Most of the time people want advice in which type of business organisation they can register their business like in Proprietorship, Partnership Firm, Private Limited Company or Public Company or in joint Venture. Most of the people still don’t know about One Person Company and Limited Liability Company (LLP).
Before registration of business under particular form of business organisation, they have to consider their type of business, investment in the business, how many people will be involve in the business.
It is always advisable to the businessmen take advice from the experts or from the business law Practitioner at the time of taking decision of the registration of the organisation because once you registered without having any knowledge about its Pros and cons, then it will be very difficult to sustain the business in the future.
Following are the some types in which you can register your business:
2. Partnership Firm
3. Limited Liability Partnership Firm
4. Private Limited
5. One Person Company
6. Public Limited
Sole Proprietorship Firm
If a single person want to start a small business like, Grocery Shop, Art Studio, Small travel Agency, Real Estate Agency, Fast Food shop. Even other small trader and Manufacturer can run their business as Sole Proprietor. This type of business is managed and owned by the single man called a Sole Proprietor and can be called as One –Man Business Organisation. In Sole Proprietorship business, the only one person enjoy the whole profit of the business and in case of loss, he is only one person liable for the loss of the business.
There is no such specific legal registration under any law to set up a Sole Proprietorship. But, one can apply for a few registrations or licenses under various laws to avoid any complicated scenario.
These are some of the registrations/licenses that may be opted by the Sole Proprietorship Firm:
a) Registration under the Shop and Establishment Act: It is required with certain exception by the Local Laws prevailing in the area where Sole Proprietorship is located
b) Registration under MSMED (Micro, Small and Medium Enterprises Development) Act: Any Micro, Small and Medium business organization who fulfill the criteria of registration under MSME Act 2005(As Amended), can registered their Business under MSME Act 2005.
c) Registration under GST (Goods and Service Tax): Registration under GST is compulsory to every business organisation who are fulfill the condition of Registration according to GST Act 2017
d) Trademark Registration: It is required in case you want to trade your products or services with an exclusive name or brand. It is beneficial where there is a threat of some misuse of the name used in your business.
e) Licenses or Certificates required according to the nature of business:
• Drug License
• Labour license
• Regional Transport Office(RTO) permit
• Food Safety and Standards Authority of India(FSSAI) license
• Mandi License Act
• And List goes on as per specific business
(d and e, is applicable to all types of Business Entities)
Advantages of Sole Proprietorship:
• Easiest form of business
• Easier to start
• Lesser investment
• No sharing of Profits earned
• Lesser legal compliances
• Lesser income tax
• Confidentiality in the Business
• Self-decision making
• No specific audit requirement
What if someone wish to convert from sole proprietorship to private limited company or partnership?
You can always choose to do so. The procedure is a little tedious, but it is possible. It is very common for sole proprietors to convert into partnerships and private limited companies at a later stage. Take an advice from the business law practitioner or from the expert who dealing in the matters related to business.
Unlimited Liability Partnership Firm
• When two or more person come together and want to start the business they can start their business as Partnership Firm/Business.
• Partnership is an agreement between two or more people to share the profits of a business. The business can be carried on together by all the partners or any one partner representing the others. A partnership can be for a fixed period of time or it may be limited to a specific project or it may be dissolved at will.
• Registering a firm under the Partnership Act, 1932 is not mandatory as in case of setting up an Organization but it is always advisable to get your firm registered before Registrar of the Firm in which the Partnership firm situated. You can face the following problems if you have not registered Partnership Firm.
• A partner of an unregistered firm cannot file a suit in any court against the firm or other partners for the enforcement of their any right arising from the partnership business. An unregistered firm or any of its partners cannot claim set-off or other proceedings in a dispute with a third party.
• Therefore, any partnership should be registered sooner or later.
Advantages of Partnership Firm
• Power to file case against Third Parties (if Partnership Firm Registered)
• Power to file case against Co-Partner (if Partnership Firm Registered)
• Ability to claim set-off if any third party file suit against the firm and partner. (if Partnership Firm Registered)
• Convert partnership firm into Private Limited Company or Limited Liability Partnership (LLP) (if Partnership Firm Registered)
• Sharing of risk (If any Losses)
• Capital for the business can be collect more than the proprietorship because number of partners involve in the business.
• Partnership firm cannot dissolve in case of any one partner leave the partnership firm. (It is only possible when there are more than two partners in the Partnership firm.)
Rights of Partner in Partnership Firm
• To take part in the business.
• To share the profit or loss of the business.
• To inspect and make copies of the books of the firm.
• To receive remuneration for taking part in the business if specified in the partnership deed.
• To receive interest on capital if specified in the partnership deed.
Duties as a Partner in a Firm:
• carry on the business
• Be just and faithful to each partner.
• Disclose true accounts of the firm.
• Furnish full information of all things affecting the firm.
Limitations on partner in the Partnership Firm: As a partner you cannot do the following without the consent of the other partners:
• Submit a dispute relating to the business to arbitration.
• Open a bank account on behalf of the firm in your own name.
• Compromise or relinquish any claim or portion of a claim of the firm.
• Withdraw a suit or proceeding filed on behalf of the firm.
• Enter into partnership with an outsider on behalf of the firm.
• Acquire or transfer immovable property belonging to the firm.
• Admit any liability in a suit or proceeding against the firm
Limited Liability Partnership
LLP is defined as partnership formed and registered under Limited Liability Partnership Act, 2008 is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name. The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
Feature of LLP
• The LLP and Partner are distinct from each other (Separate Legal Entity)
• Minimum two members required to form a Partnership firm. There is no limit on the maximum number of partners.
• Minimum contribution of Capital not required
• LLP can form by any type enterprises.
Advantages of Limited Liability Partnership
• Partner have limited liability in the LLP
• Partners are not liable for act of each other and can be held liable only for their own act
• Less compliance part than Private limited Company.
• The Partners are not liable to be sued for dues against LLP.
Conversion of firm, private company and unlisted company into LLP
A firm, private company or an unlisted public company is allowed to be converted into LLP in accordance with the provisions of the Act.
Winding up of LLP
The winding up of the LLP may be either voluntary or the Tribunal.
Circumstances in which the LLP may be wound up by Tribunal:
• If Partners want to wound up LLP through the Tribunal
• If for a period of more than six months, the number of partner reduce below two.
• If LLP unable to pay debts
• If LLP Act against the interest of sovereignty and interest of nation
• If LLP has made default in filling the annual returns and account statement with the registrar for any five consecutive financial year.
• If tribunal is of opinion that it is just and equitable that LLP be wound up.
The Indian Partnership Act, 1932 shall not be applicable to LLPs.
Requirements for Incorporation of LLP
First Obtain designated partner identification number (DPIN / DIN) for the designated partners and also obtain Digital Signature.
a) Reservation of LLP name (e-form 1)
• Address of Registered
• Description of proposed business activity
• Proposed monetary value of partner’s contribution (Minimum 1 Lac)
• Proposed name of the LLP (6 names in preference serial)
• Significance of the key or coined word(s), if any, in the proposed name(s) (in brief)
b) Incorporation Documents (e-form 2)
• Address of Registered Office
• Office Phone No.
• Email id of LLP
• Contribution of each partner
• Disclosure of partner towards:
-Number of LLP(s) in which he is a partner
-Number of company(s) in which he is a director
• Proof of Registered Office (Electricity Bill / Landline Bill etc.)
• Subscribers Sheet
c) Details to LLP Agreement (e-form 3)
Profit sharing Ratio
Form of Contribution
Initial Agreement copy
d) Consent of Partners (e-form 4)
It contains information about appointment, cessation, change in name/ address/designation of a designated partner or partner and consent to become a partner/designated partner). Format of consent is given in Form -9 available.
Provided that in case of incorporation, the individual who has given his consent to act as Partner or designated Partner shall file consent in Form 2 along with fee.
After considering all difference between Partnership Firm and LLP you can take decision regarding in which form of organisation you are need to registered your business. Take an expert advice from the legal practitioners
Private Limited Company
Private Limited Company is a type of company which offers limited liability with restrictions on ownership. As per the definition, the minimum number of members to start the private limited company is 2 with a maximum of 200 members. A Company is considered a separate legal entity having perpetual succession, with the liability of shareholders limited to the capital being contributed by them.
Feature of Private Limited Company
Name: The private limited company must use the word “PRIVATE LIMITED COMPANY” at the end.
Members: To form a private limited company minimum of 2 members and a maximum of 200 members as per the provisions of Companies Act,2013.
Limited Liability: The liability of the members is limited to the number of shares held by them. For example, if the company faces any losses under any circumstances the shareholders are liable only to the shares held by them. The personal assets owned by the shareholders are not at risk.
Perpetual Succession: The Company exists in the eyes of the law even in case of death, insolvency or bankruptcy of any of its members. This means the life of the company keeps on existing forever.
Register of Members: There is no compulsion for the private limited company to maintain the register of members as required by a public limited company.
Directors Requirement: Required of Directors in the case of a Private Limited company is only 2. With a minimum of 2 directors, a company can carry on its operations.
Paid-up Capital: A Private Limited Company must have a minimum capital of rupees one lakh or such higher amount prescribed as a time to time. However, as per the recent amendment in the year 2015, there is no such minimum capital requirement.
Advantages of Private Limited Company
Limited Liability: the liability of each shareholder is limited to the contribution made by them.
Easy Transferable Ownership: the share of private limited company is easily transferable to other. It is easier to subscribe or leave the membership of the Private limited company.
Separate Property: Private limited company is separate legal entity hence, the company is capable to own fund and other property. Property of company is not a property of its shareholder.
Raising Fund/Capital: The Private limited company can be involved more member or shareholder as than the partnership firm or proprietorship hence, they can raise more fund or capital.
Capacity to Sue: As a legal entity, a Company can sue in its name and be sued by others.
Perpetual Succession: An incorporated company never dies except its wound up as per law. Being a separate legal person is unaffected by death or departure of any member.
Tax Advantages: The Private Limited companies pay corporation tax on their taxable profits and tend to be exempt from higher personal income tax rates.
One Person Company
From its name we come to know that in this type of company required one person to run the business. This type of company created when there is only one member or promoter to run the business. Earlier when one person wants to start the business, he had an option for the proprietorship and he was need to registered his business according to his type of business but after introduction of the One Person Company under the Companies Act 2013, Business man doesn’t need any other person to start the business and they can registered their business as one person company and can enjoy the benefit of the one person company.
Section 2(62) of Companies Act, 2013 defines a one-person company as a company that has only one person as to its member. Furthermore, members of a company are nothing but subscribers to its memorandum of association, or its shareholders. So, an OPC is effectively a company that has only one shareholder as its member.
Feature of One Person Company
Eligibility to act as member of an OPC
Only a natural person who is an Indian citizen and resident in India shall be eligible to act as a member and nominee of an OPC. A Person can be member in only one OPC.
For the above purpose, the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one financial year.
An OPC can be formed under Company limited by guarantee or shares.
Name of the OCP: An OPC is required to give a legal identity by specifying a name under which the activities of the business could be carried on. The words ‘One Person Company’ should be mentioned below the name of the company, wherever the name is affixed, used or engraved.
Minimum Capital: An OPC can be started with a minimum authorized capital of Rs. 1 lakh. There is no mandatory requirement for a minimum paid up capital. Hence, person can start as an OPC with lowest capital contribution. However when the paid up capital exceeds Rs. 50 lakh, OPC must mandatorily convert to a private limited company. Also, when the average turnover for 3 consecutive years becomes Rs. 2 crore or more, there is a need to convert into a private limited company
Only a natural person, who is an Indian citizen and resident in India, shall be a nominee in a One Person Company. By “Resident in India” mean that a person who has stayed in India for a period of not less than 182 days during the immediate preceding one year.
Advantages of One Person Company (OPC): The following are the most outstanding advantages associated with an OPC in India, over the private limited or public limited companies:
To form an OPC, only one Director is needed.
The Section 173 which dictates that a limited company should conduct at least four Board meetings every year is not applicable for OPCs.
The provisions and regulations given in Section 98 and Sections from 100 to 111, which relate with general meetings, are also not applicable to OPCs.
An OPC also enjoys relaxations and exceptions from many other legal, governance, ad regulatory compliances.
The mandatory rotation of auditor after every five-year period, is also not applicable to an OPC.
Public Limited Company
In simple terms, a public company is a company whose shares can be subscribed by members of the public. As per the Companies Act, 2013 a public company is:
A company that is not a private company
Has a minimum paid-up capital of five lacs, again there is no maximum limit. However, as per the recent amendment in the year 2015, there is no such minimum capital requirement.
A private company that is a subsidiary of a public company will be considered a public company.
Feature of Public Limited Company
Name: The Public Limited Company must use the word “LIMITED COMPANY” at the end.
Members: To form a Public Limited Company minimum of 7 members and no maximum limit is mentioned in the Companies Act, 2013.
Limited Liability: The liability of the members is limited to the number of shares held by them.
Register of Members: There is no compulsion for the public limited company to maintain the register of members.
Directors Requirement: In Public limited company minimum 3 Director required.
Paid-up Capital: A Public Limited Company must have a minimum capital of rupees Five lakh or such higher amount prescribed as a time to time. However, as per the recent amendment in the year 2015, there is no such minimum capital requirement.
Prospectus: A prospectus is a comprehensive statement of the affairs of the company issued by a public limited company for its public and there is a requirement under the Act for public limited companies to issue a prospectus.
Advantages of Public Limited Company:
Transferable shares: Share of Public limited Company are bought and sold in a stock exchange market. They are freely transferable between its member and people trading in stock exchange.
Perpetual Succession: A Public Company is not affected by death of the one of its shareholder. Even in case of death of director of the company, the election held to replace the deceased director.
Large Capital: In a Public limited company the company can raised the capital from the public and there is no limitation on raising the amount of capital from the public. hence public limited company enjoy an increased ability to raise capital since they can issue share to the public through stock market.
Growth and expansion in business: Public limited Company issues shares to the public at large hence more chances in growth of the business. Public limited company also get the benefits from the government though the various schemes therefore expansion in business easily possible in the public limited company than other types of company. Also scope to launch new products and project in the market.
Structuring Equity : Different shares issued to different shareholders helps to raise more fund for business. Public company can raise fund by issuing Equity Shares Preference shares, Debenture share etc.
Deposit from Public: Public company can also accept deposits from the public but only after compliance of provision for the same which is provided in the in Company Act, 2013.
Lower Risk : A Risk of each shareholder is limited to the face value of shares held by him in the public limited company and in public company the number of share are quite higher than Private Limited company hence the shareholders risk is considerably low.