Published on June 27, 2014
Kronus Law Associates Solution to your all legal hassles……
Whenever you decide to start business of your own the first thing that obviously comes into your mind must be. . . . . …… What should be your first step ???? And answer to that is first of all you should think that under what legal entity you want to carry on your business. As in India you can run your business as a sole proprietorship, partnership firm, LLP, private ltd. company and public ltd. company And one person company which was introduced by Companies Act 2013.
By way of this presentation we want to apprise you about the basic features of different legal entities and also advantages and disadvantages of carrying on business under that entity, so that you can decide under what legal entity, it will beneficial for you to carry on your business.
Sole proprietorship A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities. Owner and proprietorship firm is one and the same thing in eyes of law. Sole proprietorship firm do not have its own separate legal existence.
Advantages of sole proprietorship Ease of formation : Starting a sole proprietorship is much less complicated than starting a formal corporation, and also much cheaper as it do require any kind of incorporation or registration like Company. Tax benefits : The owner of a sole proprietorship is not required to file a separate business tax report. Instead, they will list business information and figures within their individual tax return. This can save additional costs on accounting and tax filing and individual tax rate will be applicable. Employment : Sole proprietorships can hire employees. This can lead to many of the benefits associated with job creation, such as tax breaks. Also, spouses of the business owner can be employed without having to be formally declared as an employee. Decision making : Control over all business decisions remains in the hands of the owner. The owner can also fully transfer the sole proprietorship at any time as they deem necessary.
Disadvantages of sole proprietorship Liability: The business owner will be held directly responsible for any losses, debts, or violations coming from the business. The owner could be sued for any unlawful acts committed by the employees. This is drastically different from company, wherein the members enjoy limited liability. Lack of “continuity”: The business does not continue if the owner becomes deceased or incapacitated, since they are treated as one and the same. Upon the owner’s death, the business is liquidated and becomes part of the owner’s personal estate, to be distributed to beneficiaries. Difficulty in raising capital : Since the initial funds are usually provided by the owner, it can be difficult to generate capital. Sole proprietorships do not issue shares or other money-generating investments like companies do.
Partnership firm Partnership is defined as a relation between two or more persons who have agreed to share the profits of a business carried on by all of them or any of them acting for all. The owners of a partnership business are individually known as the "partners" and collectively as a "firm". The minimum numbers of partners in partners should be two, while maximum can be 10 in case of banking business and 20 in case of any other business firm. A partnership firm has no separate legal existence of its own i.e. firm and partners are one and the same thing.
Advantages of partnership firm Easy formation : Registration or incorporation is not required in case of partnership firm like LLP or company. It can be formed without any legal formality and expenses. Thus they are simple and economical to form. Larger resources : Due to more number of partners the partnership firm has larger resources for business operations as compared to sole proprietorship firm. Flexibility in operation : Due to limited number of partners there is flexibility in the operations of business as the partners can amend any objectives or change any operations any time by mutual consent. Better management : Business of a partnership firm is very well managed by all the partners as they take interest in the daily affairs of business because of the ownership, profit and control. Sharing of risk : In partnership every partner bears the risk individually as it is easier compared to sole proprietorship.
Disadvantage of partnership firm Instability : A partnership firm does not exist for an indefinite period of time. The death, insolvency or lunacy of a partner may lead to dissolution of the partnership firm. Unlimited liability : Liability of every partner in a partnership firm is unlimited as any of the partners may be called upon to pay all the debts even from its personal properties. A single wrong decision by one partner can lead other partners in heavy losses and liabilities. Limited capital : Due to restriction on the maximum number of members, a limited amount of capital can be raised. No legal status : A partnership firm does not have a legal status like a Joint Status like a LLP or company. In a partnership firm it is not easy to transfer ownership. Consent of every partner is required in order to transfer ownership.
Limited Liability Partnership (LLP) It is a new corporate structure that combines the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost. In other words, it is an alternative corporate business vehicle that provides the benefits of limited liability of a company, but allows its members the flexibility of organising their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. Owing to flexibility in its structure and operation, it would be useful for small and medium enterprises, in general, and for the enterprises in services sector, in particular. Internationally, LLPs are the preferred vehicle of business, particularly for service industry or for activities involving professionals.
Advantages of Limited Liability Partnership (LLP) Easy to Form: It is very easy to form LLP, as the process is very simple as compared to Companies and does not involves much formalities . Liability: A LLP exists as a separate legal entity from your personal life. Both LLP and person who own it, are separate entities and both functions separately. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not the owner. Perpetual Succession: An incorporated LLP has perpetual succession. Notwithstanding any changes in the partners of the LLP, the LLP will be a same entity with the same privileges, immunities, estates and possessions. The LLP shall continue to exist till its wound up in accordance with the provisions of the relevant law. Flexible to Manage: LLP Act 2008 gives LLP the freedom to manage its own affairs. Partner can decide the way they want to run and manage and put the same in form of terms and conditions in the LLP Agreement . Easy Transferable Ownership: It is easier to become or leave the partnership of the LLP or otherwise it is easier to transfer the ownership in
accordance with the terms of the LLP Agreement. Ceasing of old partners and coming of new partners , will automatically leads to change in ownership of LLP. Separate Property: A LLP as legal entity is capable of owning its funds and other properties. The LLP is the real person in which all the property is vested and by which it is controlled, managed and disposed off. The property of LLP is not the property of its partners. Raising Money: Financing a small business like sole proprietorship or partnership can be difficult at times. A LLP being a regulated entity like company can attract finance from PE Investors, financial institutions etc. Capacity to sue: As a juristic legal person, a LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP. No Mandatory Audit Requirement: In LLP, only in case of business, where the annual turnover/contribution exceeds Rs 40 Lacs/Rs 25 Lacs are required to get their account audited annually by a chartered accountant.
Disadvantages of Limited Liability Partnership firm • Regulated form of Business: LLP is regulated form of business, as the LLP Act 2008 provides various provisions relating to management of affairs of the LLP which includes taking the permission of regulatory authority for undertaking certain actions. • Audit and Financial Disclosure: It is necessary for LLP to get its accounts audited annually and to prepare its balance sheet and profit and loss account in accordance with the prescribed guidelines, therefore it is not possible to maintain financial secrecy of the business. • Long Closing Proceedings :It is generally not easy to close the company as compared to other forms of business, the procedure to close is long and involves compliance of various formalities, at times it takes 1-2 years to completely wind-up the company. Moreover in certain cases, it is necessary to take the permission of the High Court to close the Company. • Transfer of Interest :It is not easy to transfer the interest in LLP as compared to company; various formalities are required to comply with in accordance with the terms and conditions of the LLP Agreement.
Amendment in LLP Agreement: LLP is governed by the terms and conditions as prescribed in the LLP Agreement and which if not properly drafted will result in disputed among the partners , delay in executing decision, requirement of amending the Agreement or executing a new one, in case the new partners are admitted. Lack of Recognition: LLP is recently introduced in India and is therefore not recognized under various laws for the purpose of carrying various business and moreover due to being relatively new concept , there is still no clarity on various issues related to it , which might create problems in its smooth functioning.
COMPANY : A Company is a voluntary association of person formed for the purpose of doing some business. A company is a juristic person (in the eyes of law it is a person). The company can sue and it can be sued. It has its own name and a separate legal entity, distinct from its members who constitute it. A company has its own property, the members (shareholders) can not claim the property of the company as their own property. A company is a legal person but it is not a citizen. The liability of the members (shareholders) of the company is limited to the amount of shares they hold. But in India there are three types of Companies i.e. one person company (introduced by Companies Act 2013), private limited company and public limited company. Company One Person Company Private Limited Company Public Limited Company
One Person Company (OPC) The concept of One Person Company [OPC] is a new vehicle/form of business, introduced by The Companies Act, 2013 , thereby enabling Entrepreneur(s) carrying on the business in the Sole-Proprietor form of business to enter into a Corporate Framework. It has only one person as a member who will act in the capacity of a director as well as a shareholder . One Person Company is a hybrid of Sole-Proprietor and Company form of business, and has been provided with concessional/relaxed requirements under the Act.
Advantages of One Person Company (OPC) The biggest advantage of a one person company is that its identity is distinct from that of its owner. Therefore, if the firm is embroiled in a legal controversy, the owner will not be sued, only the company will. OPC has Limited Liability which is beneficial for entrepreneurs. (limited liability means liability of shareholder/member is limited to the amount invested by them) Since the company is distinct from that of its owner, the personal assets of the shareholders and directors remain protected in case of a credit default. It also has the feature of perpetual succession. It is easier for entrepreneurs to transfer ownership and raise capital. It has less number of compliances in comparison Pvt. Ltd. Co. Or Public Ltd. Co.
One person company is a separate taxable entity, there is a danger of a tax at both the corporate and the shareholder level being imposed and business losses may not be personally deductible to the business owner in the year incurred. Tax rate will also be higher than the individual. Management and organizational flexibility is limited by the requirements of the Companies Act. The company should be incorporated like a private company which is an expensive affair and also it is required to follow many compliances in comparison to sole proprietorship. Stagnation of ideas and innovation. Limitation on arranging funds for running the business. Disadvantages of One Person Company
Private Limited Company (Pvt. Ltd. Co.) Private limited company is a voluntary association of not less than two and not more than 200 members / shareholders, whose liability is limited, the transfer of whose shares is limited to its members and company is not allowed to invite the general public to subscribe to its shares or debentures (under Companies Act 2013). A Pvt. Ltd. Co. Should have minimum 2 directors and minimum share capital of Rupees 1,00,000.
Advantages of Private Ltd. Co. Separate Legal Entity: A company is a legal entity and a juristic person established under the Companies Act. Therefore a company form of organization has wide legal capacity and can own property ,can incur debts and can also sue and be sued in its own name. The members (Shareholders/Directors) of a company have no liability to the creditors of a company for such debts. Uninterrupted existence:- A company has 'perpetual succession', that is continued or uninterrupted existence until it is legally dissolved. A company, being a separate legal person, is unaffected by the death or other departure of any member but continues to be in existence irrespective of the changes in membership. Borrowing Capacity: A company enjoys better avenues for borrowing of funds. It can issue debentures, secured as well as unsecured and can also accept deposits from the public, etc. Even banking and financial institutions prefer to render large financial assistance to a company
rather than partnership firm or proprietorship firm Limited Liability: Limited Liability means the status of being legally responsible only to a limited amount for debts of a company. Unlike proprietorships and partnerships, in a limited liability company the liability of the members in respect of the company's debts is limited. In other words, the liability of the members of a company is limited only to the extent of the face value of shares taken up by them. Dual Relationship: In the company form of organization it is possible for a company to make a valid and effective contract with any of tis members. Thus, a person can at the same time be a shareholder, creditor, director and also an employee of the company. Free & Easy transferability of shares: Shares of a company limited by shares are transferable by a shareholder to any other person. Filing and signing a share transfer form and handing over the buyer of the shares along with share certificate can easily transfer shares.
Disadvantages of Private Ltd. Co. Many private limited companies are very profitable. Unfortunately, these profits can become diluted because they must be evenly distributed among all shareholders, and many Pvt. Ltd. Co. have up to 200 shareholders. Shareholders in a Pvt. Ltd. Co. are not able to sell or transfer their shares to the general public. The 200 or so shareholders that comprise a Pvt. Ltd. Co. must keep their shares and cannot trade them on any stock exchange. A Pvt. Ltd. Co. can be very expensive to create, as it must not only pay taxes and employee insurance, but also any legal fees or other incidentals involved in the business. PLCs can also be quite complex, meaning that lawyers and accountants almost always need to be involved in the PLC from the start, which can be costly. Even though shares in a PLC cannot be publicly traded, information concerning the company is made public. Account balances and details about the company's directors, including their names and contact information, must be made available upon request.
Public Limited Company A Public Limited Company is a Company limited by shares in which there is no restrictions on the maximum number of shareholders, but it should have minimum 7 share holders and 3 directors . It can solicit deposits and can issue shares or debenture to public. Its shares or debentures to Public and can make or accept deposits from Public and there are no restrictions on the transfer of shares. The liability of each shareholder is limited to the extent of the amount of shares subscribed. A public Limited Company should have minimum share capital of Rupees 5,00,000.
Advantage of Public Limited Company: A company must have a minimum of seven members but there is no limit as regards the maximum number. The shares of a company are freely transferable. A limited company can raise capital, investments and loans from any available sources and it can accept deposits from public also. The activities that can carried out by the company are defined by its Memorandum of Association (MoA) whereas Article of association (AoA) defines details of delegation of powers, authorities and how internal controls, board meetings shall be conducted. The ownership lies with Shareholders but controls and authorities can be delegated to Director, who is responsible for day to day activities and functioning of the company.
Higher compliances requirements as compared to other business entities like Private Limited and LLP and Audit of accounts are mandatory in such company. The liability of each shareholder is limited to the extent of the amount of shares subscribed. However, the liability of a Director / Manager of such a Company can at times be unlimited.
There are lot of legal formalities required for forming a public limited company. It is costly and time consuming. In order to protect the interest of the ordinary investor there are strict controls and regulations to comply. These companies have to publish their accounts and many more things which they are required to be made public. The original owners may lose control. Public Limited companies are huge in size and may face management problems such as slow decision making and industrial relations problems. Disadvantage of a Public Ltd. Co.
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