Different Types of Business Entities Explained
A business entity is an organisation formed by one individual or a group of individuals to carry out various business functions like manufacturing, trading, consulting, etc. In this article, you will know the types of business entities in India, their features as well as their regulation procedures.
The structure of each business entity determines its legal, financial, and other implications. Examples of business entities include public limited companies, private limited companies, sole proprietorships, general partnerships and limited liability partnerships.
What Are the Types of Business Entities?
1. Public Limited Company
A public limited company is one in which the liability of every shareholder is limited to the share capital invested by them. It can either be listed on the stock exchanges or remain unlisted. These companies are also referred to as publicly traded companies, as shares of these companies can be offered to the general public.
Features of Public Limited Company
You can find the characteristics of a public limited company below:
- For a company to be public limited, it requires a minimum of 3 directors and 7 shareholders. However, there is no restriction on the maximum number of shareholders.
- The minimum paid-up share capital is Rs. 5 lakh.
- The time and cost involved in incorporating a public limited company are very high.
- The company has a separate legal identity and can be taxed, sued, or enter contractual agreements.
- One can trade shares of a public limited company once listing on the stock exchange has taken place.
Guidelines for Registration of Public Limited Companies
Different types of business entities have different registration requirements. A public limited company can register itself by following the given guidelines:
- A public limited company can only apply for registration after they have met the minimum criteria of directors, shareholders and paid-up capital.
- The public limited company must obtain a Director Identification Number (DIN) for all directors of the company. Moreover, they must also obtain a Digital Signature Certificate (DSC).
- The company must have a properly registered address.
- The company's name must end with the term “Limited”. The incorporation procedure will start only after approval of the name by the Registrar of Companies.
2. Private Limited Company
It is a privately held company by a group of individuals. Owners of these companies cannot list shares of a private limited company on stock exchanges. These companies require fewer disclosures than a public limited company. The shareholders of these companies have limited liability to the extent of capital invested by them.
Features of Private Limited Company
The following are some features of a private limited company:
- There should be a minimum of two shareholders with a maximum of two hundred shareholders.
- There must be at least two directors in a private limited company.
- The minimum paid-up capital for these companies is Rs. 1 lakh.
- A private limited company is a separate legal entity that guarantees its perpetual succession. It does not get affected by the death or insolvency of any shareholder.
Guidelines for Registration of Private Limited Company
Here are important guidelines that one may follow to register a private limited company:
- The private limited company must fulfil minimum requirements in terms of shareholders and capital before starting the registration process.
- The company must apply for a DSC and DIN for every director of the company.
- The company must have a PAN and TAN.
- Owners must register the name of the company with ROC.
- The company needs to file E-AOA and E-MOA with the Ministry of Corporate Affairs to start the registration process.
3. Sole Proprietorship
In the case of a sole proprietorship, the owner and the firm are not separate legal entities. A single person controls the entire functioning of these companies. The owner has unlimited liability as he has complete control over the company's assets.
Features of Sole Proprietorship
The features of a sole proprietorship are:
- It does not have a distinct legal identity. The legal identity of the owner and company is the same.
- It requires fewer legal formalities and public disclosures than other types of business entities.
- Moreover, there are no capital requirements for starting a sole proprietorship company. Individuals can start a sole proprietorship with any amount available to them.
Guidelines for Registration of Sole Proprietorship
Here are the guidelines that you can follow to register your sole proprietorship:
- The business owner must have his/her PAN and Aadhaar card.
- There should be a DSC of the business owner.
- Owners can register as small and medium enterprises under the MSME Act. It will allow them to obtain various government benefits.
- The company must have a proper functioning bank account.
- There should be a registered address of the company.
4. General Partnership
A general partnership is a company formed by two or more individuals who have decided to share the business's profits, assets, and all other financial and legal obligations. These individuals are referred to as partners in the company. They have unlimited liability, i.e., in case of insolvency, even the private assets of the partners can be sold off.
Features of General Partnership
The features of a general partnership are as follows:
- It requires less paperwork or legal formalities as compared to a corporation or LLPs.
- As different individuals from various backgrounds actively manage the company, a general partnership is highly efficient.
- The partnership deed is an agreement that includes all the nitty-gritty of the company. All the partners must sign this deed.
- All the partners are jointly liable for acts carried out by any one partner.
Guidelines for Registration of General Partnership
It is not mandatory to register a partnership company under Indian Partnership Act 1872. However, for the sake of avoiding any conflict, they must register their partnership firm. Partners need to follow these given guidelines for registering the company:
- There should be a partnership deed that exhibits all the details about the company, like name, registered address, details of every partner, and date of joining of every partner.
- The partnership firm must have a proper name. Moreover, registration of the name with ROC is mandatory. Apart from this, there should be a functional bank account for the company as well.
- Every partner must have a PAN.
5. Limited Liability Partnership (LLP)
LLPs are business entities formed by two or more individuals. People involved in managing and starting an LLP come under the category of partners. As the name suggests, the liability of partners is limited to the amount of capital invested by them.
The partners are not jointly liable for any independent or unauthorised acts carried out by any one partner.
Features of Limited Liability Partnership
You can find the features of LLP described below:
- LLP is a separate legal entity. It has a distinct identity separate from its partners.
- There is no maximum limit on the number of partners.
- There is no minimum capital requirement as well for starting an LLP.
Guidelines for Registration of Limited Liability Partnership
These guidelines must be kept in mind before going for registration:
- There should be a DSC for each of the partners.
- Every partner must have his/her separate DIN.
- Partners must register the name of the LLP with the Registrar of Companies under the Ministry of Corporate Affairs.
- Every partner must have a PAN. The LLP should have a registered office as well.