This article is written by Pratap Alexander Muthalaly, from the Government Law College, Trivandrum. It analyses the functioning of corporations and other business entities. It also studies the functions of various different business entities and how they differ from each other.
What is a Business Entity?
Simply put, business entities are legal structures that facilitate the functioning of a business. That is, business entities refer to the type or structure of a business rather than what service it provides or what sector it is based in. The structuring of a business affects how it pays taxes and also how liabilities are determined.
Types of Companies
A company is a business organization, formulated by law. In India, companies are formulated through the Companies Act, 2013. Simply put, the main function of a company is to generate profits for its investors by carrying out its various business activities. Companies can be primarily classified on the basis of a few select parameters including members, liability, special status, and control.
On the Basis of Members
- One person companies: One person companies (OPC) are a relatively new company type introduced with the intention to encourage startups and young entrepreneurs, a single person on their own is enough to incorporate the entity. OPCs have proved to be crucial in recent times. Especially in promoting the concept of the corporatization of business. One point to keep in mind is that OPCs differ from sole proprietorships, given that OPCs have additional features like a separate legal existence and also limited liability.
- Private Company: A private company is one in which two or more persons have a company registered under the ambit of the Companies Act. In the case of such companies, securities are not listed on the stock exchange, and there is no provision to invite the public to subscribe or avail of shares/debentures. The members of a private company are restricted from transferring shares and there is also a maximum cap on the number of members in a private company (200).
- Public Company: A company formed by a minimum of seven members with a lawful object is termed as a public company. Such companies also have their shares listed on a recognized stock exchange, furthermore, there is an option to transfer the shares freely as well. Moreover, there is no cap or limit placed on the maximum number of people who can become members of such a company.
Based on liability
- A company limited by shares: A Company that is limited by shares is one where the company’s memorandum of association specifies that the liabilities of shareholders are limited to the amount unpaid on shares which they own. As a result, the shareholders are liable only with regard to the amount that is not paid on their holdings.
- A Company limited by guarantee: This is in reference to companies where the liability of members is limited to a definite sum as stated in the company’s memorandum of association. This essentially means that the member’s liability is limited by the MoA to a specific sum. This is because there is a definite guarantee by members to contribute to the company’s assets, in the event of the company being wound up.
- Unlimited Company: A company whose liability does not have any set limit is classified as an unlimited company. In this sort of company, the liability ends when they are no longer a member of the said company.
- Government Company: A company wherein out of the total share capital, a minimum of at least 51% is owned by Central or State Government, or otherwise partly by central and partly by the state government comes under the classification of what we call a government company. This status is also extended to any holding companies under the government company.
- Foreign Company: This is in reference to any company that is registered outside the country in question (in this case India) that has an office or place of business operations in that specific country or in any other sense undertakes business interactions and transactions within the country in question.
- Public Financial Institution: Companies that are engaged in the financial and investment sector and whose paid-up share capital in excess of 51% is held by the Central Government and for all purposes is considered to be a public financial institution. Notable cases of this include LIC, ICICI, IDFC, IDBI, and UTI.
- Section 8 Company: Companies that are formed for charitable purposes usually fall into this classification. Essentially Section 8 companies are formed to encourage commerce, scientific development, sports development, progress in the arts, research into a variety of topics, educational arenas and also social welfare, environment protection, and religion to name a few. Notably, section 8 companies are given a special license by the Central Government. Also, since the profits they earn are in theory used for the positive promotion of their cause, there is no provision for dividends to be paid to members.
On the basis of control
- Holding Company: This refers to the arrangement wherein one company, usually dubbed a parent company, has ownership and control over the management and composition of the Board of Directors of another company that is the subsidiary company, here the parent company is called the holding company.
- Subsidiary Company: A company wherein more than 51% of its total share capital is controlled and under the ownership of another company or holding company is called a subsidiary company
- Associate Company: A company wherein another company has a substantial amount of control and influence over the said company is called an associate company. Considerable influence essentially means that the other company controls a minimum of 20% of total share capital, or has significant control over the business decisions taken by the associate, as stipulated in the agreement between them.
Limited Liability Partnership
A limited liability partnership (LLP) is a unique business entity that allows individuals to organize the internal structure of their company like that of a traditional partnership, while simultaneously enjoying the added benefits like limited liability and separate legal status that are associated with companies.
The notable features of an LLP are:
- As stated earlier, an LLP is a unique business entity that allows individuals to enjoy benefits like limited liability which are commonly associated with a company while simultaneously enjoying the flexibility of a partnership.
- An LLP can continue existing irrespective of internal movements like partnership change. Furthermore, it can enter into contracts and hold property in its name. That is, it is essentially a separate legal entity.
- As mentioned earlier an LLP is a separate legal entity, basically, it is liable with regard to the full extent of its assets however it must be noted that the liability of a partner is limited to their agreed contribution in the LLP.
- The mutual rights and duties of the partners within the ambit of an LLP are governed by an agreement between the partners or alternatively between the partners and the LLP as the case may be. It should be noted however that in this case too an LLP, is not exempt from the liability from obligations as it is for all purposes a separate entity. Furthermore, LLPs must be registered with the Registrar of Companies (ROC) after following the provisions specified in the LLP Act. That is every LLP must have a registered office. Furthermore, an Incorporation Document signed and agreed to by at least two of the partners must be filed with the Registrar in a stipulated form. The Contents of LLP Agreement, as stipulated, must be filed with Registrar. If there are any changes to the LLP agreement it must be filed in Form 3 and details of partners/designated partners can be filed in Form 4 according to the provisions stipulated in the LLP Rules, 2009.
Non-Profits, Societies, and Trusts
All the legal framework and laws governing the day to day working of the different kinds of NGOs including, Societies, Trusts, and Non-profit Companies are all enumerated in the Societies Registration Act 1860, and also in the Indian Companies Act 1956.
A Society is formed via a Memorandum of Association which also contains the Articles of Association with the rules and regulations specific to that institution. All of this falls within the jurisdiction of the Registrar Of Societies. Furthermore, it is the Societies Registration Act, 1860 that oversees the affairs related to Societies.
The object of a society can vary quite a bit, the object could be anything ranging from literary schemes to charitable and social work purposes. The objects of a society can be amended by utilizing the stipulated legal procedures in place. Also, to create or form a society a minimum of two people are needed. However, there is no upper limit with regard to the maximum number of people who are members of society.
Moreover, there is no need for stamp paper drawing up the Memorandum of association or for the rules and regulations. Also, there is no need to get the approval of a competent authority prior to choosing or deciding on a name, as opposed to LLPs and other corporate entities. The management of the Society comprises its Members under the ambit of what is called “Governing Body”, with a periodic election process.
Annual meetings of the society and the governing body steadily take place as per the rules of the society. A major advantage of a society is that its legal status is limited and also it is subject to very few regulations. However, it must be noted that transfer of membership is not permitted, In spite of this, a new member can be admitted at any time keeping in mind the rules of the society of course. Another aspect is that a society can be Dissolved or even taken over by the government.
A Trust is formed through a document called a trust deed. A trust deed contains the objects of the trust most notably its bye-laws. All issues regarding trusts are within the jurisdiction of the Deputy Registrar / Charity Commissioner. In India, the laws pertaining to the affairs of trusts tend to show variation with each state.
Theoretically speaking the primary objective of a trust is to partake in and provide funding to social and charitable causes. A notable feature of trusts is that only the founders are permitted to amend the objects of a trust, likewise alteration only be done by the Founders or settlers. In the situation that the founder is discovered to be deceased, the alteration of the trust objects is for all purposes just not possible.
To form a trust the minimum number of people that is required is two. Furthermore, there is no cap on the maximum number of people who sit on the board of trust. Also, there is a stamp duty of 4% levied on everything that constitutes a trust property. Also like societies membership cannot be transferred and there is very little regulation in forming a trust. Furthermore, elections can be conducted if required.
Non-Banking Financial Institutions (NBFC)
Non-Banking Financial Companies (NBFC) are essentially those companies registered under the ambit of the Companies Act which is engaged in the process of giving out loans and advances while also simultaneously playing a part in the acquisition of shares, stocks, bonds, debentures, and also securities issued by Governments, local bodies or other organizations that operate in a similar sphere. Chit funds, hire purchases and lending businesses are some examples of NBFCs.
- They work as an alternative service to banks, which also provide loans and credit facilities.
- They are actively involved in trade centered around money market instruments.
- They provide diverse services to customers including various wealth management schemes like the management of portfolios of both stocks and shares.
- They also underwrite stocks, shares, and other obligations.
- The process that is involved in taking out money from an NBFC is relatively simple and far less complicated when compared to banks.
- Also, NBFCs are not constantly being monitored by the RBI and as a result, the process of managing them is simpler.
In recent times there has been a gradual increase in the number of registered corporations, especially One Person Corporations (OPCs). Such business entities are crucial for the further growth and advancement of our country. The concise structures of various corporations ensure that promising companies do not fold up easily. It also prevents owners from being overburdened with liability, through the formation of Limited Liability partnerships and companies.
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