Form of Business in India

–An Article by CS Pankaj Singla –

Background

Carrying business to earn a livelihood is popular in India.

But before starting or carrying any business one must understand what is Business?How it is to be done? In which forms we can run business and other basics about business.

Business

As per Wikipedia Business means the activity of making one’s living or making money by producing or buying and selling products (such as goods and services) Simply put, it is “any activity or enterprise entered into for profit”.

As per the definition provided by Investopedia, a business is defined as an organization or enterprising entity engaged in commercial, industrial, or professional activities Businesses can be for-profit entities or they can be non-profit organizations that operate to fulfil a charitable mission or further a social cause.

In layman terms Business means an activity which may involves providing goods or services to the customer and earn profit out of it.

Form of Business

There are various type of Businesses which are carried in India, anyone can opt and carryon its business operations through these business forms:

1. Sole Proprietorship
2. Partnership Firm
3. Limited Liability Partnership
4. Company
   • One Person Company
   • Private Limited Company
   • Public Limited Company

1. Sole Proprietorship

A sole proprietorship (also known as individual entrepreneurship, sole trader, or simply proprietorship) is a type of an unincorporated entity that is owned by one individual only. It is the simplest legal form of a business entity.

Advantages of a Sole Proprietorship

1. Easy to start and windup
2. Easy to run
3. Easy to manage
4. Few government regulations
5. Tax advantages
6. Control over business

Disadvantages of a Sole Proprietorship

1. Unlimited liability of the owner
2. Limitations on capital raising

• Partnership Firm

Section 4 of Indian Partnership Act, 1932 defines partnership as “the relation between person who has agreed to share profits of a business carried on by all or any of them acting for all.” It involves at least two individual who are interested in carry on business together to achieve a common goal.

A partnership firm may be registered or unregistered.

Advantages of Partnership Firm

1. Easy to form
2. Capital availability more than sole proprietorship
3. Managerial resources
4. Creditworthiness
5. Specialisation
6. Easy dissolution

Disadvantages of  Partnership Firm

1. Unlimited liability on partners
2. Conflicts may arise among partners
3. Delay in decision making
4. Not easy to find good partners;
5. Limitation on capital raising

• LLP

Limited Liability partnership is governed under LLP Act 2008. It is the advanced version of partnership firm. It imbibe features of a partnership firm and a company therefore it is widely accepted form of business.

Advantage

1. Separate legal entity
2. Managed through written agreement
3. Corporate status
4. Flexibility through modification in agreement

Disadvantages

1. Less recognised compared to company form
2. Costly to incorporate when compared to sole and partnership business
3. Limited fund access.

• Company:

The most practiced form of business in India is carrying business in Company form. Company is basically an artificial entity which has separate legal entity and it is run through an organised management system. It is governed through Companies Act, 2013. A Company can be classified and categorised in various forms ,mostly adopted forms are as given below:

One Person Company

The revolutionary new concept of ‘One Person Company’ (OPC) has been introduced by the Companies Act, 2013. This concept of OPC was first recommended by the expert committee of Dr. JJ Irani in 2005.

As per Clause 62 of Section 2 of Companies Act, 2013 “One Person Company” means a company which has only one person as a member;it shall also be important to note that Section 3 classifies OPC as a Private Company for all the legal purposes with only one member. All the provisions related to the private company are applicable to an OPC, unless otherwise expressly excluded. It involve one individual person who handle and take all decision in the Company.

Advantages of a One Person Company (OPC)

An OPC has certain privileges and exemptions which are not available to private companies. Such exemptions are enlisted as below:

1. OPCs can raise equity funding and are eligible for government schemes;
2. Complete Control of the Company with the Single Owner;
3. Easy to Manage;
4. Less compliances as compared to Private Limited or Public Limited Company;
5. Liability of the person owing the OPC can be limited or unlimited.

Disadvantages of a One Person Company (OPC)

1. OPC cannot carry out non-banking financial activities including investing in shares of another body corporate.
2. OPC cannot get converted to section 8 companies.
3. Limitation on capital raising

Private Limited Company

As per clause 68 of section 2 of Companies Act, 2013 “private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,—

• restricts the right to transfer its shares;
• except in case of One Person Company, limits the number of its members to two hundred:
• Prohibits any invitation to the public to subscribe for any securities of the company.

Private Limited Company is the most prevalent and popular form of business entity in India. A private limited company is a company which is privately held for small businesses. It has separate legal entity. The liability of the members of a Private Limited Company is limited to the amount of shares respectively held by them.

Advantages of Private Limited Company

1. Easy formation
2. Less compliance
3. Limited Liability
4. Free & Easy transfer of shares
5. FDI Allowed

Disadvantages of Private Limited Company

1. Number of shareholders in any case cannot exceed 200.
2. It cannot issue prospectus to public.
3. Division of ownership

Public Limited Company

As per clause 71 of section 2 of Companies Act, 2013 public company means a company which is not a private company.

A public limited company is a voluntary association of members that are incorporated and registered under companies Act and, therefore has a separate legal existence and the liability of whose members is limited.

Advantages of Public Limited Company

1. Raising capital through public issue of shares
2. Widening the shareholder base and spreading risk
3. Transferability of shares
4. Better capital investment opportunities

Disadvantages of Public Limited Company

1. More compliances than private company
2. Need to have a minimum of Three directors
3. Ownership and control issues

Conclusion

Anyone who wants to start business, must carefully understand their needs and requirements and accordingly choose which form to adopt so that he or she can make more profits without any extra efforts or hassle.       

About Author:

Hi, This insightful article was penned down by Mr. Pankaj Singla. Read what he has to say about himself.

Know Me: 

I am a practicing company secretary by profession and an avid reader and learner by nature.

Corporate management, secretarial services and legal parameters are few domains where my expertise lies.

10 years of experience has taught me the value of time and significance of qualitative work, serving with the same intent and thriving for knowledge to serve better is the determination that keeps me going.

Qualification: ICSI, LLB, B.Com

Specialization: Legal, Contract, Secretarial, Labor Laws, SEBI, RBI

Firm Name: Dr. Pankaj & Associates

Mobile No.: +91-9654495503

Email ID: cspankajsingla@gmail.com