EGV - Legal structures - Lecture 1 & 2
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Transcript of EGV - Legal structures - Lecture 1 & 2
Legal Structures
How do you choose the right legal structure for
your business?
Types of Legal Structures
Non-profit Organization
◦ Trust, Society
For profit enterprise
◦ Sole Proprietorship, Partnership, Limited
Liability Partnership, Private Limited
Company, Public Limited Company, Co-
operative
Non – Profit Organization
Trust
Public Trust◦ Created for charitable purpose
◦ Under the Public Charitable Trust Act
◦ Minimum two trustees
Private trust, created under and governed by the Indian Trusts Act of 1882, aims at managing assigned trust properties for private or religious purpose. It does not enjoy the privileges and tax benefits of a public trust
Society
Registered under Societies
Registration Act 1860
For literary, scientific or charitable
purpose
Minimum 7 people
Memorandum of Association
◦ Name
◦ Objectives
◦ Details of the members
For Profit Enterprise
Sole Proprietorship
One owner
Unlimited liability
No registration required
Pros
It is the cheapest and easiest form of business structure
Undivided profits belong to the sole proprietor
The owner can keep or reinvest the income as they wish
The owner is in complete control of the business
Provides a greater amount of flexibility in the business operations and decisions
This business is easy to set up and also easy to dissolve
There are less legal formalities
Cons
Unlimited liability
Responsible for all debts related to the business.
Hard to attract employees of higher quality, especially during the setting up stages of the business
Difficulty to raise funds from banks or investors
Funds are limited to only personal savings and loans or borrowings from family or friends
Because of the fact that it is difficult to raise capital, this business entity may have limited growth potential
After the death of the business owner, it could be tough for the business to survive as others may not want to take up unlimited liability for it
Partnership
Agreement between 2 or more people
Maximum of 20 partners (Banking –
10 partners)
Every partner shares responsibility
Owners are individually known as
‘Partner’ and collectively as ‘Firm’
“Relation between persons who have
agreed to share the profits of a
business carried on by all or any one
of them acting for all”
Examples
A & B are friends. They contribute equal amount of money to buy a plot of land to build their houses.
C puts in capital to start a business. D manages the business. C pays salary to D.
E starts a business. F buys goods from a factory as E’s agent and gives it to E.
G & H put equal money to start a business. G acting for himself and H gets goods from a factory while H acting for himself and G gets a loan for the business.
Partnership Deed
Name of the firm
Names of the partners
Location of the firm
The mission statement, or some statement that reflects the firm’s prerogative
Contribution by each partner in terms of capital
Share of the partners in profit and loss
Each partner’s responsibilities in regard to the firm
Debts incurred by the partners, with interest
The amount of drawings by each of the partners from the company, and the rate of interest established
Partnership
Introduction of a new partner◦ Consent of all partners
Retirement of a partner◦ Consent of all partners
◦ In accordance to the agreement
Dissolution of a firm◦ Death of a partner
◦ Bankruptcy of a partner
◦ End of period
◦ End of activity
Pros
Easy to establish and the work and responsibilities are shared
There is an increased possibility of raising funds, as capital can be pooled together
The partners have mutual support and motivation, which is especially important for new entrepreneurs
Easy to administer with profits and losses being shared by the partners depending on their business share
Filing income tax returns is easy since it is the partners and not the ‘partnership’ which is taxed
Cons
There may be conflicts arising out of shared decisions
Partnerships have a limited life and can end upon the withdrawal of partnership or by the death of one of the partners
There are also several restrictions on the transfer of rights and there is lack of unanimous authority
Unlimited liability incurred by the partners
Tax is charged individually so as the business earnings increase, so does the tax
Personal differences may crop up between the partners which may be detrimental to the business
Limited Liability Partnership
An alternative corporate business
vehicle that provides the benefits of
limited liability of a company, but
allows its members the flexibility of
organizing their internal management
on the basis of a mutually arrived
agreement, as is the case in a
partnership firm.
Origin of LLP’s
USA – Early 1990’s
◦ Real Estate Crash of the 80’s
Reason – to shield innocent members
from the liability of a partnership
India – 2009
◦ Limited Liability Partnership Act, 2008
Features of a LLP
An LLP is a body corporate and legal entity separate from its partners. It has perpetual succession. No upper limit on the no. of members
The provisions of Indian Partnership Act, 1932 are not applicable to an LLP and it is regulated by the contractual agreement between the partners.
Use the words “Limited Liability Partnership” or its acronym “LLP” as the last words of its name.
It contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’.
Features of LLP Two designated partners being
individuals, at least one of them being resident in India and all the partners shall be the agent of the LLP but not of other partners.
While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.
No partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
Features of LLP
An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs.
Provisions have been made in the Bill for corporate actions like mergers, amalgamations etc.
LLP agreement is not mandatory but in the absence of LLP agreement, mutual rights and liabilities of partners shall be determined as provided under Schedule I to the LLP Act.
Advantages
Organized Business Model based on an agreement.
Limited liability
More flexibility & lower compliance requirement as compared to a company
Simple registration procedure, no requirement of minimum capital, no restrictions on maximum limit of partners.
No exposure to personal assets of the partners except in case of fraud.
Advantages
It is easy to become a partner or leave the LLP or otherwise.
Easy to transfer ownership
As a juristic legal person, an LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP.
No restriction on limit of the remuneration to be paid to the partners
Easy to convert existing ventures to LLP
Disadvantages of a LLP
Any act of the partner without the consent of other partners, can bind the LLP.
An LLP are not allowed to raise money from Public.
Because of the hybrid form of the business, it is required to comply with various rules & regulations and legal formalities.
Winding up of business is a tedious process
Creating a LLP
Need a minimum of 2 persons
Ltd. Co., Foreign co., a LLP, a non
resident and HUF Karta can be
partners
Incorporation Document
LLP Agreement
Registrar of companies
Steps to create a LLP
Deciding the Partners
Obtaining Director Identification No &
Digital Signature
Checking Name availability for LLP
Drafting LLP Agreement
Filing of incorporation documents
Certificate of Incorporation
Accounting Aspects
The Income of LLP will be charged to
tax in the hands of the LLP only and
not in the hands of individual partners
Remuneration to partners will be taxed
as “Income from Business &
Profession”
Share of profit in the hands of the
partner is exempt from tax u/s 10(2A).
The Income of an LLP is taxable
@30%
Subject to Minimum Tax
Private Limited Company
A private limited company is a
voluntary association of not less than
two and not more than fifty members,
whose liability is limited, the transfer of
whose shares is limited to its
members and who is not allowed to
invite the general public to subscribe
to its shares or debentures.
Features Independent Legal Existence Follows the Indian Companies Act, 1956
and now 2013 Less cumbersome to organize and
operate it as it has been exempted from many regulations and restrictions to which a public limited company is subjected to.
The liability of its members is limited The shares allotted to it's members are
also not freely transferable between them. These companies are not allowed to invite public to subscribe to its shares and debentures.
It enjoys continuity of existence i.e. it continues to exist even if all its members
Advantages
Continuity of existence
Limited liability
Less legal restrictions
Disadvantages
Shares are not freely transferable
Not allowed to invite public to
subscribe to its shares
Scope for promotional frauds
Undemocratic control
Starting a Pvt Ltd. Co
Min. 2 Directors & Min. 2
Shareholders
Min. Share Capital – 1 Lakh
Director Identification Number
Digital Signature o the Directors
Search for the company name (MCA
website)
Application for name availability
◦ Give 6 options priority wise
Contd..
Drafting Memorandum of Association
& Articles of Association
Submission / Filing at ROC
Payment of RoC Fees and Stamp
Duty
Verification by RoC
Issue of Certificate of Incorporation
Public Limited Company
A public limited company is a
voluntary association of members
which is incorporated and, therefore
has a separate legal existence and the
liability of whose members is limited.
Features
Separate legal existence
Strictly governed by the laws, rules and regulations of the Indian Cos. Act.
Min. 7 members, No limit on maximum members
Share Capital – Raising capital by sale o shares
Share Holders are known as members in the company
Shares are freely transferable
Features
Liability limited only up to the face
value of the shares held.
Ownership is separate from
management
Existence is not affected by the death,
retirement or insolvency of any of its
shareholders
Advantages
Continuity of existence
Larger amount of capital
Unity of direction
Efficient management
Limited liability
Disadvantages
Scope for promotional frauds
Undemocratic control
Scope for directors for personal profit
Subjected to strict regulations
Starting a Public Ltd. Co.
◦ A Public Limited Company, in addition to
the steps followed by a Private Limited
Company has to obtain a certificate of
Commencement of Business before they
can commence the business.
Co-Operative
A society whose objective is the
promotion of the interests of its
members.
Primary motive is service to the
members rather than making profits.
Features
It is a voluntary organisation as a member is free to leave the society and withdraw his capital at any time, after giving a notice.
The minimum number of members is 10, but there is no limit to the maximum number of members. However, the members must be residing or working in the same locality.
Registration of a co-operative enterprise is compulsory. A co-operative society may be registered with the Registrar of Co-operatives Societies.
Features
Separate Legal Entity
Follows Co-operative Societies Act, 1912 or State Acts
Submit annual reports and accounts to the Registrar of Societies.
Limited Liability
Shares are not transferrable but can be returned back to the co-operative
Continuity of existince
Advantages
Greater amount of capital
Reasonable price, good quality or
better service
Better conditions of service to
employees
Continuity of existence
Limited liability
Disadvantages
Inability to collect sufficient capital
Inability to provide efficient managerial
services
Organizational limitation