The Companies Act, 1956 broadly classifies the companies into private and public companies and provides a regulatory environment based on such classification. However, with the growth of the economy and the increase in the complexity of business operations, the forms of corporate organisations keep on changing.
There is a need for the law to consider the requirements of different companies that may exist and seek to provide common principles to which all sorts of companies may refer while devising their corporate governance structure.
Difference between registering a company and a business
What Is a Business?
It is registered under Part B of the Companies and Allied Matters Act (CAMA). Section 574(1) CAMA makes it mandatory for every firm, individual, or corporation required to be registered under Part B to be registered within Twenty-Eight (28) days from the date of the commencement of the business for which registration is required.
What Is a Company?
It is registered under Part A of the Companies and Allied Matters Act (CAMA). Section 18 of CAMA provides that any two or more persons may form and incorporate a company by complying with the requirements of this Act in respect of registration of such company.
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Types of company registration
Company registration is the primary process by which business owners establish or incorporate their company. Since there are several types of companies in India, entrepreneurs have to choose a business type that suits their operations. In India, the Companies Act, 2013 provides seven different structures to set up a business:-
Private Limited Company
Private limited companies are suitable for businesses that require registration as private entities. In this type of company, shareholders distribute the liability amongst themselves to help protect their assets.
The total capital of such business types is the total of all the shares held by each company member. Also, the personal and business assets of the members are considered separate, allowing for better protection and security. The shares of such a company cannot be publicly traded or transferred.
As per the Companies Act, to be eligible for this type of business registration, the following criteria must be met:
- Minimum of two and maximum of fifteen directors.
- At least one of the directors must be an Indian resident.
- Minimum of two and maximum of 200 shareholders or members.
- Additionally, an authorised capital fee amounting to at least ₹1 lakh.
- Must have a registered office address within India.
Public Limited Company
A public limited company is one whose shares may be purchased by members of the general public. In such business entities, there is no limit on the number of shares sold or traded. Since the company’s claims are listed on the stock exchange, they can be traded freely, making the shareholders part-owners of the company.
Such companies need to obtain a registration certificate from the RoC before commencing business operations.
As per the Companies Act of 2013, the following criteria must be met to register as a public limited company:
- Minimum of three directors.
- At least one of the directors must be an Indian resident.
- Minimum of seven shareholders with no cap on the maximum limit.
- An authorised capital fee amounting to at least ₹ five lakhs.
- Must have a registered office address within India.
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Partnership Firm
In partnerships, the handling of operations is by partners who have agreed on the role and share in profits. The functions, duties, powers, and number of shares held are clearly defined in a verbal contract known as the partnership deed. These businesses fall under the purview of the Indian Partnership Act of 1932.
Partnership firms can function with or without a licence as long as they have a valid and registered partnership deed. However, most partnerships do register, giving them additional rights and benefits. The eligibility criteria to form a partnership are:
- Minimum of two and maximum of fewer than ten partners.
- Must have a registered office address within India.
- Must have a registered partnership deed signed by all partners.
Limited Liability Partnership
Popularly called an LLP, the limited liability partnership is a new company in India. It enjoys a separate legal status, helping distinguish between personal and business assets, and granting the entrepreneurs limited liability protection. In LLPs, the liability of each partner depends on the number of share capital.
To set up an LLP, the following criteria must be met:
- Minimum authorised capital amounting to ₹1 lakh.
- At least one of the designated partners must be an Indian resident.
- Minimum of two partners and no cap on the maximum number.
- At least one individual partner, if the rest are corporate bodies.
- No requirement for shared capital since each partner must have an agreed contribution.
One Person Company
The newest entry into the different types of company registration allowed in India is OPC, and it is great for small businesses. It is the best option for entrepreneurs who wish to run a trade independently. The OPC has a different legal status; entrepreneurs benefit from liability protection without having to partner with anyone else.
Since it involves only one individual, an OPC is easy to incorporate and regulate. It essentially serves as a combination of the sole proprietorship and private limited company model of business entities.
To register as an OPC, the following criteria must be fulfilled:
- Minimum authorised capital amounting to at least ₹1 lakh
- The individual must be a natural Indian citizen and resident
- The promoter must appoint a nominee during the incorporation
- Financial businesses cannot incorporate as an OPC.
Sole Proprietorship
A sole proprietorship is where a single individual handles the running of the business. The company and the owner are considered single entities, making them solely responsible for profits and losses. Since the registration bears the owners’ name, tax filings and accounting reports will also bear the owner’s name, leading to unlimited business liability.
That said, it is the simplest form of business to set up and run. Home business owners prefer this as it does not require much investment or compliances.
Section 8 Company
Commonly called a non-profit organisation, Section 8 companies work for charitable purposes. The purpose is to promote arts, science, literature, education, caring for the needy, and protecting the environment. Moreover, all their profits are used to achieve these objectives, and the members do not take dividends for themselves.
To register a Section 8 company, you must meet the following criteria:
- Minimum of two shareholders.
- Minimum of two directors, and they can be shareholders as well.
- At least one of the directors must be an Indian resident.
- No minimum capital requirement.
- Must have a registered office address in India.
Why should companies get registered?
Easy Transferability
Transferability or sharing of ownership of a business is a major hurdle in unregistered business entities. Proprietorships cannot be transferred as they are an extension of the proprietor, and it is also hard to define the assets belonging to an unregistered partnership firm.
On the other hand, as a registered business entity like a company or LLP, the business is considered a separate legal entity with assets and liabilities distinct from its promoters. Hence, transferring or sharing the ownership of a registered business is easy.
Opening Business Bank Account
The process for opening a bank account for a proprietorship or partnership firm is cumbersome, as the business entity has no legal proof of existence. Hence, in the case of a proprietorship firm or unregistered partnership firm, one must establish the presence of a business through various tax registrations in the name of the firm to open a bank account.
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On the other hand, for a company or LLP, the Ministry of Corporate Affairs establishes the business’s existence by way of a certificate of incorporation and memorandum of association. Hence, opening a bank account is not easy without submitting a copy of the certificate of incorporation and memorandum of association.
Funding for the Business
Funding in debt or equity is an important requirement for any business. It is impossible to syndicate equity funding for unregistered business entities like a proprietorship firm or partnership firm. Also, starting a proprietorship firm or partnership firm for a business with plans for syndicating equity funding would be a mistake.
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As most banks and financial institutions prefer to lend to registered business entities. Hence, it recommends highly to register a business if there are plans for raising debt or equity funds in the business’s name.
Meeting Buyer Criteria
Most large businesses with supplier selection criteria prefer to do business with a registered business entity than an unregistered business entity. Hence, writing a company can make the firm eligible to meet buyer criteria, participate in tenders and meet various requirements set by buyers or customers.