Different Types of Business Entities In India

Business enterprises can be broadly divided into two broad categories, namely, one which is non-corporate in form and the other which has a corporate character. Enterprises which fall in the former category are sole proprietorship, partnership and Hindu Undivided Family. Business organisation which comprises the latter category, are companies and co- operative undertakings. The basic difference between the corporate and the non-corporate form of organisation is that while a non-corporate form of business may be started without registration, corporate bodies cannot be set up without registration under the laws which govern their functioning.

Following are different types of business entities in India

Item: Different Types of Business Entities In India
Author: Muhammed Fasil K

Non-Corporate Form of Business Enterprises

1. Sole proprietorship:

In this form of business organisation, an individual normally uses his own capital, skill and intelligence to carry out some business activity. He is entitled to receive all the profits and gains of his business and also assumes all the risk of ownership. The sole proprietor exercises full control over the affairs of his business. As there is no legal obligation to supply any information regarding his business to anyone, he can maintain maximum secrecy in conducting his business affairs. This type of organisation is particularly suitable for businesses which are small in size and where risk and capital involved are not very large.

2. Joint Hindu Family/Hindu Undivided Family:

In this form of business ownership, the business is generally managed by the father or some other senior member of the family called the Karta or the manager. ‘Karta’ is basically the senior most male member of the family. The joint Hindu family firm comes into existence by the operation of Hindu Law and not by any contract.

3. Partnership:

In this form of organisation, few like-minded persons pool up their resources to form a partnership firm. Section 4 of the Partnership Act, 1932, defines partnership as “The relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. This definition chiefly brings out the following features of partnership:

a. Contractual Relationship:- Since partnership arises out of agreement between persons, only those persons who are competent to contract can be partners.

b. Existence of business:- There can be no partnership without business. The persons who have agreed to become partners must carry out some business activity.

c. Sharing of profits:- The agreement to carry on business must be entered into, with the object of making a profit and sharing it among all the partners.

d. Mutual agency:- The business must be carried on by all the partners or by any one or more of them acting for all the partners. Thus each partner is both an agent and a principal for all other partners.

Partnership is an ideal form of organisation for medium scale business operations which require greater amount of capital and risks than sole proprietorship or Hindu Undivided Family.

Corporate Form of Business Enterprises

1. The Co-operative Organisation:

Co-operative organisation is a voluntary association with unrestricted membership and collectively owned funds, organised on democratic principle of equality by persons of moderate means and incomes, who join together to supply their needs and wants through mutual action, in which the motive of production and distribution is service rather than profit. Besides being a form of ownership co-operative organisations are a means of protecting the interests of the relatively weaker sections of society against exploitation by big businesses operating for the maximisation of profits. The basic feature which differentiates the co-operative organisation from other form of business enterprises is that its primary motive is service to the members rather than making profits. A co-operative society is required to be registered under the Co-operative Societies Act, 1912. The co-operative societies receive a number of special concessions from the law and the Government, in order to encourage healthy development of Co-operatives.

2. Company:

This type of organisation is characterised by the fact that ownership and management are separate. The capital of the company is provided by a group of people called shareholders who entrust the management of the company in the hands of persons known as the Board of directors. A company is an artificial legal person created by process of law which makes it an entity separate and distinct from its members who constitute it. As a natural consequence of incorporation and transferability of shares, the company has perpetual succession. Thus, it can be said that this form of organisation is suitable when the capital requirements of a business are large, the liability of members is expected to be limited and the risks need to be spread among a larger number of persons.

Limited Liability Partnership (LLP)

LLP is an alternative business vehicle that gives the benefits of limited liability company and flexibility of a partnership firm. Since, LLP contains elements of both ‘a corporate structure’ as well as ‘partnership firm structure’; it is many a times termed as a hybrid of a company and a partnership. LLP is a separate legal entity which can continue its existence irrespective of changes in its partners. LLP is an incorporated partnership formed and registered under the Limited Liability Partnership Act, 2008.

Owing to flexibility in its structure and operation, LLP is useful for small and medium enterprises, in general, and for the enterprises in services sector, in particular. LLP is also very suitable for professionals like company secretaries, chartered accountants, cost accountants, advocates etc. as it helps them to form multi disciplinary limited liability partnership firms.

Forming a choice

Though there are some similarities between a limited company and other forms of associations, there are a great number of dissimilarities as well. In both the cases individuals are the subjects, and pursuit of business activity is generally the object. Distinction between a limited company and a partnership firm, limited liability partnership, a Hindu Joint family business and a registered society has been discussed in detail in the study of Company Law of Module I of Executive Programme. Taking into account the requirement in each case and all the aspects of the various forms of business entities, the decision on the right type of business entity should be taken.

Draft Sample Format Limited Liability Partnership (LLP) Agreement

Specimen Formation Agreement Deed To Convert Partnership Firm Into a Limited Company

E-book on draft resolutions and procedures

Different Types of Business Entities In India