Types of business Entities
There are several forms in which a business enterprise can be owned and organized, each with its own set of advantages and disadvantages. Selecting the appropriate form of organization is a critical decision for entrepreneurs as it directly impacts their power, control, risk, responsibility, and the distribution of profits and losses. Given the long-term commitment involved, careful consideration and deliberation are essential in making this choice. The decision on the form of business organization significantly influences the success and growth of the business, affecting factors such as profit distribution and risk management.
Sole Proprietorship
Sole proprietorship is a business structure where a single individual owns all the assets of the business. Establishing a sole proprietorship typically requires minimal legal formalities, usually limited to obtaining the necessary licenses to operate the business and registering a business name if it differs from the owner’s name. The owner of a sole proprietorship reports the income or losses from the business on their personal income tax return.
Partnership firms are formed by drafting a partnership deed among the partners, which is then registered to establish the firm. Governed by the Indian Partnership Act of 1932, partnership firms in India can have a maximum of 50/20 partners. The distribution of profits and losses among partners is determined according to the terms agreed upon in the partnership deed.
Limited Liability Partnership (LLP)
The Limited Liability Partnership (LLP) is an alternative corporate business structure offering the advantages of limited liability similar to a company while allowing its members the flexibility to organize their internal management based on a mutually agreed-upon agreement, similar to a partnership firm. Introduced in India through the Limited Liability Partnership Act of 2008, LLP provides a hybrid model that combines the benefits of both limited liability and partnership arrangements.
A cooperative organisation is an association of persons, usually of limited means, who have voluntarily joined together to achieve a common economic end through the formation of a democratically controlled organisation, making equitable distributions to the capital required, and accepting a fair share of risk and benefits of the undertaking.
A Section 8 company is an organization formed with the aim of promoting various societal, educational, charitable, environmental, or other similar objectives. These companies are registered under the Companies Act of 2013. The key characteristic of a Section 8 company is that any profits or income generated must be utilized solely for furthering the company’s stated objectives, and no dividends are paid to its members.
An OPC means a company with only 1 person as a member Share holder can make only 1 nominee, he shall become a shareholder in case of death / incapacity of original stakeholder.
Private company is a company which has the following characteristics:
• Shareholders right to transfer shares is restricted
• Minimum number of 2 members in company
• Number of shareholder is limited to 200
• An invitation to the public to subscribe to any shares or debentures or any type of security is prohibited.
A public company is a company which has the following characteristics
• Shareholders right to transfer share; is not restricted
• Minimum 7 members
• An invitation to the public to subscribe to any shares or debentures or any type of security is permitted.
