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Forms of Legal Entities

Forms of Legal Entities Class XII

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Varun Vishwanathan
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29 views12 pages

Forms of Legal Entities

Forms of Legal Entities Class XII

Uploaded by

Varun Vishwanathan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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🎓 Class 12: 2024-25 ⚖️ Legal Studies Unit 4: Topics in Law ...

Forms Share

Forms of Legal Entities:


Objective of Law Regulation of Legal Entities
The purpose of law regulation of forms of legal entities is to provide
a framework for the creation, management, and dissolution of
different types of organizations, such as corporations, partnerships,
and sole proprietorships. These regulations aim to protect the rights
and interests of stakeholders, including shareholders, employees,
customers, and creditors, and to ensure the fair and transparent
functioning of these entities within the legal and economic system.
Additionally, law regulations of legal entities may also promote
competition, prevent fraud and misconduct, and provide a clear
understanding of responsibilities and liabilities.
Types of legal entities in India
Sole Proprietorship
Sole proprietorship is a popular form of business organisation
and is the most suitable form for small businesses, especially in
their initial years of operation. Sole proprietorship refers to a
form of business organisation which is owned, managed and
controlled by an individual who is the recipient of all profits and
bearer of all risks. The word “sole” implies “only”, and “proprietor”
refers to “owner”. Hence, a sole proprietor is the one who is the
only owner of a business. It is the easiest type of business to
establish or take apart, due to a lack of government regulation
Features:
Advantages
Quick decision making
Confidentiality of information
Owner receives all the profits
Owner makes all decisions and is in complete control of the
company
Easiest and least expensive form of ownership to organize
Easy of formation and closure
The business does not pay separate taxes. All income passes
directly to the owner and is taxed at the owner’s personal tax
rate.
Disadvantages
Unlimited liability if anything happens in the business
Limited in raising funds
No separate legal status
Limited funds and resources
Limited skills and managerial ability of the proprietor
Partnership
The Indian Partnership Act, 1932 defines partnership as “the
relation between persons who have agreed to share the profit of
the business carried on by all or any one of them acting for all.”
Persons who have entered into partnership with one another are
called individually, “partners” and collectively “a firm” and the
name under which their business is carried on is called the “firm-
name”.
Features:
Advantages
Easy to establish (with the exception of developing a
partnership agreement)
Separate legal status to give liability protection
Partners may have complementary skills
Start up cost is low
More capital is available for business
Disadvantages
Partners are jointly and individually liable for the actions of
the other partners
Profits must be shared with the partners
Divided decision making
Business can suffer if the detailed partnership agreement is
not in place
Limited Liability Partnership
A limited liability partnership (LLP) is a body corporate formed
and incorporated under the Limited Liability Partnership Act,
2008. A Limited Liability Partnership (LLP) is a type of business
that combines the benefits of limited liability with the flexibility of
a partnership. It allows members to organize their internal
structure based on an agreement. This type of business is
suitable for entrepreneurs, professionals, and enterprises that
provide services or engage in scientific and technical disciplines.
It is also a good option for small enterprises and for investment
by venture capital due to its flexible structure and operation.
Features:

Advantages
The terms and conditions of an LLP are based on a mutually
agreed LLP agreement, providing greater flexibility and ease
The cost of registering an LLP is lower than incorporating a
public or private limited company.
Partners are only liable up to their agreed contribution, and
there is no joint liability created by the actions of another
partner.
The registration process is simpler compared to that of a
company.
Remuneration, voting rights, and other aspects are clear and
defined in the LLP agreement, with no restrictions on partner
remuneration as long as it is authorized by the agreement.
The LLP can sue and be sued in its own name, protecting
partners from being personally sued for the LLP’s debts.
There is greater flexibility for becoming a partner, leaving the
LLP, or transferring interest in the LLP.
Partners are free to enter into any contract, and the LLP
enjoys higher credit-worthiness compared to a partnership,
although lower than a company
There is no mandatory requirement for auditing accounts, and
the LLP can raise funds from private equity investors and
financial institutions.
Disadvantages
Actions taken by one partner without the consent of others
can bind the LLP. In some cases, partners may also be
personally liable for the LLP’s debts.
The winding-up process, as outlined in the Limited Liability
Partnership (Winding Up and Dissolution) Rules, 2012, can be
lengthy and costly.
LLPs have lower credit-worthiness compared to companies.
LLPs are required to file annual statements of accounts and
solvency, as well as an annual return with the Registrar of
Companies, which is not a requirement for partnerships.
Private Limited Company
A Private Limited Company is a separate legal entity registered
under the Companies Act, 2013. It is a type of business entity
that is owned by a small group of individuals and registered for
specific business objectives. It is a popular choice for startups
and businesses with high growth aspirations due to the limited
liability protection it offers to shareholders and the flexibility it
provides in terms of ownership and management structure.
Features:

Public Limited Company


A public limited company is recognised as a separate entity from
its owners and has the ability to enter into agreements in its own
name. It operates independently from its owners and has its own
set of rules, obligations, regulations and legal rights. The owners
run the company but have limited liability for its debts and
obligations. The owners of a public limited company are referred
to as shareholders or stakeholders, and the ownership of the
company is divided into units known as shares or equity shares.
These units of ownership can be held by multiple individuals or
corporations, making it easier for the company to raise capital by
selling shares to the public. The shareholders have a right to
participate in the decision-making process of the company and
receive dividends from the company’s profits.
Features:
Difference between Public and Private Ltd Companies
One Person Company (OPC)
As per Section 2(62) of the Companies Act 2013, “one person
company” means a company that has only one person as a
member.
Comparative Evaluation of some forms of Business Entities

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