This ppt talks about the various legal structures for businesses in India

1. Legal Structures
How do you choose the right legal structure for
your business?

2. Types of Legal Structures
 Non-profit Organization
◦ Trust, Society
 For profit enterprise
◦ Sole Proprietorship, Partnership, Limited
Liability Partnership, Private Limited
Company, Public Limited Company, Co-operative

3. Non – Profit Organization

4. Trust
 Public Trust
◦ Created for charitable purpose
◦ Under the Public Charitable Trust Act
◦ Minimum two trustees
 Private trust, created under and
governed by the Indian Trusts Act of
1882, aims at managing assigned
trust properties for private or religious
purpose. It does not enjoy the
privileges and tax benefits of a public
trust

5. Society
 Registered under Societies
Registration Act 1860
 For literary, scientific or charitable
purpose
 Minimum 7 people
 Memorandum of Association
◦ Name
◦ Objectives
◦ Details of the members

6. For Profit Enterprise

7. Sole Proprietorship
 One owner
 Unlimited liability
 No registration required

8. Pros
 It is the cheapest and easiest form of
business structure
 Undivided profits belong to the sole proprietor
 The owner can keep or reinvest the income
as they wish
 The owner is in complete control of the
business
 Provides a greater amount of flexibility in the
business operations and decisions
 This business is easy to set up and also easy
to dissolve
 There are less legal formalities

9. Cons
 Unlimited liability
 Responsible for all debts related to the business.
 Hard to attract employees of higher quality,
especially during the setting up stages of the
business
 Difficulty to raise funds from banks or investors
 Funds are limited to only personal savings and
loans or borrowings from family or friends
 Because of the fact that it is difficult to raise
capital, this business entity may have limited
growth potential
 After the death of the business owner, it could be
tough for the business to survive as others may
not want to take up unlimited liability for it

10. Partnership
 Agreement between 2 or more people
 Maximum of 20 partners (Banking –
10 partners)
 Every partner shares responsibility
 Owners are individually known as
‘Partner’ and collectively as ‘Firm’
 “Relation between persons who have
agreed to share the profits of a
business carried on by all or any one
of them acting for all”

11. Examples
 A & B are friends. They contribute equal
amount of money to buy a plot of land to
build their houses.
 C puts in capital to start a business. D
manages the business. C pays salary to
D.
 E starts a business. F buys goods from a
factory as E’s agent and gives it to E.
 G & H put equal money to start a
business. G acting for himself and H gets
goods from a factory while H acting for
himself and G gets a loan for the
business.

12. Partnership Deed
 Name of the firm
 Names of the partners
 Location of the firm
 The mission statement, or some statement
that reflects the firm’s prerogative
 Contribution by each partner in terms of
capital
 Share of the partners in profit and loss
 Each partner’s responsibilities in regard to
the firm
 Debts incurred by the partners, with interest
 The amount of drawings by each of the
partners from the company, and the rate of
interest established

13. Partnership
 Introduction of a new partner
◦ Consent of all partners
 Retirement of a partner
◦ Consent of all partners
◦ In accordance to the agreement
 Dissolution of a firm
◦ Death of a partner
◦ Bankruptcy of a partner
◦ End of period
◦ End of activity

14. Pros
 Easy to establish and the work and
responsibilities are shared
 There is an increased possibility of raising
funds, as capital can be pooled together
 The partners have mutual support and
motivation, which is especially important for
new entrepreneurs
 Easy to administer with profits and losses
being shared by the partners depending on
their business share
 Filing income tax returns is easy since it is
the partners and not the ‘partnership’ which is
taxed

15. Cons
 There may be conflicts arising out of shared
decisions
 Partnerships have a limited life and can end
upon the withdrawal of partnership or by the
death of one of the partners
 There are also several restrictions on the
transfer of rights and there is lack of
unanimous authority
 Unlimited liability incurred by the partners
 Tax is charged individually so as the business
earnings increase, so does the tax
 Personal differences may crop up between
the partners which may be detrimental to the
business

16. Limited Liability Partnership
 An alternative corporate business
vehicle that provides the benefits of
limited liability of a company, but
allows its members the flexibility of
organizing their internal management
on the basis of a mutually arrived
agreement, as is the case in a
partnership firm.

17. Origin of LLP’s
 USA – Early 1990’s
◦ Real Estate Crash of the 80’s
 Reason – to shield innocent members
from the liability of a partnership
 India – 2009
◦ Limited Liability Partnership Act, 2008

18. Features of a LLP
 An LLP is a body corporate and legal
entity separate from its partners. It has
perpetual succession. No upper limit on
the no. of members
 The provisions of Indian Partnership Act,
1932 are not applicable to an LLP and it
is regulated by the contractual
agreement between the partners.
 Use the words “Limited Liability
Partnership” or its acronym “LLP” as the
last words of its name.
 It contains elements of both ‘a corporate
structure’ as well as ‘a partnership firm
structure’.

19. Features of LLP
 Two designated partners being
individuals, at least one of them being
resident in India and all the partners shall
be the agent of the LLP but not of other
partners.
 While the LLP will be a separate legal
entity, liable to the full extent of its
assets, the liability of the partners would
be limited to their agreed contribution in
the LLP.
 No partner would be liable on account of
the independent or un-authorized actions
of other partners, thus allowing individual
partners to be shielded from joint liability
created by another partner’s wrongful
business decisions or misconduct.

20. Features of LLP
 An LLP shall be under obligation to
maintain annual accounts reflecting true
and fair view of its state of affairs.
 Provisions have been made in the Bill for
corporate actions like mergers,
amalgamations etc.
 LLP agreement is not mandatory but in
the absence of LLP agreement, mutual
rights and liabilities of partners shall be
determined as provided under Schedule
I to the LLP Act.

21. Advantages
 Organized Business Model based on an
agreement.
 Limited liability
 More flexibility & lower compliance
requirement as compared to a company
 Simple registration procedure, no
requirement of minimum capital, no
restrictions on maximum limit of
partners.
 No exposure to personal assets of the
partners except in case of fraud.

22. Advantages
 It is easy to become a partner or leave
the LLP or otherwise.
 Easy to transfer ownership
 As a juristic legal person, an LLP can
sue in its name and be sued by
others. The partners are not liable to
be sued for dues against the LLP.
 No restriction on limit of the
remuneration to be paid to the
partners
 Easy to convert existing ventures to
LLP

23. Disadvantages of a LLP
 Any act of the partner without the
consent of other partners, can bind the
LLP.
 An LLP are not allowed to raise
money from Public.
 Because of the hybrid form of the
business, it is required to comply with
various rules & regulations and legal
formalities.
 Winding up of business is a tedious
process

24. Creating a LLP
 Need a minimum of 2 persons
 Ltd. Co., Foreign co., a LLP, a non
resident and HUF Karta can be
partners
 Incorporation Document
 LLP Agreement
 Registrar of companies

25. Steps to create a LLP
 Deciding the Partners
 Obtaining Director Identification No &
Digital Signature
 Checking Name availability for LLP
 Drafting LLP Agreement
 Filing of incorporation documents
 Certificate of Incorporation

26. Accounting Aspects
 The Income of LLP will be charged to
tax in the hands of the LLP only and
not in the hands of individual partners
 Remuneration to partners will be taxed
as “Income from Business &
Profession”
 Share of profit in the hands of the
partner is exempt from tax u/s 10(2A).
 The Income of an LLP is taxable
@30%
 Subject to Minimum Tax

27. Private Limited Company
 A private limited company is a
voluntary association of not less than
two and not more than fifty members,
whose liability is limited, the transfer of
whose shares is limited to its
members and who is not allowed to
invite the general public to subscribe
to its shares or debentures.

28. Features
 Independent Legal Existence
 Follows the Indian Companies Act, 1956
and now 2013
 Less cumbersome to organize and
operate it as it has been exempted from
many regulations and restrictions to
which a public limited company is
subjected to.
 The liability of its members is limited
 The shares allotted to it's members are
also not freely transferable between
them. These companies are not allowed
to invite public to subscribe to its shares
and debentures.
 It enjoys continuity of existence i.e. it
continues to exist even if all its members

29. Advantages
 Continuity of existence
 Limited liability
 Less legal restrictions

30. Disadvantages
 Shares are not freely transferable
 Not allowed to invite public to
subscribe to its shares
 Scope for promotional frauds
 Undemocratic control

31. Starting a Pvt Ltd. Co
 Min. 2 Directors & Min. 2
Shareholders
 Min. Share Capital – 1 Lakh
 Director Identification Number
 Digital Signature o the Directors
 Search for the company name (MCA
website)
 Application for name availability
◦ Give 6 options priority wise

32. Contd..
 Drafting Memorandum of Association
& Articles of Association
 Submission / Filing at ROC
 Payment of RoC Fees and Stamp
Duty
 Verification by RoC
 Issue of Certificate of Incorporation

33. Public Limited Company
 A public limited company is a
voluntary association of members
which is incorporated and, therefore
has a separate legal existence and the
liability of whose members is limited.

34. Features
 Separate legal existence
 Strictly governed by the laws, rules and
regulations of the Indian Cos. Act.
 Min. 7 members, No limit on maximum
members
 Share Capital – Raising capital by sale o
shares
 Share Holders are known as members in
the company
 Shares are freely transferable

35. Features
 Liability limited only up to the face
value of the shares held.
 Ownership is separate from
management
 Existence is not affected by the death,
retirement or insolvency of any of its
shareholders

36. Advantages
 Continuity of existence
 Larger amount of capital
 Unity of direction
 Efficient management
 Limited liability

37. Disadvantages
 Scope for promotional frauds
 Undemocratic control
 Scope for directors for personal profit
 Subjected to strict regulations

38. Starting a Public Ltd. Co.
◦ A Public Limited Company, in addition to
the steps followed by a Private Limited
Company has to obtain a certificate of
Commencement of Business before they
can commence the business.

39. Co-Operative
 A society whose objective is the
promotion of the interests of its
members.
 Primary motive is service to the
members rather than making profits.

40. Features
 It is a voluntary organisation as a
member is free to leave the society and
withdraw his capital at any time, after
giving a notice.
 The minimum number of members is 10,
but there is no limit to the maximum
number of members. However, the
members must be residing or working in
the same locality.
 Registration of a co-operative enterprise
is compulsory. A co-operative society
may be registered with the Registrar of
Co-operatives Societies.

41. Features
 Separate Legal Entity
 Follows Co-operative Societies Act,
1912 or State Acts
 Submit annual reports and accounts to
the Registrar of Societies.
 Limited Liability
 Shares are not transferrable but can
be returned back to the co-operative
 Continuity of existince

42. Advantages
 Greater amount of capital
 Reasonable price, good quality or
better service
 Better conditions of service to
employees
 Continuity of existence
 Limited liability

43. Disadvantages
 Inability to collect sufficient capital
 Inability to provide efficient managerial
services
 Organizational limitation