HOW TO SELECT A CORPORATE BUSINESS STRUCTURE
HOW TO SELECT A CORPORATE
BUSINESS STRUCTURE
If you are new entrepreneur looking of doing a business in a
corporate form of organisation, first you have to select a form of business
organisation. There are four types of Corporate Business Forms available for entrepreneurs
carrying business in India
- Private
Companies
- Public Companies
- Limited
Liability Partnerships
Selection of the appropriate form for your
business depends on many factors such as the type of business, the number of
persons involved, whether you want full control or prefer to share
responsibilities, capital requirements, tax regulations and business liability.
If you feel the situation is not simple,
consult CompaniesInn about the legal aspects of your plans and about financial
implications.
PRIVATE COMPANIES
Private Limited Company is formed with minimum of 2 members and 2
Directors. Maximum number of members in a private company is restricted to 50. There
are restrictions for availing loans and deposits from people other than members
and Directors. The name of the company shall end with the words 'Private
Limited'.
PUBLIC COMPANY
Public company is a
company which is not a private company. The minimum number of shareholders ands
directors required for registering a Public Company is 7 and 3 respectively.
Subject to compliance of the Companies Act, there is no restriction as to
number of members, issue and transfer of shares and acceptance of deposits.
This type of company can not invite public to subscribe shares in the capital
of the company. Also acceptance of deposit from the public also strictly
regulated. Usually public companies are formed by large business houses. A
private company can be converted into a public company.
LIMITED LIABILITY
PARTNERSHIP (LLP)
LLP is a new corporate business form in India
An LLP can be formed by two partners and 2 designated partners.
There is no restriction for maximum number of partners in LLP
When making a decision about the type of business to form, there
are several other criteria you need to evaluate. Analyse the following points
carefully before taking proper decision.
A. Legal liability
To what extent does the business owner needs to be insulated from
legal liability? Majority of people approaching CompaniesInn for registration
of business organistaion prefer corporate structure of business as liability of
members is limited to the share/contribution to the company/LLP.
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Private
Limited/ Public Limited
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LLP
|
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Liability of shareholders is limited
to the value of shares taken in the company. Therefore the personal assets of
shareholders are free from the liabilities of the company.
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Liability of partners of a LLP is
limited to his contribution. Their personal assets are free from the
liabilities of LLP. However, if LLP has committed a fraud or a willful
misconduct, the liability of LLP and partners committed fraud become
unlimited.
|
B. Perpetual Succession
Business Dictionary defines perpetual succession as
continuation of an incorporated firm's existence, unaffected by the death of any of its owner(s)
or the transfer of its shares to a new entity or person. This is the main
feature of a corporate business form whether it is a company or LLP
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Situation
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Private
Limited/ Public Limited
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LLP
|
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Death of a shareholder / partner
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Company will continue and his shares
will be transmitted to his legal heirs.
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LLP will continue with other partners. Legal heirs of LLP will
get share of profit/contribution of the deceased partner. They are not
entitled to become a partner of the LLP. LLP agreement can provide a clause
enabling legal heirs to become a partner of LLP.
|
|
Transfer of Shares / Partner’s
interest.
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Shares in a company are freely
transferable. In Private companies, transfers can be regulated by articles of
the company.
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A partner can transfer his share of
profit/loss in an LLP wholly or part. Such
transfers shall always governed by LLP agreement.
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C. Tax implications
Based on the individual situation and goals of the business owner,
what are the opportunities to minimize taxation?
There are many tax saving options available to corporations compared
to proprietorship concerns or partnerships. Double taxation is a common
disadvantage often associated with incorporation a company as the company has
to pay tax on its profit and tax on distributed profit as well.
In case of taxation of LLP is concerned, there is a possibility of
taxation as partnership. If the situation is this, the disadvantages of double
taxation also get removed.
D. Cost of formation and ongoing administration.
Cost of formation and ongoing administration
is another criteria to determine form of Business Structure. This cost includes
cost of record-keeping and paperwork, as well as the costs
associated with incorporation.
|
Situation
|
Private Limited
|
Public Limited
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LLP
|
|
Cost of incorporation
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Higher than LLP
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Higher than LLP / Private
Limited
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Cheap
|
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Compliance of law
|
Less compared to LLP
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Strict than Private Limited
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Lees than company as management of
LLP is governed by LLP agreement
|
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Audit
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Need to appoint auditor irrespective
of size of the company
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Need to appoint auditor irrespective
of size of the company
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Only apply if turnover INR 4000000 or
above or contribution INR 2500000 or above
|
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Record Keeping
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Extensive record keeping compared to
LLP
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Strict
and Extensive record keeping compared to LLP
& Private Limited
|
Statutory records are basically
limited to books of accounts. Others records keeping are governed by LLP agreement
|
E. Flexibility.
Your goal is to
maximize the flexibility of the ownership structure by considering the unique
needs of the business as well as the personal needs of the owner or owners.
Individual needs are a critical consideration. No two business situations will
be the same, particularly when multiple owners are involved. No two people will
have the same goals, concerns or personal financial situations.
|
Situation
|
Private
Limited / Public Limited
|
LLP
|
|
Change
of ownership
|
Company
is most flexible form as share can be transferred freely.
|
Ownership
transfer is governed by LLP agreement. Usually, it requires consent of all
partners.
|
|
Management
|
Company
is managed by Directors by taking decisions in Board Meeting. Companies Act
& articles regulate management of
a company
|
LLP
agreement describes how to manage LLP. It can also be managed like a company
subject to agreement. LLP agreement is the basic document regulating
management of LLP.
|
|
Capital
|
Capital
of a company is sub divided into shares. Profit entitlement of based on the
percentage of shareholding in the paid up capital of the company. Voting
right also based on the shareholding
|
Capital
of LLP is contribution from partner. The contribution can be cash, tangible,
intangible assets and immovable properties etc. Profit share need not be
based on contribution. Voting right also governed by LLP agreement
|
F. Future needs
When you're first
starting out in business, it's not uncommon to be "caught up in the
moment." You're consumed with getting the business off the ground and
usually aren't thinking of what the business might look like five or ten-let
alone three-years down the road. What will happen to the business after you
die? What if, after a few years, you decide to sell your part of a business?
Corporate form of structure is the most suitable form of Business for future
requirements as it enables the owners to bring capital, change the ownership,
expansion, consolidation, merger with other firms etc.
G. Reputation
Visibility and Brand, Capability to
change with Time are the twin mantra of present
business success. As corporate form have the advantage of separate personality from
it members, you will get more acceptance from your clients, suppliers, financiers
and customers.
If you are looking
for more information, contact CompaniesInn
CompaniesInn.com
India Private Limited
# 463, 10th
Main | 13th Cross | Wilson Garden | Bangalore —560
027 | INDIA
Tel
: +91 80 4219 4109 / Mobile: +91 96633 29656
E-Mail : info@companiesinn.com
Web: www.companiesinn.com
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