Legal forms of Entrepreneurial

Organizations
Module 4
Contents
•Identifying legal structures,
•Selection of an appropriate legal structure, Sole
Proprietorship’s,
•Partnerships, Companies,
•Companies under section 25,
•Franchising,
•Legal environment – patents, copyrights,
trademarks
legal structure
An organization’s legal structure is a key determinant of the activities
that it can undertake, such as raising capital, responsibility for
obligations of the business, as well as the amount of taxes that the
organization owes to tax agencies.
A business form, or a business ownership structure, the proper legal
structure depends on the size and type of your business and your
business goals.
A business structure is a category of organization that is legally
recognized in a given jurisdiction and characterized by the legal
definition of that particular category.
Legal structure
There are three primary considerations that firms should take
into account when deciding which legal form of business
should be chosen. These are:
1.How taxes are handled
2.How liability of the owners is handled
3.How easy to set up and operate the entity
Factors affecting while choosing business
structure
• owner liability
• expenses and procedures needed to create and run the business
structure
• how the business will be taxed
• investment needs
Criteria Sole proprietor OPC P/S Jt.st.co.,

Owner unlimited unlimited Limited in case of protected

liability: registered

Expenses and do not require much More formalities Partnerships do Required fees and
procedures fees and documents to than sole need to create more formalities
start a business proprietor a partnership
agreement t

taxes taxes on business Tax on profit exempted considered

profits and losses "pass earned by separate tax
through" to the owners business entities
on their personal
income taxes
Investment Own fund Own + investor’s Investment by Public
needs partners subscription
• The legal structure of a business determines the business identity,
profitability, and stability
• A business legal structure, also known as a business entity, is a
government classification that regulates certain aspects of your
business. On a federal level, your business legal structure determines
your tax burden. On a state level, it can have liability ramifications
• Legal structure is important:
• Personal asset protection
• Maximize profitability
• Promote investor confidence
• Ensure business longevity
Legal Environment
• In India, business firms are required to have complete knowledge of
acts like
• Companies Act 1956,
• Consumer Protection Act 1986,
• Industrial Disputes Act 1947, and
• Competition Act 2002
Forms of Business structure
• Sole Proprietorship
• One Person Company
• Partnership
• Limited Liability Partnership
• Private / Public Limited Company
Sole Proprietorship

• oldest and most common form of business structure

• A single person owns, manages and controls the entire
business
• There is no separate legal entity here. All the profit
belongs to the sole proprietor
• Similarly, entire losses shall be borne by him
• Liability of the owner is unlimited in this form of
business
Legal compliances- sole proprietorship

• Opening of bank account

• Permanent Account Number (PAN) of the proprietor
• No separate PAN required for the business
• PAN of the owner is treated as PAN of the business
• Registration under Shops and Commercial Establishment Act
• Professional Tax registration
• Various other government registrations like Service Tax,
Value Added Tax (VAT), Excise, Importer Exporter Code
(IEC) etc. to be obtained on need basis
• Trademark Registration, if required.
 Merits & Demerits - sole proprietorship
Merits
De-Merits
Simple form of structure, starting up
Unlimited liability
easy
Limited financial resources, difficult to
Freedom to take decisions
raise outside capital
Tax advantage Single talent
Limited life, no perpetual succession–
Less legal compliance
enterprise dies with its proprietor
High secrecy
Easy dissolution
Cost-effective
One Person Company (OPC)

• This is a new form of business structure introduced in India through

the Companies Act, 2013. Earlier, whenever a person wanted to start a
private limited company, he had to look for a co-founder just for the
sake of compliance. With the OPC structure, this problem has been
resolved
• Disadvantages
• Investment
• ESOP Employee stock option plans
• Tax Liability :
OPC
• The OPC receives a separate legal entity status from the member
• The separate legal entity of the OPC gives protection to the single
individual who has incorporated it
• The liability of the member is limited to his/her shares, and he/she is
not personally liable for the loss of the company
Features:
• No. of Members: ONE member
• No. of Directors: minimum 1 director, maximum of 15
• Threshold: Paid-up capital < Rs.50 lakhs, turnover < R
• s.2 Crore
• Eligibility: Only natural person who is an Indian citizen
& resident can incorporate an OPC
• Status: incorporated as Private Limited Company
• Nominee: Appointment of a nominee is a must for an
OPC who shall be an Indian citizen & resident
• No. of OPCs: A person can’t incorporate more than one
OPC and become the nominee in more than one OPC
• Voluntary conversion: possible only after 2 years of
incorporation
• Restriction: OPC cannot carry on NBFC activities
including investment in securities of any body corporate
• 2 Board Meetings are mandatory >90 days between 2
meetings
• The holding of AGM is not required due to a single
shareholder
• Compliances: Financial Statements shall be audited
• Financials Statements shall be filed with Registrar of
Companies (ROC)
Advantage of OPC
• Legal status: The separate legal entity of the OPC gives protection to
the single individual who has incorporated it
• Easy to obtain funds: Since OPC is a private company, it is easy to go
for fundraising through venture capitals, angel investors, incubators
etc
• Less compliances: The OPC need not prepare the cash flow statement
• The company secretary need not sign the books of accounts and
annual returns and be signed only by the director
Advantage of OPC
• Easy to manage: Since a single person can establish and run the OPC,
it becomes easy to manage its affairs. It is easy to make decisions, and
the decision-making process is quick
• Perpetual succession: Upon the member’s death, the nominee will
run the company in the member’s place
• Easy incorporation: only one member and one nominee is required
for its incorporation, The minimum authorised capital for
incorporating OPC is Rs.1 lakh but there is no minimum paid-up
capital requirement
Disadvantages Of OPC

• Suitable for only small business: More members or shareholders cannot

be added to OPC to raise further capital
• Restriction of business activities: The OPC cannot carry out Non-Banking
Financial Investment activities, including the investments in securities of
anybody corporates
• It cannot be converted to a company with charitable objects mentioned
under Section 8 of the Companies Act, 2013
• Ownership and management: The sole member can take and approve all
decisions
• The line between ownership and control is blurred, which might result in
unethical business practices.
Partnership Firm

• governed by the Partnership Act, 1932

• A partnership is defined as a relation between two or
more persons who have agreed to share the profits of a
business carried on by them or any of them acting for
all
• Min 2 max 20 parterns
• There is no separate legal entity here.
Partnership Firm
• A partnership is a relationship between individuals who have agreed to
share the profits of a business carried on by all or any one of them
acting for all as stated in Section 4 of the Indian Partnership Act.
Therefore, a partnership consists of three essential elements.
1.A partnership must be a result of an agreement between two or more
individuals.
2.The agreement must be built to share the profits obtained from the
business.
3.The business must be run by all or any of them representing the rest.
PARTNERSHIP
ESSENTIAL OF PARTNERSHIP
• An Agreement
• Sharing Profit of Business
• Running the Business
• Partnership: is merely an abstract legal relationship between the
partners. partnership is an invisible bind that holds the partner
together
• Firm: is a concrete object signifying the collective entity for all
the partners.
• firm is the visible form of this partnership which is, therefore,
bound together.
• Merits
• Easy to form – minimum 2 partners and maximum 10 in case
of banking business and 20 in case of others
• More capital contribution compare to sole proprietorship
• Tax advantage – the tax on firm and there is no tax for partners
on profit sharing
• Less compliance
• Combined talent of all the partners are pooled together
• Partners can get salary, drawings and share in profit
• Easy dissolution
• Confidentiality
• Flexibility of operations
• Effective supervision
Demerits
• Unlimited liability
• Conflict of interest as the ownership & management are same
• Third party funding is difficult
• No perpetual succession
• No transparency
• Possibility of misuse of funds
• Lack of co-operation and understanding
• Delay in decision compared to sole proprietorship business
• Difficulty in the transfer of interest
• Lack of public confidence
Limited Liability Partnership (LLP)

• Business structure governed by Limited Liability Partnership

Act, 2008 and respective Rules
• It is a hybrid of partnership and company, which has a
separate legal entity
• It has the operational flexibility of a partnership with limited
liability
• The liability of each partner in an LLP is limited to the extent
of his/her investment in the firm
• Compliance requirement is higher for an LLP as compared to
a partnership but lesser than the limited company
FEATURES
• It has a separate legal entity just like companies.
• Minimum two persons should come together as partners to establish
LLP.
• There is no upper limit on the maximum number of partners.
• There must be a minimum of two designated partners.
• Atleast one designated partner must be a resident of India.
FEATURES
• The liability of each partner is limited to the contribution made by the
partner.
• The cost of forming an LLP is low.
• Less compliance and regulations.
• No requirement of minimum capital contribution.
Merits Demerits
Limited liability Penalty for non-filing is huge – Rs.100 per day of default
No maximum limit for partners Less transparency

Perpetual succession No shares, only capital contribution

Less compliance vis-a-vis company Not attractive for angel / VC fundingBank funding
FDI is allowed under automatic route as per recent
Scaling up of business is difficult
change

Direct conversion to Private Limited Company not

LLP can sue & be sued in its name
possible at present

Individual immunity is available (except fraud) Dissolution of LLP is time-consuming

Better governance structure vis-à-vis partnership

Audit is required only if turnover exceeds Rs.40

lac/capital contribution exceeds Rs.25 Lacs

Tax benefit as a partnership firm

LLP Registration Process

• Step 1: Obtain Digital Signature Certificate (DSC)

• Step 2: Apply for Designated Partner Identification Number (DPIN)
• Step 3: Name Approval
• Step 4: Incorporation of LLP
• Step 5: File Limited Liability Partnership (LLP) Agreement
Documents required for LLP
• PAN Card/ ID Proof of Partner
• Residence Proof of Partners
• Photograph
• Passport (in case of Foreign Nationals/ NRIs) –
• Proof of Registered Office Address:
• Digital Signature Certificate
Private / Public Limited Company
• A public limited company is a joint stock company, that is not a
private company, and the shares of which are listed on a stock
exchange.
• A private company is a closely held company that does not have its
shares listed on any stock exchange and cannot be openly traded.
Number of members.
Public company advantage

• Directional insights from stakeholders

• Reduction in personal liabilities
• Improve branding and reputation
• Corporation link improvement and alternate growth
• Raise capital through public buyers
Public company disadvantage

• Potential loss of control

• A different direction for the business
• Stock market vulnerability
• Increase legal implication
Private sector advantages

• No minimum capital
• Limited liabilities
• Easy fundraising
• Easy shares transfer
• Uninterrupted existence
• Credibility building
Private sector disadvantages

• Restricted transferability in shares

• The number of shareholders cannot be exceeded 50
• It cannot use the prospectus to the public
• Stock exchange share cannot be quoted
 Private / Public Limited Company
• It is governed by the Companies Act, 2013
• It is a separate legal entity having perpetual succession
• The minimum number of members is 2 and maximum is 200 in case of Private
Limited Company.
• For Public Limited Company, the minimum is 7 and there is no maximum limit.
• Shares of Public Limited Company are freely transferable whereas it is not so in
a Private Limited Company.
• It is a highly regulated form of business structure and more transparent as there
is a requirement of compliance and disclosures in various stages.
• It is a form of structure which is most preferred by all the investors
 PRIVATE LIMITED PUBLIC LIMITED
BASIS FOR COMPARISON
COMPANY COMPANY
Meaning Private Limited Company Public Limited Company
refers to the company implies a company that is
which is not listed on a listed on a recognized
stock exchange and the stock exchange and
shares are held privately whose shares are traded
by the members openly by the public.
concerned.
Minimum number of 2 7
members
Maximum number of 200, except in case of one Unlimited
members person company
Minimum number of 2 3
Articles of Association It must frame its own It can frame its own
articles of association. articles of association
or adopt Table F.
Transfer of Shares The shares of a private The shares of a public
company are not company are freely
freely transferable, as transferable, i.e. freely
there are restrictions traded in an open
in Articles of market called a stock
Association. exchange.
Public Subscription Issue of shares or It can invite the public
debentures to the to subscribe to its
public is prohibited. shares or debentures.
Issue of prospectus Prohibited from issuing a prospectus. It can issue a prospectus or it can also
opt for private placement.
Minimum amount of allotment The company can allot shares, The company cannot allot shares
without obtaining minimum unless the minimum subscription
subscription. stated in the prospectus is obtained.

Commencement of Business It can start a business just after It requires a certificate of

receiving a certificate of commencement of business after it is
incorporation. incorporated.
Appointment of Director Two or more directors can be One Director can be appointed by a
appointed by a single resolution. single resolution.
Filing of Consent to act as Director Directors need not require the filing Directors must file their consent to
of their consent to act as a director. act as a director, within 30 days of
appointment with the Registrar.
Retirement of Directors by rotation The directors are not required to 2/3rd of the total number of
retire by rotation. The directors can directors must retire by rotation.
be permanent.
Place of Holding AGM AGM can be held anywhere. AGM is held at the registered office
or any other place where the
registered office is situat
Companies under section 25
• A “Section 25” company is registered under Section 25 of the
Companies Act, 1956
• This section provides an alternative to those who want to promote
charity without creating a Trust or a Society for the purpose. It allows
the formation of a company, which will exist as a legal entity in its
own right, separate from the person promoting it
• any company under this section must necessarily re-invest any and all
income towards promoting the said object or charity
• no money gets out of a Section 25 company
Companies under section 25
• Conditions for grant of License under Section 25
• a) Its objects should be only to promote commerce, art, science,
religion, charity or any other useful object
• b) Its should intend to apply its profits or other incomes only in
promoting its objects; and
• c) Central Government through the office of the Registrar of
Companies should have granted a license to such a company
recognizing them as such
Main Instrument – For a Section 25 Company, the main instrument i.e.
Bye laws are Memorandum and Articles of Association
Steps in opening co., u/s 25
1. APPLICATION FOR REGISTRATION
• application in E-Form 1A with a prescribed fee, presently, INR 1,000
• Six names in preferential order may be proposed in single application
• application should be made in writing to the Registrar of Companies
for granting of license
• Draft of the MOA and AOA of the proposed company
• Name, Address and Occupation of the promoters & members of
Board of Directors
• A statement showing details of assets and liabilities
Steps in opening co., u/s 25
• estimate of the future annual income and expenditure
• a brief description of the work proposed to be carried out
• A declaration by a Company Secretary or advocate or a chartered
accountant on NonJudicial Stamp Paper of the appropriate value.
• Declaration signed by all the promoters on Non – Judicial Stamp
Paper of the appropriate value
• Declaration on Non-Judicial Stamp paper that Memorandum &
Articles of Association have been drawn up in accordance with the
provisions of the act
Steps in opening co., u/s 25
3. GRANT OF APPROVAL: Registrar of Companies may grant the license
within 30 days from the date of filing of application
4. INCOME TAX PROVISIONS:
• The income of an NGO with a 12A certificate is exempt from taxes.
• it is treated in the same manner as treatment of income of a society or a
public charitable trust.
• Such Companies also can get itself registered under section 80G of the
Income Tax Act, 1956
• donor making the donation to such company will get a deduction of 50% of
the sum donated from its income
• The Company has to apply in Form10G to the Commissioner of Income Tax
for such Registration
Advantages/exemption of company reg u/s 25
• Dispense with the words ‘Limited’ or ‘Private Limited: helps the
company to enjoy its limited liability
• Partnership firm: A partnership firm is allowed u/s 25
• Minimum Paid up Share Capital: Companies Amendment Act, 2000,
have, however, been exempted from the requirement of minimum
paid-up capital
• Publication of Name: Section 25 Company is not required to mention
its name & address outside its office as required in case of all other
companies u/s 147
Advantages/exemption of company reg u/s 25
• Time and Place of AGM – Section 25 Companies are allowed to free to
determine the date, place and time of its AGM through its BOD
• Notice of AGM - allowed to hold an AGM after giving a notice of 14
days instead of 21 days
• Maintenance of Books of Accounts –required to maintain the Books
of Accounts of only 4 years instead of 8 years
• Increase in Number of Directors –free to increase its number of
directors without seeking approval of the central government
• Board Meetings –required to hold Board Meeting only once in six
months but instead of in a year
Advantages/exemption of company reg u/s 25
• No Stamp Duty- Section 25 companies are not required to pay Stamp
duty on registration of Companies as well as on increase of capital
• Quorum for Board Meetings – 1/4th or 8 whichever is less with a
minimum of 2
• Exemption from Companies Auditor Report Order 2003 –
• Foreign Funds: Section 25 Companies are recognized under Foreign
Contribution Regulation Act for receiving foreign contribution and
funds for carrying on charitable and religious activities
• Liability: Liability for repayment of debts and lawsuits incurred by the
Company, lies on it and not the owner
Advantages/exemption of company reg u/s 25
• Perpetual Succession: The Company shall continue ton exist till its
wound up in accordance with the provisions of the relevant law
• Easy Transferable Ownership: it is easier to become or leave the
membership of the Company or otherwise it is easier to transfer the
ownership
• Separate Property: A
Companies under section 25
• it is easier to start — being exempt from statutory requirements of
minimum paid-up capital.
• They are much easier to run than Trusts and Societies, as board meetings
require a smaller quorum and requirements for calling such meetings are
less rigid.
• It is easier to increase the number of directors,
• it is easier for people donating money to join or leave or transfer shares to
others, and such a company is obliged to fulfill far less stringent book-
keeping and auditing requirements as against a regular company
• Lastly, a Section 25 company enjoys significant tax benefits.
• Such companies are also exempt from stamp duty payments.
Companies under section 25
• Power to dispense with" Limited" in name of charitable or other
company – if
• A) is about to be formed as a limited company for promoting
commerce, art, science, religion, charity or any other useful object,
and
• B) intends to apply its profits, if any, or other income in promoting its
objects, and to prohibit the payment of any dividend to its members,
the Central Government may, by licence, direct that the association
may be registered as a company with limited liability, without the
addition to its name of the word" Limited" or the words" Private
Limited".
Companies under section 25
• A firm may be a member of any association or company licensed under this
section
• The licence may at any time be revoked by the Central Government
• upon revocation, the Registrar shall enter the word" Limited" or the words"
Private Limited" at the end of the name upon the register of the body to
which it was granted; and the body shall cease to enjoy the exemption
granted by this section
• Upon the revocation of a licence granted under this section to a body the
name of which contains the words" Chamber of Commerce", that body
shall, within a period of three months from the date of revocation or such
longer period as the Central Government may think fit to allow, change its
name to a name which does not contain those words
Franchising,
• refers to an arrangement between a franchisor and franchisee wherein the
latter acquires the rights to market and distribute the franchisor’s products
or services using its business plan, brand name, and trademarks
• Features
• Two Parties:
• Exclusive Right:
• Assistance
• Policies:
• Limited Period
• Payments:
Types of Franchises
• Product Franchises -Papa John’s, KFC, McDonald’s, and Burger
King
• Business Format Franchises-Soft drink bottlers
Advantages

• valuable feedback regarding customer choices, requirements, and

product popularity.
• expand their distribution chain quickly.
• Franchisees do not have to promote a product
• The risk for franchisees is low
• The franchisee’s financial investment is a source of capital for the
franchisor.
• Franchisors can acquire local business knowledge from franchisees
Disadvantages

• franchisees may tarnish the franchisor’s reputation

• Franchisors require a lot of resources to help franchisees
• Disclosure of confidential details to a competitor
• Franchisors impose various restrictions on franchisees;
• requires a substantial amount to acquire the rights to a franchise,
• there’s little room for changes.
Legal environment – patents, copyrights,
trademarks
• Patent: Patent is an exclusive right for an invention provided
by the law for a limited time to the Patentee
• By patenting an invention, the patentee is able to control
• the making,
• using,
• selling or importing of the patented product or process for
producing that product without his/her consent
Steps in patent procedure
1.capturing your idea for creating complete invention disclosure,
2.conducting a patentability search,
3.drafting a patent application,
4.filing the application,
5.publication of application,
6.examination,
7.responding to objections, and
8.grant of the patent.
Copyright

• Copyright is a right given by the law to creators of literary,

dramatic, musical and artistic works and producers of
cinematograph films and sound recordings
• copyright is mainly used to protect the creativity of writers,
artists, designers, dramatists, musicians, architects and
producers of sound recordings, cinematograph films and
computer software.
•.
Trademark
• Trademarks are mostly used to protect brand names,
business names, slogans and more
• It is a visual symbol which may be a word signature, name,
device, label, numerals or combination of colours used by
one Enterprise on goods or services or other articles of
commerce to distinguish it from other similar goods or
services originating from a different undertaking
significant advantages of trademark registration
istration
1. Legal Protection
2. Create an Intangible Asset
3. Get Exclusive Rights
4. Applying a Registered Symbol
5. Promotes Goods and Services
Process of getting Trademark
• 1. conduct a trademark search
• Submit an application- manual/e-filing 15 -20 days
• Examination of the application
• Publication of trademark –trademark journal
• Registration certificate- after 3 months
Basis Trademark Copyright Patent
It protects the expression
of ideas like artistic work. The patent protects the
Trademark protects any Artistic work includes work invention of the inventor
word, symbol, a design related to books, paintings, and gives an exclusive right
Introduction that identifies a business music and computer to the inventor over
and distinguishes the band Programme. Copyright his/her invention and it
from others. protection helps in also excludes others from
excluding others from using the invention.
using the work.
Significance Brand Identification Expression of Idea Invention

Govern by Trade Marks Act, 1999 Indian Copyright Act, 1957 Indian Patent Act, 1970

Protects distinctive mark, Protects Artistic & literary

Components Protects Invention
symbol or design work
Trademark registration is
not mandatory however it
There is no such Patent Registration is
Registration Requirement is advisable to get as it
registration required. mandatory.
gives exclusive right over
the mark/symbol.