Different types of Legal Entities in India and their main characteristics

Introduction

When it comes to establishing a legal entity in India, any individual or an enterprise should first and foremost begin with a basic understanding of the options available, the risks involved and finally the pros and cons of each option.

India is a vast market for key sectors to operate and flourish. Being one of the best developing main economies of the world, the service division plays a key role in its development. India has a notable edge over other economies due to its freedom of investment and transparency, with an extra boost given by the government in promoting Foreign Direct Investment (FDI) by increasing admission to its vast and diversified marketplace, India has been a hotspot for many foreign investments.

Whilst considering establishing an entity in India, it is essential that individuals or enterprises ensure that business is operated in its fullest of capacity and with the minimum wastage of resources. Finding the right structure shall offer a competitive advantage with better taxation treatment and compliance.

Types of Legal Entities in India

Let us understand the different types of legal entities and their implications. Some of the main characteristics of these entities are as follows:

A.Private Limited Company:

A private limited company is a company as defined under Section 2(68) of the Companies Act 2013 as a company with minimum paid up share capital as prescribed by its article. A private company needs to have a minimum of 2 directors out of which at least 1 needs to be a Resident Director. A Resident Director is anyone who has lived in India for a minimum of 182 days.

•Legal Entity and transferability: Private Companies enjoy separate legal entity, which has its own legal existence and therefore they can sue and can also be sued under its name. Companies can transfer shareholding without any restrictions or disruption to the current business.

•Borrowing capacity: Private entities have an advantage for obtaining loans, as they are well structured, they are able to obtain loans from banks and financial institutions and can also raise their own loans by issuing debentures and convertible debentures in its name.

•Possession and dual relationship: A person in a Private Limited Company can be a shareholder/employee/director at the same time, however they can only claim ownership to the extent of their shareholding in the company.

B.Public Limited Company:

A public company as defined under Section 2(71) of the Companies Act 2013 means any company which is not a private company. Some of the important characteristics are that a public company is formed by a minimum of 7 (seven) persons with a minimum paid-up capital. The company may be listed in the stock exchange and thereafter shares of the company are traded openly.

However, there are more legal restrictions on this type of establishment than a Private Limited Company. A Public Company needs to have a minimum of 3 directors out of which at least 1 needs to be a Resident Director as defined above.

•Huge Capital but Limited Liability: As these companies invite shareholding from the public through listing of their shares on the stock exchange they enjoy a large amount of capital, however, the liability of the shareholders is limited to their investments/shares in the company. it is not necessary to sue other shareholders.

•Continuance of existence and number of members: The company remains in existence until it is wound up. The death of a shareholder does not wind up the company. There is a minimum requirement of seven shareholders and can exceed any number of members as its share capital can occupy.

C.Limited Liability Partnership (LLP):

A limited liability is a partnership firm incorporated under the special statute known as the Limited Liability Partnership Act 2009. These entities obtain special benefits as compared to regular partnership firms. The responsibility towards losses or debts is limited to investments made by each individual partner. A limited liability partnership and its partners are considered separate legal entities. Furthermore, a partner is not responsible or liable to account for the independent actions of other partners, thus individual partners are safe from joint liabilities for the misconduct of each other. A LLP is formed with a minimum of 2 partners and 1 designated partner must be a resident of India.

•There is no requirement of a minimum capital; A LLP can be started with no minimum amount of capital contribution. It should be noted that there can be two or more partners in this form of legal structure.

•Less compliance requirements: As it is easier to start a LLP by following minimum statutory requirements as compared to other company structures, it is suitable for small businesses due to its flexibility and convenience. LLP’s are obligated to submit only two statements i.e. Annual Return Statements and Statements of Accounts. Also, the cost of registration is less as compared to other company structures.

D.Partnership Firm

For a partnership firm, the partners are governed under the provision of the Indian Partnership Act, 1932, whereby the partnership is “the connection between persons who have consented to share the benefits of the business carried on by all or any of them representing all.” In addition, the partners are governed by an individual agreement deciding their profit sharing ratio and other terms of business and operation. A partnership firm is formed with a minimum of 2 partners and 1 designated partner must be a resident of India.

A peculiar characteristic is that the partners are responsible for all liabilities , to which there is no limit. It is not mandatory to register the partnership, but it is advisable to do so.

E.Sole Proprietorship

Sole proprietorship is a type of business entity where a solitary individual handles the whole business association. He/she is the sole beneficiary of all benefits and conveyor of all losses. There is no different law that administers sole proprietorships.

Conclusion:

There are various types of business entities in India with its own legal and financial implications and choosing the right one can greatly impact the success and growth of a business in India. Taking into consideration the individual requirements, the purpose of establishing these entities, the future goals and plans of the business, the individual or entities can decide on their specific needs by incorporating any of the abovementioned entities.