Legal Entrepreneurship

Module II - Establishing of an Entity

 Module II
• Structuring a Partnership/Limited Liability Partnership:
– Basics of Partnership and Partnership Deed
– Registration Procedures and Dissolution
– Basics of LLP and LLP agreements
– Registration Procedures and Steps of Incorporation
– Annual and Periodic Compliances
– Dissolution
• Structuring a Company:
– Concepts of Corporations, One person Company, Sole Proprietorship, Private
Limited Company, Public Company
– Steps for Incorporation,
– Annual Compliances, Conversion of Business from one form to another,
• Structuring Non Profit Businesses, Cooperatives, Trusts
– Procedure and Key Issues for Incorporation and Structuring of a
trust/society/non-profit company
– Tax Benefits for a Non-Profit Entity
• Startups and Early Stage Businesses: Medium and Small Scale Enterprises
– Micro, Small And Medium Enterprises Development Act, 2006
– Advantages of registration & Registration process
– Money Recovery Procedures for Startups,
– Dispute resolution mechanisms
 Sole Proprietorship - Shop and Establishment Act
• Majority of the businesses in India are unregistered with many being
operated as a sole proprietorship firm business. A sole proprietorship is
one of the easiest and simplest form of business entity to register and
maintain in India. There is no formal sole proprietorship registration and to
start a proprietorship only PAN number for the Proprietor, certain licenses
and capital is required.
• This registration can be done by a sole proprietor who has a shop. Shop
would mean any premises:
– 1 . Where goods are sold, either by retail, wholesale, or
– 2. Where services are rendered to customers.
– 3. It includes an office a store-room, godown, warehouse or work place,
whether in the same premises or otherwise, used in connection with
such trade/ business.
• It does not include a factory or a commercial establishment, hotel etc. As a
business owner or proprietor of a shop or establishment, you are
compulsorily required to get your shops registered under the Shops and
Establishment Act.
 Sole Proprietorship - Shop and Establishment Act
• Advantages
– It can be started easily by just one person.
– Minimum compliance is required to get it up and running.
– It is relatively lesser expensive to start this type of business
– There are no corporate tax payments for a sole proprietorship.
– The decision-making and the control of the business are with one person only.
• Disadvantages
– There is an unlimited liability of the proprietor. He is personally liable for all the
transactions he enters.
– If something happens to the sole person taking care of the business, there is
always the threat of business shutting down.
– Due to a single person managing the business, there is always difficulty in
raising capital.
 Sole Proprietorship - Shop and Establishment Act
• Since for starting a Sole Proprietorship, no registration is really required,
however, if one wishes to go through a formal procedure one may opt for
establishing a business under Shop and Establishment Act wherein one has
to obtain certificate from the respective municipal authority; other method
can be through GST registration when the business turnover is more than
20 Lakh rupees; or by obtaining the Udyog Aadhar number (that is again a
unique identification number for business) issued by the Ministry of MSME.
Udyog Aadhar number is also issued to Partnerships and to companies.

* Mid Semester Portion covers only registration under Shop and Establishment
 Sole Proprietorship - Shop and Establishment Act
• Shop and Establishment Act Licence (Governed by State
Laws)
• The municipal authorities of all states require businesses to have a Shops
& Establishment License. This is a license (subject to periodic renewal)
that must be obtained once for all places of business, even if you are
operating from home. The Shop and Establishment Act license are given
by the Department of Labour in the individual States and it puts certain
conditions/clauses for employers pertaining to conditions of work and the
list of rights for the employees. Each shop or business establishment
needs to register itself for Shop and Establishment Act, irrespective of the
number of employees or lack of it. Establishment covered under the Act
must apply for registration, within 30 days from the date of
commencement of establishment, in prescribed form along with
prescribed fees.

• Most banks will not open an account for your business without this
license, since it forms as a proof of your business establishemnt.
 Sole Proprietorship - Shop and Establishment Act
Documents and Procedure
1. Applying for PAN. If you already have one this step is not required. Proprietorship businesses
are considered to be one and the same as the Proprietor. The PAN card of the proprietor will
be used for opening bank account, obtaining licenses / registrations / certificates in the
name of the sole proprietorship and filing income tax return for the sole proprietorship.
Hence, obtaining PAN card for the Proprietor is the first step in establishing a sole
proprietorship.
2. Settle on the name of Business
3. Application under the Act: If the concerned officer is satisfied with the application he/she
will issue Shop and Establishment Act registration certificate. As mentioned earlier,
application procedure would differ from state to state, however, basic details to be provided
at the time of applying for registration are as under:
• Name and address of the establishment
• Name of the employer
• PAN of establishment
• Address proof utility bill
• Sale deed or rent agreement
• Category of establishment
• Number of employee
• Details of employee aadhar card, pan, address proof
• Other relevant details as called for picture of the place of business
4. Opening of Current Account in Bank in the name of Business (Copy of license mandatorily
required) Copy of licencse and KYC documents.
 Sole Proprietorship - Shop and Establishment Act
Documents and Procedure
1. Address Proof: Utility Bills (latest upto 3 months) of the place
of business/ Rent Agreement/ Sale Deed
2. Employee/Owner-PAN Card and Aadhaar Card & Photograph
3. Employee details – Their address proof, Aadhaar Card, PAN
Card and Photograph
4. Pictures of the place of business and raw material
(The issuing of license mostly takes place after inspection of the
premises and material and nature of business)
For Current Account in Bank – documents remain the same with
an addition of copy of License and KYC documents. (Currently
the charges for opening a current account is Rs. 10,000/-)
Sole Proprietorship - Shop and Establishment Act

Link to sample Form under the Act

https://www.indiafilings.com/learn/wp-
content/uploads/2018/04/Andhra-Pradesh-Shop-and-
Establishment-Act-Application.pdf
 Partnership
• A business structure in which two or more individuals manage and operate
a business in accordance with the terms and objectives set out in the
Partnership Deed. This structure is thought to have lost its relevance since
the introduction of the Limited Liability Partnership (LLP) because its
partners have unlimited liability, which means they are personally liable for
the debts of the business. However, low costs, ease of setting up and
minimal compliance requirements make it a sensible option for some, such
as home businesses that are unlikely to take on any debt. Registration is
optional for General Partnerships.
• Governed by the Indian Partnership Act, 1932
• The registration takes place at the state level under the authority of
Registrars appointed under S. 57 of the Act (registrars are considered as
public servant under s. 21 IPC)
• S. 464 Companies Act, 2013 – maximum number of partners in a
partnership firm cannot exceed 100. therefore the currently, rule 10 ,
Companies (Miscellaneous) Rules, 2014 provides for maximum 50
partners.
 Partnership Deed
• The Primary Document for the regulating the partnership is a Partnership Deed.
• Details required in a Deed.
General Details:
1. Name and address of the firm and all the partners
2. Nature of business
3. Date of starting of business Capital to be contributed by each partner
4. Capital to be contributed by each partner (Designating business bringing partner, active
partner etc, it any)
5. Profit/loss sharing ratio among the partners
B. Specific Details:
Apart from these, certain specific clauses may also be mentioned to avoid any conflict at a
later stage:
1. Interest on capital invested, drawings by partners or any loans provided by partners to
firm
2. Salaries, commissions or any other amount to be payable to partners
3. Rights of each partner, including additional rights to be enjoyed by the active partners
4. Duties and obligations of all partners
5. Adjustments or processes to be followed on account of retirement or death of a partner
or dissolution of firm.
6. Other clauses as partners may decide by mutual discussion
 Partnership Registration
Registration procedure and Required Documents
1. Naming the Partnership Firm (Conditions – Name cannot be similar to any
existing business entity; A firm name shall not contain any words, namely -
Crown, Empero, Empress, Empire, Imperial, King, Queen, Royal, or words
expressing or implying the sanction, approval or patronage of, Government,
except when the State Government allows for it in writing
2. Drafting of the Partnership Deed
3. Documents and Application for Registration of firm (Form 1) has to be
submitted to the Registrar and fees. Obtain certificate
4. Registration Application has to be filed with affidavit certifying that all the
information and documents supplied are true.
5. After the registration, Obtain Permanent Account Number of the Firm from
the PAN card portal of NSDL (National Securities Depository Limited)
6. Register for GST if the turnover is more than 20 Lakh rupees, at the GST
Portal.
7. Open Current Bank Account in the name of the firm. For monetary
transactions; the banks usually rent out the Swipe machines with minimal
rent starting from approximately Rs. 300/- per month
 Partnership Registration
Required Documents
1. Address Proof of the Place of Business – Rent Agreement ( with NOC from
landlord for using the place for your business purpose)/ Utility Bills latest
upto 3 months/ Sale Deed or Property Registration Deed
2. Address Proof , PAN Card and Aadhaar Card of each Partner
3. Partnership Deed, signed by all partners and with Judicial Stamp (stamp
duty will differ state wise)
4. PAN Card of the Firm (Obtained through Form 49A)
5. Partnership Registration certificate (for GST and Bank Purpose)
6. GST certificate can also be submitted for bank purposes.
7. Authorisation letter on the letterhead of the firm authorising a partner as
authorised signatory for the bank account.
 Partnership Registration
Form 1 for Partnership Registration
https://www.indiafilings.com/learn/wp-
content/uploads/2018/08/FirmRegistrationForm.pdf

Sample Partnership Deed

https://www.indiafilings.com/sample-format/partnership-deed-format.pdf
 Partnership Dissolution
Notice of Contingecy to VC by Court
Modes –
1. Voluntary Dissolution; with the consent of all the partners

2. Compulsory Dissolution; when everyone becomes insolvent or carrying of bussiness becomes unlawful
3. Dissolution on the happening of certain contingencies; death, insolvency retirement or
completion of adventure
4. Dissolution by notice of partnership at will; simply by giving notice to other partners
5. Dissolution by court. (all modes have been discussed in previous
semesters) partner commits breach of deed, becomes incapable of performing his duties and on account of unsound mind
• Until a public notice of dissolution is given, partners remain liable for any act done
by any of the partners which would have been an act of the firm, if such act was
done before resolution.
• If a partner has been declared insolvent or has retired from the firm, he will not
liable for any acts done after his insolvency or retirement. The legal heirs of any
deceased partner are also not liable for any acts done by other partners after the
partner has died.
 Partnership Dissolution
Settling of Accounts at Dissolution
• Accounts of the firm are settled in the following order–
• Losses of the firm will be paid out of the profits, next out of the capital of
the partners, and even then, losses aren’t paid off, losses will be divided
among the partners in profit sharing ratios,
• Assets of the firm and the capital contributed by the partners to set-off
losses of the firm will be applied in the following order–
– Third party debts will be paid first
– Next, loan amount taken by firm from any partner will be repaid to that partner
– Capital contributed by each partner will be repaid to him in the capital contribution ratio
– Balance amount will be shared among the partners in their profit sharing ratios.
• Upon realization, all assets will be sold off in the market, and the cash
realizing out of such a sale will be used for paying the liabilities. Assets or
liabilities may also be taken over by the partner(s) for which the respective
partner capital accounts will be adjusted by such amount.
 Partnership Dissolution
Settling of Accounts at Dissolution
• If a partner paid a certain premium for entering into a partnership for
a fixed term, and the firm is dissolved before the end of fixed term,
the firm is liable to repay the partner his premium amount. But few
conditions are attached with this –
– Firm isn’t dissolving due to death of a partner
– Dissolution shouldn’t be happening due to his misconduct
– Dissolution is happening on the basis of an agreement that contains no
provision for repayment of full or a part of the premium.
 Difference between Dissolution of a firm and
dissolution of a Partnership
Parameters Dissolution of a Firm Dissolution of a Partnership

The business continues.

Continuation of business The business discontinues. However, the partnership is
reconstituted.

The firm is wound up. Assets

Assets and liabilities of the
Winding up are realized and liabilities
firm are only revalued.
are settled.

A Court Order can dissolve a A Court Order cannot

Court order
firm. dissolve a partnership.

It involves the dissolution of

It does not involve the
Scope partnership between all
dissolution of the firm.
partners.

Final closure of books Yes No

Limited Liability Partnership; How is it different from
Partnership
LLP: A corporate business vehicle that enables professional
expertise and entrepreneurial initiative to combine and operate in
flexible, innovative and efficient manner, providing benefits of
limited liability while allowing its members the flexibility for
organizing their internal structure as a partnership
Governing Act – The Limited Liability Partnership Act, 2008
LIMITED LIABILITY PARTNERSHIP
BASIS FOR COMPARISON PARTNERSHIP
(LLP)
Meaning Partnership refers to an Limited Liability Partnership is a
arrangement wherein two or more form of business operation which
person agree to carry on a combines the features of a
business and share profits & losses partnership and a body corporate.
mutually.
Governed By Indian Partnership Act, 1932 Limited Liability Partnership Act,
2008

Registration Optional Mandatory

Charter document Partnership deed LLP Agreement

Liability Unlimited Limited to capital contribution,

except in case of fraud.
 Limited Liability Partnership; How is it
different from Partnership
Contractual capacity It cannot enter into contract in its It can sue and be sued in its name.
name.
Legal Status Partners are collectively known as It has a separate legal status.
firm, so there is no separate legal
entity.
Name of firm Any name Name containing LLP as suffix

Maximum partners 100 partners No limit

Property Cannot be held in the name of firm. Can be held in the name of the LLP.

Perpetual Succession No Yes

Audit of accounts Not mandatory Mandatory, only if turnover and

capital contribution overreaches 40
lakhs and 25 lakhs respectively.

Relationship Partners are agents of firm and other Partners are agents of LLP only.
partners as well.
 LLP Agreement
• It is compulsory to make and execute LLP agreement within 30 days of the
incorporation of LLP as per the LLP incorporation document (Form 2). As per
provisions of the LLP Act, in the absence of agreement as to any matter, the
mutual rights and liabilities shall be as provided for under Schedule I to the Act.
Therefore, in case any LLP proposes to exclude provisions/requirements of
Schedule I to the Act, it would have to enter into an LLP Agreement, specifically
excluding applicability of any or all paragraphs of Schedule I.
• Contents of LLP
– Name of the LLP
– Date of Agreement and Parties of the Agreement
– Introductory provisions like introducing new partners, auditing., duration, management etc..
– Partner’s contribution and ratio of contributions
– LLP record keeping and bank arrangements
– Dissociation of a Partner
– Issues of partnership rights and duties
– Sale, transfer of partnership rights
– Managerial rights, fiduciary duties, voting rights etc - Winding up Clause
Sample LLP Agreement
https://www.indiafilings.com/learn/wp-content/uploads/2015/04/LLP-Agreement.pdf
 LLP Incorporation
Procedure and Documents Required
To register a Indian LLP, you need to first apply for a Designated Partner Identification
Number (DPIN), which can be done by filing eForm for acquiring the DIN or DPIN. You
would then need to acquire your Digital Signature Certificate and register the same on
the portal. Thereafter, you need to get the LLP name approved by the Ministry. Once
the LLP name is approved, you can register the LLP by filing the incorporation form.

1. Obtain a Digital Signature Certificate – The Information Technology Act, 2000

provides for use of Digital Signatures on the documents submitted in electronic form in
order to ensure the security and authenticity of the documents filed electronically.
This is the only secure and authentic way that a document can be submitted
electronically. As such, all filings done by the LLP(s) are required to be filed with the
use of Digital Signatures by the person authorised to sign the documents. (Acquire DSC
-A licensed Certifying Authority (CA) issues the digital signature. Certifying Authority
(CA) means a person who has been granted a license to issue a digital signature
certificate under Section 24 of the Indian IT-Act 2000.) (Register DSC - Role check can
be performed only after the signatories have registered their Digital signature
certificates (DSC) with LLP application.)

2. Obtain Director Identification Number – All designated partners of the proposed LLP
shall obtain “Designated Partner Identification Number (DPIN)”. You need to file eForm
DIR-3 in order to obtain DIN or DPIN. In case you already have a DIN (Director
Identification Number), the same can be used as a DPIN.
 LLP Incorporation
Procedure and Documents Required
4. New User Registration – To file an eForm or to avail any paid service on LLP
portal; you are first required to register yourself as a user in the relevant user
category, such as registered and business user on the Ministry of Corporate Affairs
Portal
5. Name Approval and reservation - LLP-RUN(Limited Liability Partnership-Reserve
Unique Name) is filed for the reservation of name of proposed LLP which shall be
processed by the Central Registration Centre under Non-STP. But before quoting
the name in the form, it is recommended that you use the free name search
facility on MCA portal. The system will provide the list of closely resembling
names of existing companies/LLPs based on the search criteria filled up. This will
help you in choosing names not similar to already existing names. The registrar
will approve the name only if the name is not undesirable in the opinion of the
Central Government and does not resemble any existing partnership firm or an
LLP or a body corporate or a trademark. The form RUN-LLP (Form 1) has to be
accompanied with fees as per Annexure ‘A’ which may be either
approved/rejected by the registrar. A re-submission of the form shall be allowed
to be made within 15 days for rectifying the defects. There is a provision to
provide for 2 proposed names of the LLP.
RUN LLP Sample
 LLP Incorporation
Procedure and Documents Required
• Incorporation of LLP - The form used for incorporation is FiLLiP(Form for
incorporation of Limited Liability Partnership- Form 2, after the approval of name
through form 1) which shall be filed with the Registrar who has a jurisdiction over
the state in which the registered office of the LLP is situated. The form will be an
integrated form.
– Fees as per Annexure ‘A’ shall be paid.
– This form also provides for applying for allotment of DPIN, if an individual who
is to be appointed as a designated partner does not have a DPIN or DIN.
– The application for allotment shall be allowed to be made by two individuals
only.
– The application for reservation may be made through FiLLiP too.
– If the name that is applied for is approved, then this approved and reserved
name shall be filled as the proposed name of the LLP
6. Filing LLP Agreement - After incorporation of LLP, an initial LLP agreement (on
Stamp Paper) is to be filed within 30 days of incorporation of LLP. The user has to
file the information in Form 3 (Information with regard to Limited Liability
Partnership Agreement and changes, if any, made therein).

LLP formation takes approximately 15 to 20 days

 LLP Incorporation
Documents Required
• PAN Card/ ID Proof of the Partners
• Address and Residence Proof of the partners
• Photograph of the partners
• Passport (in case of Foreign Nationals/ NRIs)
• Proof of Registered Office Address
• Digital Signature Certificate of the designated partner, who has shall be designated
through letter on the letter head duly signed by all partners
Form name Form purpose
RUN – LLP (Reserve Unique Form for reserving a name for the LLP
Name- LLP)
*FiLLiP Form for incorporation of LLP
Form 5 Notice for change of name
Form 17 Application and statement for the conversion of a firm into LLP
Form 18 Application and Statement for conversion of a private
company/unlisted public company into LLP
 Annual/Periodic Compliances
• In order to escape penalties the LLP(s) are required to file annual compliances which are
quite few in number. Whilst non-compliance might only charge a Private Limited
company INR 1 lakh in terms of penalties, it might charge an LLP up to INR 5 lakh.
Factors leading to non compliance – No Business Activity; Recurring Losses; Lack of
knowledge with respect to compliances; LLP heading for closure
• Fines against LLP for non-compliance can vary from 25,000 to 5 Lakhs and for the
designated part, it may vary from 10,000 to 1 Lakh.
• An LLP has to compulsorily undertake the following three filings annually even if it is
recurring losses or heading for closure
1. Form 8: Statement of Account and Solvency - is to be submitted within 30 days from
the expiry of six months from the closure of the financial year i.e 30th October (2019).
2. Form 11: Annual Return - To be submitted within 60 days of closure of the financial
year i.e 30th May (2019).
3. Income Tax Returns: (Form ITR 5) If turnover is more than INR 40 lakh or whose
contribution has exceeded INR 25 Lakh have to get the books of account audited by
practicing Chartered Accountants and file for tax by September 30th. For LLPs where tax
audit is not required the due date for tax filing is July 31st. For LLP that have entered
into an international transaction with associated enterprise need to file form 3CEB that
has to be certified by a Practicing Chartered Accountant. This filing has to be done by
30th November every year.
 Annual/Periodic Compliances
Form 8: Statement of Account and Solvency (Details about profts made and other
financial data) (30th October every year)
• All enrolled LLPs are required to have their books of accounts in place and fill in data with
respect to the profit made, and other financial data in regards to business, and submit it in
Form 8, every year.
• Form 8 must be attested by the signatures of the designated partners and should also be
certified by a practicing chartered accountant or a practicing company secretary or a
practicing cost accountant.
• Failing to file, the statement of accounts & solvency report within the specified due date will
lead to a fine of INR 100 per day.
Form 11: Annual Return (30th May every year)
• This form is considered as the summary of management affairs of LLP, like numbers of
partners along with their names; Total contribution by/to partners of the LLP; Details of
notices received towards Penalties imposed / compounding offenses committed during the
financial year
• It must be e-filed on the MCA portal or offline after downloading the form. The form has to
be attested by a practicing Company Secretary if total contribution made by Partners is more
than Rs. 50 lakhs OR Turnover of LLP is more than Rs. 5 crores
• Penalty of Rs. 100 per day is chargeable till the date of filing.
 Dissolution of an LLP
• Modes of Closing an LLP
1. Declaring the LLP as defunct - In case the LLP wants to close down its business or
where it is not carrying on any business operations for the period of one year or
more, it can make an application to the Registrar for declaring the LLP as defunct
and removing the name of the LLP from its register of LLP’s. eForm 24 is required
to be filed for striking off the name of LLP under clause (b) of sub rule 1 of Rule
37 of LLP Rules 2008. Similarly, Registrar also has the power to strike off any
defunct LLP after satisfying himself of the need to strike off and has reasonable
cause. However, in this case, registrar has to send a notice to the LLP of his
intention and request to send their representation within one month from the
date of the notice. The Registrar shall publish such notice or content of the
application made by the LLP on its website for a period of one month for the
information of the general public. In case no reply is received within the
mentioned period, registrar may strike off the name of LLP.
2. Winding Up - It is the process where all the assets of the business are disposed
off to meet the liabilities of the same and surplus any, is distributed among the
owners. The LLP Act 2008 provides for Voluntary Winding Up and Compulsory
Winding Up of the LLP.
 Dissolution of an LLP
• An LLP may be compulsorily wound up when-
– if the limited liability partnership decides that limited liability partnership be
wound up by the Tribunal;
– if, for a period of more than six months, the number of partners of the limited
liability partnership is reduced below two;
– if the limited liability partnership is unable to pay its debts;
– if the limited liability partnership has acted against the interests of the
sovereignty and integrity of India, the security of the State or public order;
– if the limited liability partnership has made a default in filing with the Registrar
the Statement of Account and Solvency or annual return for any five
consecutive financial years; or
– if the Tribunal is of the opinion that it is just and equitable that the limited
liability partnership be wound up.
• Voluntary Winding Up - Voluntary winding up happens when the
partners decide amongst themselves to discontinue and close the LLP.
 Dissolution of an LLP
• Procedure for Voluntary Winding Up
1. Passing of Resolution: LLPs can be voluntarily wound-up by passing a resolution
with the consent of at least 3/4th of the total number of partners. A replica of
the resolution should be filed with the Registrar on Form 1 within the 30 days of
passing the resolution. Along with this, a replica of the sanction should be given to
the individual who takes care of the process of winding up.
2. Winding up with Creditors: An announcement made by the majority of the
partners in Form 2 stating that they have no sum unpaid or they will pay their
debts within an assured time period (period fixed by the partners) but not
exceeding more than one year from the date of passing of the resolution for the
sake of winding up.
3. Publication of Winding Up Resolution: After the passing of the resolution for
winding up and receiving the consent from the creditors for winding up, then
within 14 days, the LLP should give a notice of the resolution by advertisement
in a newspaper circulating in the territory where the office is registered or the
principal office of the LLP is located.
4. Appointment of the Liquidator: With the approval of the majority of the partners,
through resolution, voluntary liquidator as the LLP liquidator is appointed with a
fixed remuneration. The liquidator will be appointed only after the approval of
2/3rds of the creditors in a value of the LLP. If the creditors want, then they have a
choice to nominate an LLP liquidator and in a case of instantaneous appointments
by the creditors and the partners, the LLP liquidator appointed by the creditors
will come into existence. If no liquidator is acting, then the Tribunal will be
appointing an LLP liquidator.
 Dissolution of an LLP
• Procedure for Voluntary Winding Up
5. Dissolution: As soon as the affairs of the LLP are wound-up which
means, when liabilities have been discharged and assets have been
liquidated, a report will be made by LLP liquidator, in Form 9, stating
the way in which the winding up has been conducted, including the
final closing of the accounts with all the detailed explanations, and
the property which has been disposed of. After this, the approval of
the partners and creditors is sought for dissolution.