Selecting a viable legal structure is key to long-term business success. Every entity in India should be registered under the governing legislation. For this purpose, every entity must comprehend its options and have a legally-viable structure that exists in the status quo. One must choose an ideal legal structure perfectly aligned with the business goals and doesn’t offer too much compliance.
Well-defined goals empower the company to opt for an ideal business structure to fulfill such goals. For example, certain companies intend to access the benefits of being start-ups. For this purpose, it is a vital requirement to be registered either as an LLP or a Private Limited Company Registration
Certain types of entities also safeguard the personal assets of the Directors/Partners in case of a financial crisis. Following are the popular business structures available in India and their noteworthy features to help decide the ideal structure for your proposed company.
Types of Business structure in India
Following are the most common business structures in India;
In a partnership firm, two or more individuals can work together and reap profit. There is a partnership deed that outlines the invested interests of involved partners and their profit sharing ratio. It also entails norms around business operations. The partners in such a business structure serve unlimited liabilities. When it comes to the partnership structure, it is not compulsory but ideal to get it registered.
In a nutshell, the partnership business structure renders the following leverages to its partners;
It is easier to procure funding in a partnership as banks consider them safer than proprietorship-based businesses.
This structure ensures the ideal allocation of accountability among the serving partners to keep everything transparent.
There is a sense of faith and reliability among the serving partner in the partnership firm. All partners can act together or individually on behalf of others.
Limited Liability Partnerships
A Limited Liability Partnership falls under the Limited Liability Partnership Act 2009. Compared to the partnership structure, partners in an LLP are not forced to address unlimited liabilities triggered by the business.
Their accountability towards debts is limited to the extent of their investment; an LLP and its partners are deemed autonomous legal entities. Since partners’ liability is limited to their contribution threshold in the LLP, it entails elements of both a partnership firm and a corporate structure. The personal liability of the partner does not exist in this business model except in the case of fraud.Furthermore, a partner has nothing to do with the other partner’s misconduct as the concept of joint liability does not exist in LLP.
Some notable benefits of LLP include;
No Minimum Capital Requirement
A LLP can be established without a minimum amount of capital contribution.
LLP can be easily set up compared to a structure like a private limited company due to less compliance.
No limitation on owners’ numbers
There can be multiple partners in such a legal structure.
Low setup cost
The LLP structure cost is considerably lower than other business structures likea private limited company or public limited company.
LLPs are liable to furnish only two statements with MCA, such as Annual Return Statements and Statements of Accounts. Unlike private or public limited companies, they are not exposed to heavy compliances.
Private Ltd Co.
Section 2(68) of Companies Act 2013 specifies “private company” refers to a entity that has a minimum paid-up share capital as prescribed by its AOA.
It is the among the most popular business structures in India owing to the following reasons;
Separate Legal Entity
Such companies are said to be an independent legal structure. It means that private limited companies have the leverage to sue anyone under their name in case of legal dispute.
Private limited companies have to increase funding because most banks find them more stable than other structures like partnerships or LLP. Also, they have the liberty to issue debentures and convertible debentures to ensure better financial stability.
Private limited companies are easily transferrable or can be sold, either partially or in full, to another entity without any disruption to the existing business.
Such companies’ operations remain unaffected by the demise or resignation of any serving member.
Complete Possession of Property
The ownership of a private limited company remains intact and in under the control of the actual owner.
A member of the private limited company can serve various roles simultaneously. Serving members can simultaneously act as shareholders, employees, and even directors.
Public Limited Companies
Unlike a private ltd company, Public limited companies ride on an entirely different concept altogether. As the name suggests, they are public by nature which means that their shares are available to the general public.
A public limited company can be set up by a minimum of 7 (seven) persons with a prescribed paid-up capital of Rs 5 lakh. Being incorporated as a public limited company brings strings of benefits for the founding members. These are as follows;
shareholders’ liability in such a company is limited to their stake only.
No cap on the members’ number
there is a limit on how many members can be a part of a public limited company.
Conceptually, a Public limited company has perpetual existence. It means it will continue to run even in testing scenarios like the demise of a member or shareholder.
Easy Capital Procurement
Unlike all business structures, Public limited companies have increased leverage when it comes to capital procurement. As these companies easily find their way to the stock exchange, it becomes easier for them to secure public funding via the issuance of debentures and bonds
The concept of OPC was introduced with the idea to foster economic growth and employment generation. The incorporation legalities of OPC are on the lower side as only one person (founding member) is enough to lay down its foundation. The founding member owns all shares of such firms. There is a requirement for nominating a director for such a company.
Some benefits of selecting this structure are as follows:
In OPC, the liability of the single shareholder is limited to the unpaid subscription money in his name.
This implies that his/her personal asset remains intact from the creditors.
Seamless decision making
Only the owner is liable to involve with key decisions making without meeting tons of compliances.
OPC allows a nominated individual to run the business affairs of the company in case of the untimely demise of a founding member. Such companies have perpetual existence, and hence they can remain operational under testing scenarios like fiscal crisis and the loss of a founding member.
So these are prominent business structures in India. Before selecting one of these structures, consider the factors like the company’s objectives, compliance threshold, and flexibility to expand further. Your ability to confront compliances and meet short and long-term shall be the deciding factor in your plan to opt for an ideal business structure.