Legal Form of Business

Dr. Prateeksha Maurya

Assistant Professor of Finance and Accounting
Indian Institute of Management Jammu
Types of Business Structures

Informal
Business
Structures
Formal
Facts and Figures
Benefits of Formalization

▪ Obtain legal Identity/status

▪ Establish business trademark/brand

▪ Access to resources

▪ Access to government contracts and grants

▪ Business expansion
Types of Legal forms of Business in India

▪ Sole Proprietorship

▪ Partnership

▪ Limited Liability Partnership

▪ Private Limited Companies

▪ One-Person Companies

▪ Public Limited Companies

Sole Proprietorship
• Fully controlled by one person (Owner/Proprietor)
• No formal Registration required.
• Unlimited Liability of Owner
• No separate legal entity

• Fun Fact: eBay started as sole proprietorship by Pierre Omidyar in 1995 (It was
named Auction Web)
Benefits of Sole Proprietorship
▪ Cost-Effective

▪ Flexibility in decision making

▪ Workplace Relationship
Partnership
• 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.

• Unlimited Liability of all partners.

• It is not mandatory but suitable to get it registered. (Indian Partnership Act 1932)

• Fun Fact: Microsoft started as Partnership between Bill gates and Paul Allen in 1975 and was
incorporated six years later in 1981
Benefits of Partnership

▪ Fund Raising

▪ Shared Responsibility

▪ Shared Liability
Limited Liability Partnership (LLP)
▪ Incorporated under the Limited Liability Partnership Act 2009.

▪ 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.

▪ 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.
Benefits of Limited Liability Partnership
(LLP)
▪ 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.
Private Limited Company
▪ Section 2(68) of Companies Act, 2013 defines private companies.
▪ According to that, private companies are those companies whose articles of
association restrict the transferability of shares and prevent the public at large from
subscribing to them.
▪ This is the basic criterion that differentiates private companies from public
companies.
▪ The Section further says private companies can have a maximum of 200 members
(except for One Person Companies).
▪ This number does not include present and former employees who are also members.
Moreover, more than two persons who own shares jointly are treated as a single
member.
▪ This definition had previously prescribed a minimum paid-up share capital of Rs. 1
lakh for private companies, but an amendment in 2005 removed this requirement.
▪ Private companies can now have a minimum paid-up capital of any amount.
▪ Minimum 2 and maximum of 200 members can come together to form a
private company by submitting an application to that effect to the
Registrar of Companies along with a subscribed copy of their
Memorandum of Association and other required documents after
payment of prescribed fees.
▪ The Memorandum must state the name of the company (which should
include the words “Private Limited”), the address of its registered office,
its objects and purposes, and extent of liability of its members. It must
also mention the details of subscribers to the Memorandum.
▪ Apart from this, the Companies Act has also prescribed certain other
compliances, such as requirements relating to names of private
companies, their Articles of Association, details of members,
transferability of shares, etc.
Benefits of Private Limited Company
▪ 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.
▪ Better Financing: A private limited company enjoys the privileges of
borrowing more funds than LLPs as it has more options for taking on debt.
▪ 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 (Perpetual) Existence: The company’s existence remains
unaffected by the death or resignation of any member.
Public Limited Company
▪ 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.
▪ Can you give some examples??
Benefits of Public Limited Company
▪ 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.
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.
Benefits of One Person Company

▪ Benefits of MSME policies

▪ Better credibility

▪ Sole decision making

How to select the legal form?

• Continuity of Existence

• Complex Procedures

• Liabilities

• Control

• Investment Needs
Legal Form and Start-up Funding