Types of business organization

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In this MBA presentation topic, we are going to discuss various types of business entities that can be started in India along with the rules and regulations associated with each firm. Different types of business organization are

  • Sole Proprietorship 
  • Partnership Firm
  • Private Limited Company
  • Public Limited Company 
  • Charitable Organization

Sole Proprietorship

For sole proprietorship, registration is not required. Liability associated with this type of business entity is unlimited. It is generally started by Professionals for small business. There is no Separate Legal Entity associated with it.

Partnership

The rules and regulation of a partnership firm is defined in Section 11 of the Companies Act, 1956. Partnership firm consisting of more than 20 persons can't be formed, Indian Partnership Act, 1932 Section 4. Partnership is the relation between persons who have agreed to share profits of business carried on by all or any one of them acting for all other partners. Here too, there is unlimited liability. Registration is not Compulsory for these kind of firms.

Company

Companies are run based on Governing Act – Companies Act, 1956. Special Features of Company are

  • Company is a Separate Legal Entity
  • Companies can sue and be sued in its own name
  • When it comes to liability of the shareholders, liabilities get limited based on the extent of their shareholdings 
  • Company is distinct from its shareholders
  • Companies can acquire and hold property in its own name

Types of Companies in India

DESCRIPTIONSPRIVATE COMPANYPUBLIC COMPANY
  Which by its article restricts: Numbers of members to 50 Transfer of shares Cannot give Invitation to public to subscribe its debenture, shares etc. Acceptance of deposits from person other than its shareholders and directors Which is not * private
Governing Laws Companies Act, 1956 Companies Act, 1956 - SEBI Act, 1992 and allied laws.
Incorporation Time 2 to 3 weeks   2 to 3 weeks  
Minimum No. of Shareholders 2 (Two) 7 (Seven)  
Maximum No. of shareholders 50 (Fifty) No limit
Minimum Paid up Capital INR 1,00,000/- INR 5,00,000/-  
Transferability of Shares Restricted Freely. If company is listed then through stock exchange(s)  
Minimum No. of Directors 2 3
Whether a Foreigner can be Director Yes Yes
Whole Time Director (WTD) / Managing Director (WTMD): Appointment Appointment not compulsory and No restriction on appointment Appointment : Not compulsory, If paid up capital < Rs. 5 Cr. Compulsory. If paid up capital => Rs.5 Crs
WTD / WTMD: Remuneration No restriction As per schedule XIII, otherwise permission of Central Government.
Foreigner as WTM D / WTD No restriction With the approval of Central Government  
Loan to Director etc. Yes With the previous approval of Central Government
Contracts with Director etc. Yes With the consent of Board, If paid up capital of the company is (One) 1 Cr. or more, approval of Central Govt. is necessary
Loan, Investment & Guarantee by the company No restriction Some restrictions

Charitable Organization

A charitable organization can be a Trust, Society or Section 25 Company. There is no restriction on the type of business an organization can do and amount of profits it can generate. The main difference between a charitable organization and other entities are, the profits cannot be distributed to Shareholders / trustee.

Regulatory Bodies in India

  • Foreign Investment Promotion Board (FIPB) 
  • Reserve Bank of India (RBI) 
  • Security Exchange Board of India (SEBI) 
  • Registrar of Companies (RoC) 
  • Trade Mark Registry (TMR) 
  • Director General of Foreign Trade (DGFT)

FDI In India

Automatic Route for FDI is not available for Domestic Airlines, Petroleum Sector (except for private sector oil refining), Investing companies in Infrastructure & Services Sector , Defense and Strategic Industries, Atomic Minerals, Print Media, Broadcasting, Postal services, Courier Services, Establishment and Operation of satellite, Development of Integrated Township and Tea Sector. 

FDI is Prohibited in Retail Trading, Atomic Energy, Lottery Business, Gambling and Betting, Housing and Real Estate business, Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisiculture and Cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea plantations)

How a Foreign Company can enter into India?

A foreign company can enter India via one of the following ventures.

  • Liaison Office
  • Branch Office
  • Project / Site Office
  • Joint Venture
  • 100 % Wholly Owned Subsidiary

Liaison Office

Permitted activities for a Liaison Office in India are 

  • Representing in India the parent company/group companies.
  • Promoting export import from/to India.
  • Promoting technical / financial collaborations between parent / group companies and companies in India.
  • Acting as a communication channel between the parent company and Indian companies.

Procedure for setting up Liaison Office

  • Apply in Form FNC-1 in quadruplicate to RBI
  • English version of the certificate of incorporation / registration attested by Indian Embassy / Notary public in the country of registration.
  • Latest balance sheet of the applicant company / firm.
  • Certified photo-copy of the agency Agreement, if any, with parties in India.
  • Photo-copy of the Agreement / draft- Agreement / correspondence indicating the terms of appointment of the proposed representative duly authenticated by the applicant.
  • Where applicable, certified photocopy of Government of India’s approval for undertaking projects in India.
  • Where applicable, certified photocopy of the contract / Agreement for undertaking activities / rendering services.

Liaison Office

Conditions Imposed While Granting Permission are 

  • No commission / fee will be charged or any other remuneration received by the Indian office of the foreign company for its liaison activities in India.
  • Except the liaison work, the office will not undertake any activity of a trading, commercial or industrial nature without the prior permission of RBI
  • The entire expenses of the Indian office will be met exclusively by remittance from abroad through normal banking channels.

Branch Office

Permitted activities

  • Export/Import of goods
  • Rendering professional or consultancy services. 
  • Carrying out research work, in which the parent company is engaged.
  • Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
  • Representing the parent company in India and acting as buying/selling agent in India.
  • Rendering services in Information Technology and development of software in India.
  • Rendering technical support to the products supplied by parent/group companies.

Joint Ventures

Joint Ventures are of two types

  • Incorporated Joint Ventures 
  • Contractual Joint Ventures
    • Financial Joint Venture
    • Technical Joint Venture

Essentials for Joint Ventures

  • Name of the JV
  • Shareholding Pattern
  • Funding and Financing of JV
  • Constitution of Board of Directors, Powers of Directors, Meeting 
  • Transfer of shares, right of refusal, buy out provisions
  • Non disclosure, non competition, IPR’s
  • Governing laws, Dispute resolution
  • Verify Limit of FDI permitted in proposed JV
  • Drafting of Moa & Aoa in accordance with JV Agreement 
  • Incorporation of JV company
  • Private & Public JV Company

100% Wholly Owned Subsidiary

  • Verify FDI for 100% WOS
  • Incorporation of WOS
  • Private & Public WOS
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