Structuring of Business Entities in India

Written By

S.Dhanapal, B.Com,B.A.B.L,A.C.S

Practising Company Secretary

STRUCTURING OF BUSINESS ENTITIES IN INDIA

SOLE PROPRIETORSHIP

MEANING:-

The sole proprietorship is the oldest, simplest, and most common form of business entity. It is a business owned by a single individual. For tax and legal liability purpose, the owner and the business are one and the same. The proprietorship is not taxed as separate entity. Note that the earnings of the business are taxed at the individual level, whether or not they are actually in cash. There is no vehicle for sheltering income. For liability purposes, the individual and the business are also one and the same. Thus, legal claimants can pursue the personal property of the proprietor and not simply the assets used in the business.

KEY ATTRIBUTES:-

  • Creation (minimum requirements) – No Formalities for creating a sole proprietorship.
  • Profits / Losses / Distributions – Owner may use all profits and losses for business.
  • Liability – Owner faces unlimited personal liability.
  • Capital / Financing – All capital obtained from owner or through loans based on owner’s creditworthiness.
  • Duration – Usually no continuity upon disability, retirement or death of owner.
  • Transfer of Ownership – Assets may be sold in entirety or in part.
  • Management and Control – Owner manages and controls the business.
  • Taxation – The owner only pays tax and not entity.

ADVANTAGES:-

  • A sole proprietor has complete control and decision-making power over the business.
  • Sale or transfer can take place at the discretion of the sole proprietor.
  • No corporate tax payments.
  • Minimal legal costs to forming a sole proprietorship.
  • Few formal business requirements

DISADVANTAGES:-

&      The sole proprietor of the business will be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the business.

&      All responsibilities and business decisions fall on the shoulders of the sole proprietor.

&      Investors won™t usually invest in sole proprietorships.

HINDU UNDIVIDED FAMILY

The Hindu Undivided Family can best be defined as a family that consists of a common ancestor and all his lineal male descendants and their wives and unmarried daughters. The Hindu Undivided Family (HUF) cannot be created by acts of any party. The only exceptions are in the case of an adoption or a marriage when a stranger may become a HUF member. An undivided family, which is a normal condition of Hindu society, is ordinarily joint, not only in estate but also in food and worship.

BASIC CRITERIA FOR AN HUF

There are some essential conditions that must be fulfilled to qualify as an HUF. These are outlined below:

  • Only one member or co-parcener cannot form an HUF;
  • The joint family continues even in the hands of females after the death of the sole male member;
  • An HUF need not consist of two male members. One male member is enough. For example, a father and his unmarried daughters may form and HUF.

 

GENERAL ASSETS OF HUF

1. Ancestral property;

2. Property allotted on partition;

3. Property acquired with the aid of joint family property;

4. Separate property of a co-parcener, blended with the family property. The provisions of S.64 (2) of the I.T. Act have superseded the principles of Hindu Law, in a case where the co-parcener impresses his property with the character of joint family property.

WHEN IS AN HUF RECOGNISED?

The phrase creating an HUF is really quite misleading because an HUF comes into existence the moment you give birth to a son (or a daughter, if she is regarded as a coparcener in the state where most of your property is located). However, even though you may already have an HUF, it may not really exist from the tax point of view unless your HUF has assets and is deriving income from those assets. Put another way, in order for an HUF to exist on tax records, it needs to have income.

WHO CAN BE MEMBERS?

All the members in your family, including your wife, children, their wives and their children. While the male members are called coparceners, the females are referred to as members. The senior-most male member is called the karta (manager), and a typical HUF consists of a karta, his sons, grandsons, and great-grandsons (all of whom are coparceners), and their wives and unmarried daughters (all of whom are members).

RIGHTS OF THE MEMBERS?

The difference between a coparcener and a member is that a coparcener can demand partition of an HUF. This is by way of distribution of HUF property among the coparceners. While each coparcener would then be entitled to a share of the property, the members would be entitled to receive maintenance from the HUF. The karta generally manages the family property, which is regarded as the joint property of all the coparceners.

PARTNERSHIP

ACT: Indian Partnership Act, 1932.

˜PARTNERSHIP IS A RELATIONSHIP BETWEEN PERSONS WHO HAVE AGREED TO SHARE PROFITS OF THE BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL.™

Section 58: A Partnership Firm can get registered at any time, by filing an application:

APPLICATION

APPLICATION SHALL CONTAIN:-

1. Name of the Firm

2. Place or Principal place of business

3. Names of any other places where the firm carries on the business.

4. Date on which each partner joined the firm.

5. Name in full and permanent address of Partners.

6. Duration of the firm.

> Application shall be signed and verified by all the partners or their duly authorized agents.

> Application shall be accompanied by prescribed fee as well as the following documents:

> Prescribed Registration Form for Incorporation of a Firm. (Form No. 1 and Specimen of Affidavit)

> Certified true copy of the Partnership deed entered into.

> ownership proof of the principal place of business

VARIOUS FORMS INVOLVED IN PARTNERSHIP BUSINESS

Form No.  II – For change of principle place of business & change in the name of the firm.

Form No. III – For change of the other than principle place of business.

Form No.  IV – For change of name of the partners & permanent address of the partners.

Form No.   V – For change of constitution of forms & addition or retirement of partner.

Form No.  VI – For dissolution of the firm

Form No. VII – For minor partner attains the age of majority.

 

ADVANTAGES OF A PARTNERSHIP

 

Partnerships have many of the same advantages of the sole proprietorship, along with others:

Except for the time and the legal cost of drafting a partnership agreement, it is easy to establish.

Because there is more than one owner, the entity has more than one pool of capital to tap in financing the business and its operations.

Profits from the business flow directly to the partners personal tax returns; they are not subject to a second level of taxation.

The entity can draw on the judgment and management of more than one person. In the best cases, the partners will have complementary skills.

 

DISADVANTAGES OF A PARTNERSHIP

 

As mentioned earlier, partners are jointly and severally liable for the actions of the other partners. Thus, one partner can put other partners at risk without their knowledge or consent. Other disadvantages include the following:

Profits must be shared among the partners.

With two or more partners being privy to decisions, decision making may be slower and more difficult than in a sole proprietorship. Disputes can tie the partnership in knots.

As with a sole proprietorship, the cost of some employee benefits may not be deductible from income taxation.

Depending on the partnership agreement, the partnership may have a limited life. Unless otherwise specified, it will end upon the withdrawal or death of any partner.

PARTNERSHIP FIRM REGISTRATION
Though registration of firm is not compulsory but partners usually go for registration because consequences of non registration are very severe and detrimental to their interest. The registration of the firm may be effected at any time by sending or by delivering to the registrar of the area in which any place of business of the firm is situated or proposed to be situated ,a statement in the prescribed form and accompanied by prescribed fee stating the firm name ,the place or principal place of the business of the firm ,the names of any other places where the firm carries on business ,the date at which each partner joined the firm ,the names in full and permanent addresses of the partners and the duration of the firm. The statement shall be signed by all the partners, especially authorized in this behalf .When the Registrar is satisfied that the provisions have been duly complied with he shall record an entry of the statement in the register called Register of firms, and shall file the statement. Registration of the firm takes effect from the date of entry in register of firm.

CASE STUDIES IN PARTNERSHIP:

In Davis v. Davis, partners in a business borrowed money on the security of some property of which they were tenants-in-common. They expended the money partly in erecting on a small part of the mortgaged property workshops as an addition to works in which they carried on the partnership business, and which also belonged to them as co-owners. It was held by the Chancery Division that the workshops did not become partnership property, for there was no evidence that the parties had such an intention.

Further, in Waterer v. Waterer, a nursery man carried on business on a piece of freehold land belonging to him in fee simple. On his death he devised all his property to his three sons as tenants-in-common. They continued the nursery business in partnership, and out of money belonging to the father™s estate completed the purchase of adjacent land which he had agreed to buy. The land was also used in the business. Two of the sons then purchased the share of the third son in the land and the business and continued the business. One of the two sons died and the question arose as to whether the land was partnership property.

PART IX CONVERSION

 

(Conversion of FIRM into COMPANY)

Sections 565 to 581 deal with conversion of entities into a company under the Companies Act, 1956.

PART IX RELATES TO:-

The registration of companies as companies limited by shares, A joint stock company, i.e. a company having a permanent paid up or nominal share capital.

Such a company, when registered with limited liability under the Companies Act, 1956 shall be deemed to be a company limited by shares.

CERTIFICATE OF REGISTRATION

On compliance with the provisions of Part IX and on payment of the prescribed fees, the Registrar shall certify that the company has been incorporated as a company under the Companies Act, 1956 and in case of a limited liability company, that its liability is limited and thereupon the company will have been incorporated.

A company cannot be registered under part IX unless:-

The assents of majority of its members as are present in person.

Or where proxies are allowed, by proxy, at a general meeting summoned for the purpose is obtained.

Since the liability of the members of the firm is unlimited, when a firm desires to register itself as a company under Part IX as a limited company.

The majority required to assent as aforesaid shall consist of not less than ¾ of the members as are present in person or where proxies are allowed, by proxy, at a general meeting summoned for the purpose.

Where a firm is about to register as a company limited by guarantee, the assent to its being registered shall be accompanied by a resolution declaring that each member undertakes to contribute to the assets of the company, in the event of its being wound up while he is a member, or within one year if he ceases to be a member, for payment of debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member and of the costs, charges and expenses of winding up, and for the adjustment of the rights of the contributories amongst themselves, such amount as may be required, not exceeding a specified amount.

In computing the aforesaid majority, when a poll is demanded, regard shall be had to the number of votes to which each member is entitled to according to the regulations of the company.

REQUIREMENTS

As a matter of procedure, it has been experience that the following conditions facilitate speedy registration under Part IX :-

À       There must be at least 7 partners in the partnership firm.

À       The firm must be registered with the Registrar of Firms

À       There must be a fixed capital of at least Rs 1 lakh

À       There must be an agreement by the partners to convert the partnership to a company. This can be done by a contract in writing to this effect to which the partner’s resolution for conversion can be attached as annexure.

À       A memorandum of association and articles of association may be  made  for the company which will be similar in  all  respects  to  a  normal Memorandum and Articles of Association except that it  will  be  in agreement form. The Company may alter the form of its by substituting the memorandum and articles of association in place of the deed of partnership, by special resolution.

PROCEDURE FOR PART IX CONVERSION

Before registration under Part IX, the following documents must be delivered to the Registrar of Companies:-

g          A list showing the names, addresses and occupations of all persons who on a day named in the list, not being more than 6 clear days before the date of registration were members of the company, with the addition of the shares or stock held by them respectively, distinguishing, in cases where the shares are numbered, each share by its number. The company must consist of at least 7 or more members.

g          A copy of the Act of Parliament or other India Law, deed of settlement or deed of partnership or other instrument constituting or regulating the company.

g          If the company is intended to be registered as a limited company, a statement specifying the following particulars:-

a.         The nominal share capital of the company and the number of shares into which it is divided or the amount of stock of which it consists.

b.         The number of shares taken and the amount paid of each share.

c.          The name of the company, with the addition of the word “Limited” or “Private Limited” as the case may be, as the last word / words, in case the company is being registered with limited liability.

d.         Name approval letter from the Registrar of Companies u/s 20 of the Companies Act, 1956. Where the name sought by the company may with the approval of the Central Government signified in writing change its name with effect from the date of its registration under Part IX, assent of members to such change will be required in a manner similar to the manner mentioned above.

g          In case of a company intended to be registered as a company limited by guarantee, a copy of the resolution declaring the amount of guarantee & A list showing the names, addresses and occupations of the directors and the manager of the company

g          All above statements must be filed in necessary Forms and must be verified by at least 2 directors of the company or other principal officers of the company.

g          The Registrar of Companies may call for additional details in order to verify whether a company can be registered under Part IX of the Companies Act, 1956.

EFFECT OF REGISTRATION UNDER PART IX

 

  • Vesting of Property: All property, movable as well as immovable belonging to or vested in the firm at the time of registration shall, on such registration pass to and vest in the company as incorporated under Part IX.
  • The Registration of a company under Part IX shall not in any manner affect its rights or liabilities in respect of any debt or obligation incurred or any contract entered into, by, to, with or on behalf of the firm before registration.
  • All suits and other legal proceedings taken by or against the company or any public officer or member thereof which were pending at the time of registration may be continued in the same manner as if registration had not taken place. However, no execution can be done against the property or person of any individual member of the company on any decree or order obtained in such suit or proceeding. If the property of the company is inadequate to satisfy the decree or order, an order for winding up the company may be obtained.
  • All provisions of any Indian law or other instrument constituting or regulating the company shall apply to the registered company in the same manner as if the company had been formed under the Companies Act, 1956 and those conditions were required to be contained and were contained in its Memorandum and Articles of Association.
  • As per section 383A of the Companies Act, if the paid up capital of the Company is Rs. 500 lacs or more than the company is required to appoint a full time Company Secretary.
  • As per section 269 of the Companies Act, 1956 if the paid up capital of the company is Rs. 500 Lacs or more than the Company is required to appoint either Managing Director or Whole Time Director or Manager.
  • Debts and liabilities are not automatically transferred to the new company and therefore a novation agreement will have to be entered into by the company with its debtors and creditors.
  • Obtain an indemnity from the company to the partnership firm for all acts, deeds and things done after the registration under Part IX and vice versa.
  • Comply with all the relevant provisions of the Companies Act, 1956 i.e. call requisite meetings, register charges, comply with section 58A if necessary, etc.
  • Stamp duty.      Conversion of firm to company is exempted from payment of stamp duty as there is no change in the ownership and no transfer is involved.
LIMITED LIABILITY PARTNERSHIP(LLP)

MEANING

Limited Liability Partnership entities, the world wide recognized form of business organization has now been introduced in India by way of Limited Liability Partnership Act, 2008. A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization. In an LLP one partner is not responsible or liable for another partner’s misconduct or negligence, this is an important difference from that of a unlimited partnership. In an LLP, all partners have a form of limited liability for each individual’s protection within the partnership, similar to that of the shareholders of a corporation. However, unlike corporate shareholders, the partners have the right to manage the business directly. An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP’s employees or other agents.

SIMPLE STEPS FOR FORMING AN LLP

 

1)    Deciding Partners and Designated Partners.

2)    Obtaining DPIN & DSC.

3)    Check Name Availability.

4)    Draft LLP Agreement.

5)    Filing of Incorporation Documents.

6)    Certificate of Incorporation.

ADVANTAGES

 

Ø  Renowned and accepted form of business worldwide in comparison to Company.

Ø  Low cost of Formation.

Ø  Easy to establish.

Ø  Easy to manage & run.

Ø  No requirement of any minimum capital contribution.

Ø  No restrictions as to maximum number of partners.

Ø  LLP & its partners are distinct from each other.

Ø  Partners are not liable for Act of partners.

Ø  Less Compliance level.

Ø  No exposure to personal assets of the partners except in case of fraud.

Ø  Fewer requirements as to maintenance of statutory records.

Ø  Less Government Intervention.

Ø  Easy to dissolve or wind-up.

Ø  Professionals can form Multi-disciplinary Professional LLP, which was not allowed earlier.

Ø  No requirement as to Minimum Alternate Tax.

Ø  Audit requirement only in case of contributions exceeding Rs. 25 lakh or turnover exceeding Rs. 40 lakh.

DISADVANTAGES

 

&      Any act of the partner without the other partner, may bind the LLP.

&      Under some cases, liability may extend to personal assets of partners.

&      Cannot raise money from Public.

BASE COUNTRY Year of Formation Act Nature of Business Attractions/Difference
INDIA 2008 Limited Liability Partnership Act, `2008 All types of Business Carried out, Central Government / RBI Approval in Certain Cases FDI is Restricted on Limited Liability Partnership
POLAND 2001 Limited Liability Partnerships Under Polish Law All Professional Services Any other form of Business is Prohibited
SINGAPORE 2005 Limited Liability Partnerships Act 2005. All types of business can be carried out and it is based on both the US and UK models of LLP For Taxation it is treated as Partnership Firm.
UNITED KINGDOM 2000 (in Great Britain)  / 2002 (Northern Ireland) Limited Liability Partnerships Act 2000 / The Limited Liability Partnerships Act 2002 Commonly LLPs will be formed by auditors/ Solicitors In UK its similar its taxed similar to Partnership
UNITED STATES 1996 Uniform Partnership Act in 1996 Formed by Professionals like Auditors, Solicitors and Architects Avoiding Double taxation
CANADA 2004 Partnership Amendment Act, 2004 LLPs for lawyers. Other Professional services can be started but no other objects are allowed.
CHINA 2007 Partnership Enterprise Law Knowledge-based professions and technical service industries. Special general partnership
JAPAN 2006 yÅ«gen sekinin jigyō kumiai (Limited Liability Partnership) Its suitable only for joint ventures and small businesses LLPs may not be used by lawyers or accountants as they have to carry on under unlimited liability

PRIVATE LIMITED COMPANY

A private limited company is a voluntary involvement 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 debentures or shares.

ADVANTAGES

 

à    Recognised formal structure

à    Separation of personal & company assets

à    Ability to pay dividends in lieu of salary

à    Continuity of business beyond the individual

à    Fewer formalities in corporate affairs.

à    Limited liability.

DISADVANTAGES

g          Growth may be limited because maximum shareholders allowed are only 50.

g          The shares in a private limited company cannot be sold or transferred to anyone else without the agreement of other shareholders.

g          No Private Company can accept deposits form General Public.

STEPS FOR INCORPORATION

 

À       Apply for name availability: a few names shall be selected for applying to registrar of companies

À       Director Identification Number (DIN) has to be obtained from MCA for all directors, before applying form no1a for name availability.

À       An application for name availability shall be made to roc in form no.1a accompanied with a fee of rs.500/-.

À       Within 2 months from the date of intimation of name clearance by the registrar of companies, following documents shall be submitted to the registrar for registration of the company after paying registration and filling fee.

À       Memorandum and articles of association duly signed and witnessed, out of which one copy should be stamped

À       Declaration of compliance in Form no.1 of companies general rules and forms;

À       Form no.32 giving particulars of directors; Form no.18 giving intimation of the location of registered office

À       Original copy of registrar™s letter regarding availability of name; agreement, proposed for the appointment of managing or whole time director or manager.

À       Power of attorney on non-judicial stamp paper of requisite values by all subscribers authorising one of them or any other person to make corrections in the papers.

Privileges of a private limited company
Sec Description of the matter
3(1)(iii) A Private Company need to have Minimum paid-up capital of Rs. 1 lakh as against Rs. 5 lakhs for Public Company.
12(1) A Pvt. Co. can be formed by just two persons as against minimum seven persons required for incorporation of a Public Company.
58A Deposits taken by Pvt. Co. from its members. Directors and their relatives are exempt from the rigors of this section. If the depositor ceases to be such capacity, the deposits made by him cease to qualify for exemption from the date of such cessation
70(3) A Pvt. Co. need not file Statement in lieu of Prospectus with ROC.
77(2 & 3) There is no prohibition on a Pvt. Co., which is not a subsidiary of a public company, to provide financial assistance to anyone for purchasing or subscribing for its own shares or of its holding company.
81 A Pvt. Co. can issue further shares in any manner; i.e. rights shares to the existing shareholders need not be offered.
85 to 90 The provisions of these sections requiring that there should be only two kinds of share capital and that voting rights should be proportional to the capital paid up and prohibiting and terminating disproportionately excessive voting rights are not made applicable to a private company which is not subsidiary of a public company and such company may issue share capital of such kinds, in such forms and with such proportionate or disproportionate or other voting rights as it may think fit.
111 (13) The right of appeal to the Company Law Board against rejection of a transfer of shares is not available as long as the private company is only enforcing the provisions of its articles in rejecting a particular transfer. It appears from the new section 111(13) that a right of appeal will be available where the rejection is outside the provisions of the private company™s articles. The right of appeal is also available where there is transmission by court sale or sale by other public authority [s. 111(11)]
149 Procedures for obtaining certificate of commencement of business do not apply to Pvt. Co. A Pvt. Co. can commence its business as soon as the certificate of incorporation is issued.
165 Pvt. Co. is not required to hold statutory meeting or prepare any statutory report.
170 to 186 The provisions of these sections relating to general meetings, unless the provisions of any section are expressly made applicable by the company™s articles, do not apply to such a private company to the extent to which the company makes its own provisions by its articles. Relaxation in the length of Notice for calling General Meeting, contents and manner of Service of Notices, Explanatory Statements, Quorum for meeting, Chairman of meeting, Restrictions of voting rights etc. to the extent to which the company makes its own provisions by its articles.
192A Passing of resolution by Postal Ballot not relevant for Pvt. Co.
198 Ceiling on overall managerial remuneration not applicable to Pvt. Co. A private company, which is not subsidiary of a public company, may remunerate those in management, by such higher percentage of profits or in any manner as it may think fit.
204 No restriction on appointment of any firm, body corporate to office or place of profit.
220 P & L A/c. of a Pvt. Co. is not open for inspection by Public.
224(1B) The ceiling, on number of companies an auditor can audit, does not include audit of Pvt. Cos.
252 & 252A Minimum Directors for Pvt. Co. is 2 (two) against 3 (three) in case of Public Co. Requirement of Independent Directors or Small Shareholders™ Directors not applicable to Pvt. Co.
255 Retirement of Directors by rotation not mandatory.
256 A Pvt. Co. need not adopt the procedure relating to appointment, retirement, re-appointment of directors etc. applicable to a public company.
257 The provision requiring the giving of 14 days notice by new candidates seeking election as directors and deposit of certain amount (Rs. 500) are not mandatory for Pvt. Cos.
259 Central Government approval for increasing number of directors beyond the permissible maximum (presently 12) not required.
262 The provision relating to manner of filling casual vacancy among directors and the duration of the period of office of those so appointed do not apply to Pvt. Co.
263(1) Appointment of two or more persons as directors by a single resolution can be done by Pvt. Co.
264 No requirement of filing consent by the directors to be filed with the Registrar to act as a director.
266(5) Restrictions on appointment of director and subscription to qualification shares not applicable to Pvt. Co.
268, 269 Central Government approval for amendment relating to appointment/reappointment of a whole-time director/ director not liable to retire by rotation.
270-273 Requirements of qualification shares holding by directors the time within which the qualification shares to be acquired and filing of a declaration by each director of the qualification shares held, is not applicable to Pvt.
274(1)(g) The disqualification u/s. 274(1) clause (g) does not include directorships of Pvt. Co.
275 to 279 The Directorships of Pvt. Cos. not to be considered for the limit on no. of companies a person can be director.
292A Provisions relating to formation of Audit Committee not applicable.
293 Restrictions on certain powers of Board of directors regarding selling, leasing, remitting or giving time for payments of debts, investing or borrowing moneys, or contributing to charities other than for political purpose are not applicable to Pvt. Co.
295 Restriction on loans to directors/relatives etc. does not apply to Pvt. Co.
300 No restriction on interested directors from participating in the proceedings of the Board and exercising their votes.
309, 310, 311 A private company which is not a subsidiary of a public company, is free from restrictions on Payment of remuneration to the directors or increase in their remuneration. The Procedures like filing Form 25C not required in case of Pvt. Co.
316, 317 No restriction on period of appointment of managing director/manager for more than 5 years at a time.
349, 350 Provision relating to the determination of net profits and ascertainment of depreciation shall not apply.
372A No restrictions on giving loans or guarantees to other companies or on making investment in the shares of the other companies.
386, 388 No. of companies on which a person may be appointed manager, the remuneration of a manager and the application of sections 269, 310 to 312 and 317 in relation to managers do not apply.
409(3) Powers given to the Central Government to prevent change in the Board of directors not applicable to Pvt
416(1) Restrictions on Contract by agents of the company in which the

PUBLIC LIMITED COMPANY

MEANING

A company which is not a private company. The minimum number of shareholders and directors required for registering a Public Company is 7 and 3 respectively. Subject to compliance of the Companies Act, there is no restriction as to number of members, issue and transfer of shares and acceptance of deposits.

Separate Legal Entity: A public company is a separate legal entity independent of its members who formed it.

Registration: It is mandatory to register the company with the ROC.

Number of Members: The Company must have a minimum of 7 members and there is no limit to the maximum number of members.

Raising Capital: The Company can raise capital by inviting public to subscribe to its shares / debentures.

Transfer of Shares: The shares of the company are easily and freely transferable among members. No prior consent of shareholders is required.

 

ADVANTAGES

  • The shareholders have limited liability.
  • A company can raise additional capital by issuing more shares or debentures.
  • Greater borrowing power.
  • A board of directors with experience/ expertise can be appointed.
  • Shareholders can sell/transfer their shares freely.

 

DISADVANTAGES

  • Costly and complicated to set up as a public limited company need to employee specialist bankers and lawyers to help organise the converting to the public limited company.
  • Certain financial information must be made available for everyone, competitors and customers etc
  • Shareholders in public companies expect a steady stream of income from dividends, which might mean that the business has to concentrate on short term objectives of creating a profit, whereas it might be better to work on longer term objectives, such as growth and investment.
  • Threat of takeover, because another company can buy up a large number of shares because they are traded publicly (can be sold to anyone). If they buy enough, they can then persuade other shareholders to join with them to vote in a new management team.

 

FORMATION OF PUBLIC COMPANY

Apply for name availability: a few names shall be selected for applying to registrar of companies

Director Identification Number (DIN) has to be obtained from MCA for all directors, before applying form 1A for name availability.

An application for name availability shall be made to ROC in Form No.1A accompanied with a fee of Rs.500/-.

Within  2  months  from  the  date  of  intimation  of  name  clearance by the registrar of companies, following documents shall be submitted to the registrar for registration of the company after paying registration and filing fee.

g          Memorandum and articles of association duly signed and witnessed, out of which one copy should be stamped

g          Declaration of compliance in form no.1 of companies general rules and forms;

g          Form no.32 giving particulars of directors;

g          Form no.18 giving intimation of the location of registered office original copy of registrar™s letter regarding availability of name;

g          Agreement, proposed for the appointment of managing or whole time director or manager.

g          Power of attorney on non-judicial stamp paper of requisite values by all subscribers authorising one of them or any other person to make corrections in the papers

g          The registrar after scrutinizing the documents shall register the company & issue certificate of incorporation.

CHECKLIST OF IMPORTANT FORMALITIES / FILINGS BY PUBLIC COMPANY

  • Minimum Paid-up Capital : Public Company must have a minimum paid-up capital of Rs. 5,00,000

 

  • Minimum number of members : Public Company requires atleast 7 members

 

  • Maximum number of members : There is no restriction of maximum number of members in a Public Company

 

  • Transferability of shares: There is no restriction on the transferability of the shares of a Public company

 

  • Number of Directors ; Public Company must have atleast 3 directors

 

  • Consent of the directors :Directors of a Public Company must have file with the Registrar a consent to act as Director of the company

 

  • Qualification shares: Directors of a Public Company are required to sign an undertaking to acquire the qualification shares of the public Company.

 

  • Shares Warrants: Public Company can issue Share Warrants against its fully paid up shares.
  • Further issue of shares: Public Company has to offer the further issue of shares to its existing share holders as right shares. Further issue of shares can only be offer to the general public with the approval of the existing share holders in the general meeting of the share holders only.

 

  • Quorum: In the case of a Public Company FIVE members must be present personally to constitute quorum. However, the Articles of Association may provide and number of members more than the required under the Act.

 

  • Managerial remuneration : Total managerial remuneration in the case of a Public Company cannot exceed 11% of the net profits. (section 269/schedule XIII)

 

  • Borrowings : compliance under section 293(1)(d)

 

  • Inter corporate loans & investments: compliance of section 372A

 

  • Disclosure of Interest by Directors : compliance of section 299

 

  • Any Transactions during the year where Directors are interested : compliance of section 297

 

  • Whether any loan given to Director or his interested relative, firm , company : compliance of section 295

LIMITATIONS OF A PUBLIC COMPANY

A public company is subject to several limitations and restrictions under the act as stated below:

1.A public company is subject to certain restrictions for giving loan etc., for the purchase of any shares in a company or its holding company.

2.Restrictions relating to allotment of further shares by the company to existing shareholders.

3.Such a company is required to obtain a certificate for commencement of business not required if converted into a public company.

4.A public company needs to hold a statutory meeting and send the statutory report within the prescribed period and file the same with the registrar  not required if converted into a public company.

5.A public company needs to comply with the provisions of section 171 to 186 relating to conduct of general meeting, such as notice of general meeting, its quorum. Appointment of proxies etc.,

6.All the provisions relating to appointment and remuneration of managing and whole time directors are applicable to a public company.

7.A public company is not permitted to appoint any firm or body corporate to an office or place of profit for a term exceeding five years unless the prior approval of the central government is obtained .

8.No public company of its board of directors can appoint or reappoint any person or firm as an auditor, if such person or partner of the firm is, at the date of such appointment or reappointment holding appointment as auditor in twenty or more public companies.

9.The directors of a public company are liable to retire by rotation

10.The directors of a public company, if required by the articles, have to obtain such number of qualification shares and within such period as specified in section 270 & 272.

11. Section 274 (1) enumerates various disqualifications for appointment of directors of public as well as private companies.  However clause (g) sates the conditions in which a person who is already a director of a public company shall not be eligible for appointment of any other public company for a period of five years from the specified date.  The conditions stated in the above clause are as under.

(a)  Failure of the company to file the annual accounts and annual returns for any three continuous financial years commencing on and after the first day of April 1999 or

(b)Failure of the company to repay deposits or interest thereon on the due date or redeem its debentures on the due date or pay dividend and such failure continues for one year or more.

A director who is disqualified under S274 (1) (g)  can however be appointed as a director of a private company.

12.A person cannot be appointed as a director of more than fifteen companies.  In calculating the said number of companies, directorship held by such a person in a private company shall be excluded (S.275 to 279).

13.The board of directors of a public company is required to obtain the approval of the members in a general meeting for matters such as selling, leasing, remitting or give time for repayment of any debt, investing or borrowing monies or contributing to charities other than for political purposes.

14.The approval of central government is required for granting loans or giving any guarantee or providing any security to directors etc.,  (S 295)

15 A director of a public company who is interested in any contract or arrangement is prohibited in any discussion or voting on the same in any board proceedings (S300)

16. A person cannot be appointed or re-appointed as a managing director of a public company for a period of more than five years (S317)

17.There are certain restrictions imposed on a public company with regards to inter-corporate loans and investments.  The provisions of section 372 A relating to the inter corporate loans and investments are briefly given as under.

No public company shall directly or indirectly.

a)      Make any loan to any other body corporate.

b)      Give any guarantee, or provide security, in connection with a loan made by any other person to or to any other person by any body corporate and

c)      Acquire by way of subscription, purchase or otherwise the securities of any other body corporate.

Exceeding sixty percent of its paid up share capital and free reserves, or one hundred percent of its free reserves whichever is more unless previous approval of the members has been obtained by a special resolution passed in a general meeting.

18.In case of public company the tribunal is empowered to prevent a change in the board of directors which is likely to affect the company prejudicially. (S409).

COMPARISON BETWEEN A PRIVATE COMPANY / PUBLIC COMPANY / LLP / PARTNERSHIP CONCERN/HUF


CRITERIA PRIVATE LIMITED COMPANY PUBLIC LIMITED COMPANY LIMITED LIABILITY PARTNERSHIP PARTNERSHIP CONCERN HINDU UNDIVIDED FAMILY
REGISTRATION , MEMBERSHIP AND CHARTER DOCUMENTS
Applicable Law Companies Act, 1956 Companies Act, 1956 LLP Act 2008 Partnership Act, 1932 Hindu Succession Act, 1956
Mandatory registration Yes, with Registrar of Companies Yes, with Registrar of Companies Yes, with Registrar of Companies Optional Not Mandatory
Charter Documents Memorandum and Article of Association Memorandum and Articles of Association LLP Agreement Partnership Agreement Hereditary
Charter Documents needs to be filed with regulator Yes, with Registrar of Companies Yes, with Registrar of Companies Yes, with Registrar of LLP Optional Registrar of Firms Not applicable
Identification number Company Identification number granted by ROC Company Identification number granted by ROC LLP Identification number granted by Registrar of LLP Optional. Partnership registration granted only to registered Partnerships Not Applicable
Minimum Paid-up Capital Rupees 100,000 Rupees 500,000 Not specified one Not specified one Not Applicable
Number of members Minimum – 2 Maximum – 50 Minimum – 7 Maximum – No Limit Minimum – 2 Maximum – No Limit Minimum 2 Maximum – 20 Karta Head Other Persons were  Co-parceners
Identity of Partners / directors Mandatory, needs to obtain Director Identification Number Mandatory, needs to obtain Director Identification Number Mandatory, needs to obtain Designated Partner Identification Number Not required Not required
Liability of Partners / members Limited Limited Limited Unlimited Unlimited for Karta, Others were Joint & Several
Legal Entity Yes , can sue or be sued in the name of Company Yes , can sue or be sued in the name of Company Yes , can sue or be sued in the name of LLP No, only Partners can sue or be sued. Can Sue and Can be sued also
Perpetual Succession Yes Yes Yes No. Unpredictable

 

COMPLIANCE
Priorapprovalof Name Mandatory. Name should be in accordance with the Companies Act Mandatory. Name should be in accordance with the Companies Act Mandatory. Name should be in accordance with the LLP Act Not required. Not required
Board meetings Mandatory, at least four in every year. Mandatory, at least four in every year. Depends upon the procedure prescribed in the LLP Agreement. Depends upon the procedure prescribed in the Partnership Agreement. Not Applicable
Shareholders meeting Mandatory Mandatory Not applicable Not applicable Not Applicable
Preparation of Minute Books Mandatory Mandatory Depends upon the procedure prescribed in the LLP Agreement. Depends upon the procedure prescribed in the LLP Agreement. Not Applicable
Appointment of Auditors Mandatory Mandatory Mandatory Mandatory
Maintenance of other statutory registers Mandatory Mandatory Not Applicable Not Applicable Not Applicable
Maintenance of Books of accounts Mandatory Mandatory Mandatory Mandatory At their own Discretion
Filing of Annual return and Balance sheet with the statutory Authority Mandatory with ROC Mandatory with ROC Mandatory with Registrar of LLP Not required Not Applicable but Income tax return has to be filed as per IT ACT, 1961.
Invitation to the public Restricted Possible Restricted Restricted Restricted
Listing on stock exchange Restricted Possible Restricted Restricted Restricted
Issue of shares / interest other than cash Not Possible except sweat equity Not Possible except sweat equity / ESOP Possible Possible Not possible
Merger/ amalgamation Possible Possible Possible Not possible Not Possible
ACCOUNTING AND TAXATION
Obtaining PAN /TAN Mandatory Mandatory Mandatory Mandatory Mandatory
Audit requirement Mandatory Mandatory Mandatory Mandatory Not Required
Filing of ITR Mandatory Mandatory Mandatory Mandatory Mandatory
Accounting Standards Applicable Applicable Not yet issued Not applicable Not Applicable

Tags: AssetBusinessCompanies lawCorporationHindu Undivided FamilyIncorporationLegal personalitySole proprietorship

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About Dhanapal Sreepathi

Dhanapal Sreepathi | Managing Partner

A Practising Company Secretary by profession, practising in Chennai, Managing Partner of M/s S Dhanapal & Associates, a firm of Practising Company Secretaries in Chennai. He is a graduate in commerce, law and an Associate Member of The Institute of Company Secretaries of India. He is also a visiting Faculty of The Institute of Company Secretaries of India (ICSI), Chennai. A passionate writer on legal and secretarial matters in Chartered Accountant Study Circle Journals and ICSI Journals, can be reached at csdhanapal@gmail.com, blog space is www.corporatelegalclub.blogspot.com.

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