Company Entities and its types in India

What is Company incorporation?

Company incorporation is the legal procedure to form a company or a corporate entity. To carry on a business, it is necessary to register it. The registration or incorporation involves the separation of assets, income from the firm owners and the rights of the investors. There is no legal entity to the corporate if it is not incorporated as a company.

Business entities are essential for starting, managing, and growing your business. This guide to business entities covers every major type of legal entity, core concepts, criteria for choosing an entity, and legal entity management.

What are the business entities?

A business entity simply refers to the form of incorporation for a business. Limited liability companies and corporations are common types of legal entities. When a business incorporates, the law recognizes the business as a distinct legal entity that can enter contracts and acquire property among other rights and privileges.

There are, of course, some exceptions like sole proprietorships and general partnerships, which do not require incorporation. They also do not have the same rights and privileges as incorporated legal entities.

There are seven broad groups of business entities:

Entity One: Private Limited Company
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.

Entity Two: Public Limited Partnership

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.

Entity Three: Limited Liability Partnership

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.

Entity Four: Sole Proprietorship

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.

Entity Five: Partnership Firm

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.

Entity Six: One Person Company

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 a 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.

Entity Seven: Section 8 Company

A Section 8 Company of Companies, 2013, is the same as Section 25 company under the old Companies Act, 1956. Section 8 company is one of the most popular forms of Non- Profit Organisations in India. A Section 8 company can be established for “promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object,” provided it “intends to apply its profits, if any, or other income in promoting its objects” and “intends to prohibit the payment of any dividend to its members.”. To register a section 8 company in India, the process is similar to the incorporation of other companies (except an additional license is required).

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