Legal entity includes any individual, company or organisation that has legal rights or obligations which include tax filings. Any business that can enter into contracts either as a vendor or a supplier and can sue or be sued in a court of law comes under the ambit of legal entities. These entities are structures in such a way that they permeate a higher level of protection for strictly personal assets from lawsuits or penalties. Different types of legal entities provide different types of protectionist measures and also vary in terms of tax burdens.
About Legal Entities
Legal entities can also enter into contracts, assume the obligations of said contracts, borrow and pay debts, file suits and be named by other parties in suits. They can also be held accountable in the court of law for these lawsuits. Legal entity forms and types of legal entity can look different and have varying compliance and governance implications. These entities are issued a Legal Entity Identifier (LEI) which serves as a reference to connect companies with financial information. The laws and regulations that govern legal entities fluctuate drastically across jurisdictions therefore they are still not entirely fixed and keep changing over time.
There are several legal structures you can go for when setting up a business. For instance, sole proprietorship involves a person who owns an unincorporated business by herself and makes all the decisions while taking all of the risks. Partnership on the other hand allows business owners to share the responsibilities and profits of a company while clearly demonstrating the professional relationship between the partners from the outset. Limited Liability Company (LLC) is a hybrid between a general partnership and a corporation that offers the limited liability assurances without the penalty of double taxation.
How Do Legal Entities Affect Personal Liabilities?
You can always do business without forming a legal entity but the issue lies around liability. On who does the burden fall when things go wrong? When you are not registered as a legal entity, the line between business finances and personal finances and liabilities fades away. In other words, given a situation where your company is being sued or it falls into a debt, you can be held personally liable for it, seizing your personal assets to repay the debt or you’ll be sued in the court of law in place of your company.
If you are a simple handicraft artist selling simple crafts on sites like Etsy, you do not need to get into the complexities of legal entities. However, if you are a proper startup trying to scale and expand in the future, it is necessary for you to figure out the entity that suits your business the best in order to be safe in the future.
The laws and regulations that govern legal entities fluctuate drastically across jurisdictions therefore they are still not entirely fixed and keep changing over time.
Legal Entity Names
The legal entity name you choose for your business is what will build your reputation and make you known in the marketplace. It is very important to select a name that is compliant with laws governing business entity names. It is a huge responsibility and must be decided carefully after seeking legal advice.
Make sure you choose an original legal name before a business entity can be formed. This legal name may be changed later on however your business can have only one legal name at any given time. Make wise decisions to avoid unnecessary hassles and difficulties later on when you need to focus on other aspects of your business.
Types of Legal Entities:
A Joint Venture (JV) is a new business entity created via a partnership between foreign and Indian investors. In a joint venture, the partners jointly share the profits, losses, management responsibilities, and operation expenses. The main advantage of joint ventures is that the foreign company is able to utilize their well-established contact network, marketing channels and distribution channels along with the available financial resources of the Indian partner. Joint ventures also offer the investors to jointly manage the risks involved with the new business. This reduces individual risk exposure as investors are able to share their liabilities. Thus if something happens, they do not lose their entire investments and are not in the position to be in debt traps.
Examples of Joint Ventures in India:
- Hindustan Aeronautics Ltd
- Tata Global Beverages
- Fratelli Wines
Partnership Firm in India
A partnership firm forms a relation between people or investors who agree to share the profits of the business. They either carry out all operations together or one person acts in place of all while the others just invest. A partnership business requires a minimum of two people to start a business. The maximum cap limit on the number of partners is ten. A Partnership Firm is a type of Joint-Venture Company. The owners of a partnership firm are individually known as partners and collectively known as a firm. Within the business, the partners have unlimited liability and can share profits in any mutually agreed ratio.
Examples of Partnership Firms in India
- Red Bull and GoPro.
- Spotify and Uber.
- Levi’s & Pinterest.
- Maruti Suzuki.
One Person Company in India
A One Person Company (OPC) was introduced recently in India in 2013 and it is a new type of business entity in India. Incorporating an OPC is only permitted to a resident of India. No foreigner can incorporate an OPC. One person company can be owned only by a single individual. The concept was introduced so as to incentivise individual entrepreneurs to start their own business ventures. It falls under the category of a private company. But it can also be featured as a separate legal entity. The liability of the owner is limited in a one person company to avoid huge investment risks in case the ventures fail. Examples:
- R.H. AGRI INDUSTRIES (OPC) PRIVATE LIMITED
- AGRIFIRST FARM INDUSTRIES (OPC) PRIVATE LIMITED
Public Limited Company in India
Though the incorporation of Public Limited Companies in India can be difficult as well as time-consuming, several business investors and entrepreneurs go ahead with it. A Public Limited Company in India can have a minimum of three directors, a minimum of seven shareholders, and can have a maximum of unlimited shareholders. They can be listed in a stock exchange or remain unlisted. If the company is listed as a Public Limited Company in a stock exchange then its shareholders can freely trade the company’s shares. Being a separate legal entity, the company’s existence remains completely unaffected by retirement, death, or insolvency of its shareholders.
- Bharat Heavy Electricals Ltd.
- Bharat Petroleum Corporation Ltd (BPCL)
- Indian Oil Corporation Ltd.
- Oil and Natural Gas Corporation Ltd (ONGC)
Private Limited Company in India
A Private Limited Company in India is a privately held small business entity which is considered as an independent legal entity on incorporation. Private limited companies can have a minimum of one and a maximum of fifty shareholders. Unlike Public Limited Companies, these companies cannot publicly trade their shares. They can have a minimum of two and a maximum of fifteen directors.
Examples of Pvt Ltd Companies:
- Hindustan Coca-Cola Beverages Pvt Ltd.
- Malabar Gold Pvt Ltd.
- Mother Dairy Fruit & Vegetable Pvt Ltd.
- Parle Products Pvt Ltd.
Sole Proprietorship in India
A form of a business entity where a single individual handles the entire business organization is called Sole Proprietorship. The individual who handles the business will be the sole recipient of all profits and bearer of all losses to the business. The liability of the owner is unlimited. Such entities are suitable where the market is limited, localized, and customers need individual attention. If your business requires limited capital and risk factor is not that much then this type of company is the most appropriate for you. They involve less legal formalities as they do not have any legal existence. Coca-Cola, Apple, Hewlett-Packards, Amazon, Google, Mattel and Walt Disney all started out as Sole Proprietorships initially.
Branch Office in India
Branch offices in India involve foreign companies who are engaged in manufacturing and trading activities abroad that set up their offices in India. These companies are not allowed to carry out manufacturing activities on their own in their Branch Office. Commercial activities of any nature are not allowed for a Branch Office. However, they are allowed to subcontract manufacturing to any Indian manufacturer. Branch offices of foreign companies require approval from the Reserve Bank of India (RBI) before they begin operating at any part of the country.
Non-Government Organization (NGO) in India
Non-Government Organization (NGO) or Nonprofit Company is a citizen-based association that operates to serve some particular social purpose and they work independently of the government. The main thing that differentiates them from other organizations is that they are not focused towards gaining profits. Their main aim is to work for promoting a cause that leads to the betterment of society.
Examples of NGOs in India:
- Child Rights and You