What type of business should you register as
You can set up your business entity under different legal types. Each has its own use, advantage and disadvantage. This piece briefly examines the different legal classifications and where they are best suited. While selecting an entity for setting up your business,
one has to keep in mind the size and liability of the business and relevant commercial issues, such as funding. The business can be organised on the lines of:
Sole proprietorship: This is ideal for a commercial enterprise intended to be run and managed by an individual. ‘Incorporation’ is simple; there are no mandatory formalities with any government authority. The proprietorship has the comfort, in some respects, of being an extension of the individual. In law, there is no distinction between the ‘individual’ and the proprietorship. In relation to taxes, for example, this works well because the filing is kept simple. On the flip side, the liability for the commercial enterprise is with the individual.
Partnership firm: Like the sole proprietorship, the partnership, where two or more persons come together for commercial gain, is fairly simple to set up. The partnership deed, which should encompass the details, including the functions and management and sharing of profits should be registered with the relevant authority. A partnership deed can be ‘registered’ by stamping it with the appropriate stamp duty [Rs 100 for most states in India; remember that stamp duty varies from state to state] and submitting it to the local Registrar of Firms. The partnership could structure a time-frame and clear mode of dissolution or be ‘at-will’; where any partner can collect his/her earnings and walk out of the partnership. It is important to remember that with respect to liability, the partnership laws are clear that all liability for the partnership is with those individuals who constitute the partnership.
Private limited company: A company, since its historical founding in early modern Europe, has been the most popular modern commercial entity. The corporation as a legal entity began as an institution ‘chartered’ by governments to carry out specific public functions. In our times, companies have a legal ‘persona’ and are entitled to some of the legal rights of a living person. It must be noted that a company is a distinct legal entity in law; distinct from its shareholders, members or directors, in contrast to a proprietorship or partnership. The company is capable of ‘being an individual’ and subject to some exceptions taking on commercial and legal risk which need not be transferred to the shareholders or director. In fact, the modern corporation is a very special kind of person, unlike the human persona, solely concerned with generating maximum profit possible for its owners.
For private limited companies, regulatory compliance issues are demanding though fairly uncomplicated to perceive. A company’s functions must conform to the ‘list’ specified in the Memorandum of Association filed with the Registrar of Companies at inception. A private limited company is allowed a great deal of flexibility in management and is permitted a flexible structure in their Articles of Association, which govern internal management.
Unlike a partnership where there is a limit to the number of partners [limited to twenty under the Indian Partnership Act, 1932]; there is no limit to the number of shareholders in a company. Also, the liability of a shareholder is ‘limited’ to the value of the share he or she has paid up for. This allows a possible funding entity to become a stakeholder without incurring extra legal risk.
This limited liability and independent persona makes the company a popular choice for business.
A public company is generally one which is permitted by law to offer or sell its shares to the public through stock exchanges. Public companies are required to report to the Securities and Exchange Board of India [SEBI]; have to comply with additional regulations aimed at safeguarding investor money. In India [and the United States]; a public company can also refer to a government-owned or controlled company which is funded by ‘public money’ or that which belongs to the people. I do not see the entrepreneur worried about this, unless he or she opts for public funding at a later stage through a stock offering at a stock exchange [Initial and Subsequent Public Offers].
Incorporating abroad: This is advantageous primarily for tax reasons. If one incorporates in a jurisdiction with a milder tax regime. Though, it must be said that our [Indian] tax authorities are viewing investments from Mauritius and elsewhere as particularly ‘suspicious’.
Shell Company: It is a term used to refer to companies that exist in name but have ceased to do business. Shell companies are at their most interesting when they are listed on a stock exchange, because they provide a cheap way for another company to acquire a listing by ‘reversing’ into the shell. Usually, the term has a sinister connotation referring, for example, to the companies set up by Nathan Myhrvold [Intellectual Ventures, formerly Chief Technology Officer, Microsoft] and Peter Detkin [former General Counsel, Intel] to buy and own patents with a view to extracting royalties from unsuspecting tech companies.
The author is a practising commercial lawyer and partner with FoxMandal Little. <rodney.ryder@foxmandallittle.com>
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written by Aarti, November 25, 2008
Need some help with my queries for a sole proprietorship.
1. Can the name contain “INC.” in it? I mean, can a sole proprietorship be an 'Incorporation' or an 'Enterprise'? Can it be named something like “ABC Inc.” or "ABC Ent."?
2. Can I deal in multiple items under the same title?
3. Is there any procedure to register a sole proprietorship?
4. If there is no registration, that means any 2 companies/sole proprietorships can have the same name which can give rise to frauds etc. or create confusions if they’re in the same industry? Whats the solution to this?
5. How will I know the items which come under VAT/sales tax/service tax?
Thanks & Regards,
A.D.K.
rt.is.kool@gmail.com
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I really enjoyed this article.
I am always trying to foster good relationships with people who can help my cause.