EGV - Legal structures - Lecture 1 & 2
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This document provides an overview of different legal structures for businesses in India, including non-profit organizations like trusts and societies, and for-profit structures like sole proprietorships, partnerships, limited liability partnerships, private limited companies, and public limited companies. It describes the key features and requirements of each structure, discussing advantages and disadvantages. Limited liability partnership is described as a hybrid structure that provides limited liability like a company but allows flexible internal management like a partnership.
EGV - Legal structures - Lecture 1 & 2
- 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
- 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
Editor's Notes
- #10: Unlimited liability - This could mean even the sale of personal property for the repayment of the creditors
- #17: . In an LLP, one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from that of an unlimited partnership. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation.
- #29: t need not file a prospectus with the Registrar. it need not obtain the Certificate for Commencement of business. it need not hold the statutory general meeting nor need it file the statutory report. restrictions placed on the directors of the public limited company do not apply to its directors.
- #32: DIN – unique identity number issued by ministry of corporate affairs for an individual who is or wants to be a director
- #33: MOA – covers fundamental provisions of the companys constitution. It covers the main and other objectives the company AOA – covers the rules and regulations governing the internal management of the company. It is a binding contract between the co and its members and members itself defining their rights and duties