Business Structures


Success of a business always depends on how one can organise it and pursue it to accomplish the desired goals. A business can be organised in different forms such as Sole Proprietorship, Partnership, Limited Company (One Person Company-OPC, Private Company or Public Limited Company) or Limited Liability Partnership.

While selecting a business organisation, one must have an understanding about the different types of business structures, its merits and demerits, suitability for desired business etc.

In India, there are several forms of business organizations viz, Sole Proprietorship, Partnership Firm, Limited Company and Limited Liability Partnership (LLP).

Basically these organizations are classified into incorporated and unincorporated structures. Company and LLP are the incorporated business organizations and Partnership Firm and Sole Proprietorship are the unincorporated structures. Incorporated business structures are created under respective laws such as Companies Act and LLP Act and will be treated as separate legal entities.

Partnership is created by an agreement between partners and is governed by Partnership Act. It is not mandatory to register a Partnership and even if it is registered under Partnership Act, it does not entitle a corporate entity status. An individual can start a sole proprietorship by opening a bank account with a bank. Sole Proprietorship does not require registration.

Incorporated Business structures have certain advantages over unincorporated business.

Sole Proprietorship

A sole proprietorship, also known as a sole trader or simply a proprietorship, is a type of business structure that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits (after tax) and has unlimited responsibility for all losses and debts. All assets and debts of the business in the proprietorship are owned by the proprietor. This means that the owner has no less liability than if they were acting as an individual instead of as a business.

A sole proprietor may use a trade name or business name other than his or her name. In India, there is no specific law for registration of sole proprietorship, but as per the Shop and Establishment Law (State Law), every establishment needs to get registered under the Act, which can be used as limited purpose sole proprietorship registration.

As the name reveals, a sole proprietor ship is operated managed and run by a single individual. The identity of the organistaion is nothing but the individual himself.

However, depends on the nature of business, it is required to obtain registration such as Service Tax, VAT, IEC etc. A sole proprietorship can be registered under MSME Act to avail the benefits and protection.

The proprietorship business carries unlimited business risk as the business proprietor is individually responsible to settle all business liabilities. Proprietor's personal assets are at risk to compensate the business liabilities.

Partnership

Partnership is one of the oldest business structures in India. Partnership is relation of two or more persons who have agreed to share the profits and losses according to their ratio of business run by all or any one of them acting for all. In simple terms, partnership is a contractual relation of two or more persons carrying business to share profit or loss in an agreed ratio.

In India, a partnership is governed by Indian Partnership Act, 1932, and a partnership firm does not have an independent status apart from the partners constituting it. Partnership does no have a legal entity status than of its partners. It has limited identity for the purpose of tax laws. Any two people can start partnership business under an agreement called partnership deed. It is not mandatory to register a partnership deed but it is advisable to register partnership deed but for evidential purpose.

CompanieInn.com can help you to create your Partnership deed and get it registered.

Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is an incorporated business form that combines the features of partnership and the company form of business. The LLP form of organisation was introduced in India in April 2009 through the Limited Liability Partnership Act, 2008. An LLP like organisation structure is available globally. In the US, an LLC has many features of an LLP seen in India. The UK and Singapore also have an LLP form of organisation structure for doing business.

The main demerits of a partnership firm are unlimited liability and all the partners are responsible for the wrong doing of one partner. In an LLP, one partner is not responsible or liable for another partner's misconduct or negligence. All partners have limited liability for each individual's protection within the partnership, similar to that of the shareholders of a limited company. However, unlike the company shareholders, the partners have the right to manage the business directly. An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP's employees or other agents. The management of LLP is defined by the LLP agreement and partners have the freedom to regulate affairs of the LLP.

CompaniesInn.com holds the record of registering the fist LLP in India through the online filing system at www.llp.gov.in on 24-04-2009 (CompaniesInn Consulting LLP, LLPIN AAA-0002)

One Person Company (OPC)

One Person Company or OPC means a company which has only one person as a member. OPC has all benefits of a private limited company such as protecting personal assets from business liability, separate legal entity and perpetual succession. One Person Company (OPC) is a Company registered with ONLY ONE PERSON as its shareholder. An OPC is classified as a private company under Companies Act.

Private Limited Company

It is the most common incorporated business organisation in India. It is generally called as a 'Private Company'. A private limited company is registered with the below mentioned features and restrictions:

  • Minimum and maximum number of shareholders in a private company is 2 and 200, respectively
  • No Minimum Capital
  • Minimum number of directors are 2
  • Share transfer can be restricted as per Articles of the company
  • Cannot accept deposits from the public and it can take loans only from shareholders, directors and relatives of directors
  • Cannot issue shares to the public
  • Less compliance with respect to company laws
  • Name of the company should end with the words 'Private Limited'
  • A Private Limited Company is more flexible than a Public Limited Company as many of the restrictive provisions of Companies Act are not applicable to Private Limited Companies.

Public Limited Company

As the name reveals, public limited company has a wider coverage than a private limited company. It is generally called as a 'Public Company'.

A public limited company has the following features:

  • Minimum number of shareholders is 7. There is no restriction on maximum number of shareholders.
  • Minimum number of directors is 3
  • Subject to the compliance of the Companies Act, the Company can issue shares to public
  • Subject to the compliance of the Companies Act, it can accept deposits from public.
  • Operations of public limited companies are subject to compliance of many of the restrictive provisions of Companies Act.
  • Generally companies requiring huge capital investment are opting for registering as Public Limited Company.

Section 8 Companies - Non Profit Company

Generally companies are promoted with an object of making profit by carrying commercial transactions. But a company can be registered with charitable motive with the object not to make any profit also.

The registration of such company is subject to the provisions of Section 8 of the Companies Act. 2013. So, these companies generally called as Section 8 Company. These companies must be formed with an object to promote of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object.

The name of a Company registered under Section 8 of the Act, the name shall include the words foundation, Forum, Association, Federation, Chambers, Confederation, council, Electoral trust etc.

A Section 8 Company shall not pay any dividend to its members but apply its surplus of receipts over payments for promotion of its objects. These companies need not use the words Limited or Private Limited after the name.

The registration process of a Section 8 company is slightly different from a regular limited company. A license for registration must be obtained from the Ministry of Corporate Affairs for registration as a Section 8 Company.

These companies are generally registered as Guarantee Company with limited liability with or without capital. This company can be private or public in nature depends on the number of persons involved in it.

Guarantee Company

Guarantee Company is a sub classification of Private and Public Companies. Usually it does not have share capital but instead has members who act as guarantors. The guarantors give an undertaking to contribute a nominal amount (typically very small) in the event of the winding up of the company. This type of company may also have capital and in that case, members are liable to pay the capital amount taken as well as the guarantee amount.

Usually these companies are formed for Clubs and associations wherein members are not looking for profit.

Producer Company

Producer Company is another classification of Private and Public Company. These types of companies have the features of co-operative societies. Only 'primary producers' or 'producer institution' can form a producer company and participate in the ownership of such companies.

'Primary Producers' means people engaged in the process of Primary Produce. Primary produce means produce of farmers arising from agriculture including animal husbandry, horticulture, floriculture, pisciculture, viticulture, forestry, forest products, re-vegetation, bee raising and farming plantation products: produce of persons engaged in handloom, handicraft and other cottage industries: by - products of such products; and products arising out of ancillary industries.