Types of Business Entities in India

Types of Business Entities in India

• Sole Proprietorship
• Partnership
• Hindu Undivided Family (HUF) Business
• Limited Liability Partnership (LLP)
• Co-operative Societies
• Various types of companies
• Branch/Liaison Office of foreign companies

Company Classifications

• Incorporation: Charter Companies, Statutory Companies, Registered Companies
• Liability: Companies limited by shares/guarantee, unlimited liability companies
• Number of Members: One Person Company, Private Company, Public Company
• Size: Small Companies, Other Companies
• Control: Holding Company, Subsidiary Company, Associate Company

Special Company Types

• Non-profit companies licensed under Section 8
• Government companies
• Foreign companies
• Holding/Subsidiary companies
• Investment companies
• Producer companies

Memorandum & Articles of Association

• Memorandum of Association (MoA): Defines the company's constitution, scope of activities, and relations with the outside world. Contains information on the company's name, registered office, objects, capital, liability, and subscription clauses.
• Articles of Association (AoA): Serves as the company's bye-laws, outlining the internal management and conduct of business.
• Importance: Both documents must be registered with the Registrar of Companies during incorporation. Studying the MoA and AoA is crucial for understanding a company's powers, scope, and relationship with external parties.

Indian Labour Law

• Focus: Ensuring worker health, safety, and welfare; protecting workers from oppressive terms; encouraging worker involvement; resolving industrial disputes; enforcing social insurance and welfare schemes.

New Labour Codes

• Objective: Create a more efficient and effective set of labor laws.
• Features: Simplification of labor regulations, promotion of ease of doing business, harmonization of labor laws.

Law of Welfare & Working Condition

• Objective: Improve labor welfare, increase productivity, and provide reasonable social security.
• Key Legislative Framework:
  • Factories Act, 1948
  • Contract Labour (Regulation and Abolition) Act, 1970
  • Child and Adolescent Labour (Prohibition and Regulation) Act, 1986

Law of Industrial Relations

• Goals: Enhance worker understanding of their responsibilities, foster collaboration between employers and employees, promote workers' rights to association, organization, and collective bargaining.

Types of Business Organizations

• Sole Proprietorship: A single person owns and manages the business.
• Partnership Firm: A business owned and operated by two or more individuals who share profits and losses.
• Hindu Undivided Family (HUF): A family business structure recognized by the Hindu law, where members share property and income jointly.
• Limited Liability Partnership (LLP): A business structure where partners have limited liability and are not personally liable for the firm's debts.
• Co-operative Society: A democratic business organization where members share ownership and profits.
• Section 8 Company: A company with non-profit objectives, promoting charitable, social or educational purposes.
• One Person Company: A company with a single individual as shareholder, director and managing director.
• Private Company: A company with a limited number of shareholders and shares are not traded publicly.
• Public Company: A company with a large number of shareholders, shares are traded publicly.

Selection of a Business Organization

• Factors influencing the selection include: nature of business activity, scale of operations, capital requirements, managerial ability, degree of control and management, degree of risk and liability, stability of business, flexibility of administration, division of profit, costs, procedure, and government regulation, tax implications, geographical mobility, transferability of ownership, managerial needs, secrecy, and independence.

Nature of Business Activity

• The type of business activity can influence the selection of a business organization. For example, a small retail store might be best suited as a sole proprietorship while a large manufacturing firm may be more suitable as a public company.

Scale of Operations

• The size or scale of a business will influence the appropriate business organization. A small-scale operation may be suitable for a sole proprietorship or a partnership, while a large-scale business may require the structure and resources of a company.

Capital Requirements

• The amount of capital required to establish and manage the business will impact the selection of the business organization.
• A sole proprietorship can be established with minimal capital, while a public company typically requires a significant amount of capital.
• The availability of funding sources may also play a role in the decision.

Managerial Ability

• The skills and experience of the individuals involved in the business operation are crucial factors to consider. If a business requires a high level of managerial expertise, a company structure may be more appropriate.

Degree of Control and Management

• The level of control desired over the business operations will also factor into the decision. Sole proprietorships offer the highest level of individual control, while public companies have a more complex management structure.

Degree of Risk and Liability

• The level of risk and liability that owners are willing to undertake plays a key role in choosing the suitable business organization.
• Liability protection: A sole proprietor is personally liable for all business debts; in a partnership, partners share liability.
• Limited Liability Partnerships (LLP) offer partners limited liability, meaning they are not personally liable for the LLP's debts. Companies provide shareholders limited liability, shielding them from personal responsibility for the company's debts.

Stability of Business

• Businesses with a high degree of stability and a long-term outlook may be more suitable for a company structure. This offers a more stable and reliable business entity for investors and creditors.

Flexibility of Administration

• Sole proprietorships and partnerships generally have more flexibility in administration. This allows for quick decision-making and adaptability to changing circumstances. Companies, on the other hand, have more rigid structures and processes.

Division of Profit

• The method of profit distribution is a crucial factor in partnerships, corporations, and cooperatives.
• In a sole proprietorship, all profits belong to the owner.
• In a partnership, profits are typically divided according to the agreement between the partners.
• Companies divide profits as dividends to shareholders based on their ownership.
• Cooperatives distribute profits based on the members' patronage or contributions.

Costs, Procedure and Government Regulation

• The costs and procedures involved in setting up and operating the business will vary depending on the chosen business organization.
• Companies, for example, typically have higher setup costs and more complex regulatory compliance requirements compared to partnerships or sole proprietorships.

Tax Implication

• The tax implications of each business organization need to be considered carefully.
• Different business structures have different tax rates and reporting requirements.

Geographical Mobility

• The ability to relocate the business operations to a different location will be affected by the chosen business organization.
• Sole proprietorships have greater mobility whereas public companies may face more complex regulations and legal processes when relocating.

Transferability of Ownership

• How easily ownership can be transferred to new owners will vary depending on the organization.
• Sole proprietorships and partnerships can be transferred easily. Public companies, however, require more complex procedures for transferring ownership.

Managerial Needs

• The managerial needs of the business will influence the choice of organization.
• Public companies typically have larger, more complex management teams compared to sole proprietorships or partnerships.

Secrecy

• The level of secrecy desired in the business operations may also play a role in the selection of the business organization.
• Sole proprietorships have the highest level of secrecy, while companies may have disclosure requirements.

Independence

• The level of independence desired by the owners/managers will influence the decision.
• Sole proprietorships have the highest degree of independence, while public companies with multiple shareholders may have a more complex decision-making process.

Synopsis for Consideration of Form of Organization

• Factors like the nature of the business, capital requirements, and desired control will influence the decision of the suitable business organization.

Company as a Choice of Business Organization for Start-Ups

• Companies offer several advantages for start-ups, including limited liability, access to capital, and a more established legal framework.

Lesson Round-Up

• Understanding various business organization types is crucial when starting a business.
• The appropriate selection should be based on factors like business activity, capital needs, and management structure.
• Company structures offer advantages for start-ups, such as limited liability and access to capital.

Explore the various business entities in India, including sole proprietorships, partnerships, and limited liability partnerships. This quiz covers the classification of companies, including their incorporation, liability, and control. Test your knowledge on the unique features of different company types and their regulatory framework.