resorting to personal guarantee from directors ofPrivate Limited Company. Nevertheless, it is an ideal vehicle where the sharesof the company will be closely held and where there is no requirement for morecapital to be raised through public issue.Public Limited CompanyThe regulatory provisions for this type of entity arecontained in The Companies Act, 1956. A Public Limited Company must beregistered with ROC.A Public Limited Company is a Company limited by shares inwhich there is no restriction on the maximum number of shareholders, transferof shares and acceptance of public deposits. The minimum paid-up capital for apublic limited company is INR 500,000. A Public Limited Company must have aminimum of seven shareholders and have a minimum of three directors and maximumof 12 directors. Where the paid-up capital is equal to or exceeds INR 50million, a company secretary must be appointed.The liability of each shareholder is limited to the extentof the unpaid amount of the shares’ face value and the premium thereon inrespect of the shares held by him. However, the liability of a Director /Manager of such a Company can at times be unlimited. The shares of a companyare freely transferable and that too without the prior consent of othershareholders or without subsequent notice to the company.A company is a legally independent body therefore isperpetual irrespective of death, retirement or insolvency of any of itsshareholders. The shareholders do not have a right in managing the activitiesof the company there is a clear separation of management and ownership and thecompany’s Board of Directors are vested with the decision making power as perthe rule of majority.There are some strict compliance requirements for Public LimitedCompanyIt must have at least three DirectorsA prospectus or a statement in lieu of prospectus has to be filed with the Registrar of Companies before allotment of shares.It has to obtain Certificate of Commencement of Business from the Registrar of Companies before it can commence business on incorporation.It has to hold a statutory meeting of members and file a Statutory Report with the Registrar of Companies.It must be noted that the financial status of the company ispublic and requires public disclosure of its operational outcomes hence thereis no confidentiality. The regulatory regime is very strict for Public LimitedCompanies and resultant compliance cost is also high. But it is suitable forlarge scale businesses that require huge capital and allied resources. The easeof raising capital by issuing shares or through loans and ability to attracthigh quality talents to manage the company affairs, democratic management etc.,make it an ideal format for large scale businesses.Deemed Public CompaniesUnder section 43 (A) of Companies Act, 1956, certain privatecompanies are deemed to be public companies when25% or more of its paid up share capital is held by one or more body CorporateIts average Annual turnover exceeds INR. 250 million.It holds 25% or more of paid up capital of a public company or it accepts or renews deposits from public after making an invitation by an advertisement.