Types Of Business Entities In India
Often there had been several stages in your life when you would have thought of starting a business of yours and even though you had sufficient capital at your disposition, you failed to take a productive initiative because of the clumsy legal procedures and several jargons of this field. If your head nods in affirmative then here I take you to a real roller-coaster ride to the mystery of entrepreneurship
To own a business, the first thing that needs to be clarified is what exactly is the type of business that you want to own. There are basically two types of business entities basing upon several factors such as the capital, no of partners, the purpose, the longevity etc. If you have a minimal capital and you don’t want to scratch your head in all those legal procedures and want to do it solely to earn profit and you have no specific purpose to serve in the market then you can opt to start a business firm of yours. A firm can be opened with sole proprietorship or under partnership and it has no specific legal procedures and involves not much of the paperwork to be carried out and hence it is as easy to disintegrate as to start.
On the other hand a Company is a separate legal entity which has to be unique in name and behaves as an independent entity distinct from its members having its own purpose, property, debt, a separate bank account and is liable to sue and being sued by any court of law in the territory. A company has a legal seal which is nothing but the signature of the company and it must have board of directors to take decision on its behalf. The property of the company is its sole proprietary and its members can never claim the property to be theirs and all its property shall be used for its own growth and development. The existence of the company is carried forward by the principle of perpetual succession which means that a company can never die unless the objective for which it was formed is met or is specifically wounded up by some agency and that its members and directors may keep changing but the company shall remain unaffected with any such moves. Yet another exclusive characteristic of the company is the importance of shares and shareholders. Shareholders in a company are always free to transfer it to other so that a particular person may at his/her wish transfers it to the other and the company shall remain operational as usual. Unlike co-operatives where they have a “One Member-One Vote Principle” in a company if a person has 10 shares then he has the right to cast 10 votes for any decision and each decision is made on the basis of majority of all votes cast in favor of a decision. Hence the word company which is an amalgamation of two Latin words “Com” to come together and “Pain” which means bread and referred to the gang which used to eat together has such broader meanings.
Companies can be divided into various categories. Basing upon type of business activities undertaken it can be 1. Manufacturing Based 2. Service Based 3.Non Banking Finance Activities 4 Non Profit Making etc. On the basis of Place Of registration it can be either an Indian Company which is incorporated in India or a Foreign Company which is incorporated outside India but have its business centers in India as well. On the basis of Holdings, it can be either Holding or Subsidiary to holding Company. On the basis of membership pattern and size, it can be 1.Public 2.Private 3.Government Company. These public companies can then be either listed or unlisted depending upon whether they go public with their shares or not and Private companies can be either Independent or Subsidiary of Public. Yet another classification can be made on the basis of liabilities of the members and directors which can be either 1. Limited or 2. Unlimited. A liability is nothing but an obligation to do or refrain from doing something. It is the claim of the members against the assets invested in the company as per the predetermined terms and conditions.
A Limited Company means limited in terms of liability. Now going broader in terms of liability, a company can be limited in terms of liability of shares and also liability limited by guarantee. Liability limited by shares means that since the company in itself behaves as a separate legal entity whose existence is solely different from its members or directors hence the liability of the shareholders such as clearing debts etc doesn’t rest on its shareholders and can be taken care of by the revenues and profits of the Company only. This liability may extend to shareholders in case they have uncalled share capital which is nothing but the amount of nominal value of a share which is unpaid and has not been called by the company. In case of fully paid up share, its members have no ability at all. Yet another type of liability limit is in terms of guarantee. A company limited by guarantee is a registered company with or without share capital whose members have liability limited as per the Memorandum of Association to such amount as undertaken by them to pay at the time of liquidation of company. However this situation to pay the amount only at the time of liquidation of company. There can be companies which are limited by guarantee and also have share capital. Yet another characteristic feature of a company is that it gets past the practice of double taxation which is the case with corporations. Double Taxation occurs when taxing jurisdiction for a being overlaps and the person or assets of a person falls under the ownership of two separate entities like that of the company as well as its Shareholder or owner.
Now it can be easily inferred from above that an Unlimited Company is a company in which the liability of members is unlimited and its owners may, at the time of liquidation or in case of any such necessity shall have to pay for the debts of company just like the liability of a partnership where each member is equally responsible for the liability of the business. Contrary to Private Companies in which shareholders rights to transfer shares are prohibited, a Public Company can go public with its share after obtaining trading certificate and requires government approval for the appointment of management. Though government doesn’t play strategic roles in making decisions in case of Public Companies yet the parafalaria for different processes and operations increase. Government plays a key role only in case of Government companies which are the ones in which not less than 51% of paid up share capital is held by Central Government or state government r any such local body and are governed by the provisions of Companies Act. Any company which is not a private limited company can go Public with its share by listing itself in a Stock Exchange as per the SEBI Act 1992. Thus a company which is not a private limited company can be either listed or unlisted.
Types of business entities and corporations discussed so far had been the ones which are most commonly encountered in our day-to-day life. Apart from these there are several other entities which are also operational but are very less talked about. These include Liaison Office/Representative Office, Project Office and Branch Office. Liaison Offices are those offices which are established by the approval of Govt. Of India meant solely to promote import/export and several collaborations but are restricted to undertake any commercial activity either directly or indirectly. Project offices on the other hand are the ones undertaken by foreign national companies to execute specific projects in India subject to certain predetermined conditions. Foreign companies which are into manufacturing goods can establish their branch offices in India for carrying out trade and representing and promoting themselves in India but are restricted to carry any manufacturing at their own in India. However these offices can get into contract with Indian Companies for manufacturing activities.
Hence this was all about the different types of business entities operational in India. However much more clarifications are still required with respect to Private and Public Limited Companies. I shall deal with Companies Act 1956 and the guidelines which regulate these companies with a layman’s approach in the coming articles and once all those clarifications are met, I shall deal with step by step procedure for owning a business entities and various complications attached to it.
Note:The author is an amateur writer and a neophyte in economics and all contents put here have been taken from various sites many of which are already added in his blogroll. Queries, if any,can be sent to him at mihirjha27@gmail.com and comments are always welcome.
Thanx and Regards
Mihir Jha
