Benefits of Incorporated Business
An incorporated business means a business entity registered and incorporated under any Law. In India, 'Limited Company' and 'Limited Liability Partnership' are the incorporated business forms. Limited Companies are classified as One Person Company (OPC), 'Private Limited Company' and 'Public Limited Company'.
Limited Company is registered and administered under the provision of Companies Act, 2013 and Limited Liability Partnership is registered and administered under the provision of Limited Liability Partnership Act 2008.
Benefits of Incorporated Business
An incorporated business ('Limited Company' and 'Limited Liability Partnership') has the following advantages:
An incorporated business is the most accepted business organization the structure and is well known to the public
The owner's liability is limited to the extent of agreed capital contribution to the business and ends once he pays agreed capital.
Protection of Personal Assets of owners:
As the liability of owners is limited, their personal assets are protected against the business risk as the company's liability is not the liability of its owners.
Assets and liabilities of an incorporated business belongs to itself and do not belong to the share owners. Hence, an incorporated business will continue to be in existence even if the owner changes.
Can sue and be sued
An incorporated business is an artificial person created by law. Like any other person, it can sue and be sued before the court of law. This means that if an incorporated entity defaults, others can take legal action against the entity and likewise the business can take legal action against defaulters
Concept of Limited Liability
Limited liability means that the personal financial liability of an investor in a business limited to the extent of a fixed amount that one has agreed to invest in a company or a limited liability partnership. In other words, the investor is not personally liable for the business debts and liabilities of the Limited Company or Limited Liability Partnership. In the unfortunate event of winding up of the business, the investor's liability is limited to the unpaid amount of agreed contribution by shares or otherwise.
On the contrary, the liability of sole proprietors and partners in general partnership are unlimited and even their personal assets are exposed to pay off the business debts and other business liabilities.
The Directors run the day to day business of a Company and are liable to comply with the various requirements specified under law. In the case of an LLP, Designated Partner is responsible for the legal compliances of an LLP. In case of any non-compliance, Directors and Designated Partners are held responsible personally.
Usually in a Company, the shareholders are the Directors and in an LLP, the Partners become designated partners. In their role as a Director or Designated Partner, their liability is unlimited, as they are exposed to penal provisions under the law for the non-compliance of respective regulations.
Selection of Suitable Business
Selecting correct business structure is very important for the success of any business. This is based on many parameters including your present plan and future plan, number of partners, investment required, foreign investment, area of operation, ability to take risk etc. below are the some of the points which helps you to select business form.
Business Risk and Personal Assets:
The possibility that a business will have lower than anticipated profits, or that it will experience a loss rather than a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, overall economic climate and government regulations. If someone do business as partnership or proprietorship and if he/she incurs loss or business create some liability, then creditor can recover from the assets of business owners. But in case of Company or LLP, the liability is limited to the extent of their investment and no one can claim more than the committed amount. So, in case of businesses with more risk, LLP or Company would be ideal.
Incorporated businesses like LLP and Company have more acceptance than partnership or proprietorship. This is because, all information regarding the partners, directors etc are available in the public domain. This give more acceptance to LLP and Company compared to Partnership or Proprietorship
If your business has foreign investors, the best option is Company. It is also possible to have foreign investors in LLP subject to central government approvals.
Proprietorship is taxed as individual income of the proprietor. In partnership and LLP, tax is at 30.9% after partner's salary which is taxed as personal income of partners. No tax payable on Profit after tax in partnership and LLP. In Company, 30.9% is the tax rate plus surcharges and profit distribution also attract tax at 16% plus surcharges.
In LLP and Company, business will continue irrespective of changes in the owners.
Selection of Best Business Structure
You can select any business organization based on your requirements. Usually people go for Company or LLP as both are organized business structures and hence enjoy better acceptance among corporate, government, bank and the public at large.
- Guarantee Company is a sub classification of Private and Public Companies. Usually it does not have share capital but instead has members who act as guarantors. The guarantors give an undertaking to contribute a nominal amount (typically very small) in the event of the winding up of the company. This type of company may also have capital and in that case, members are liable to pay the capital amount taken as well as the guarantee amount.
Usually these companies are formed for Clubs and associations wherein members are not looking for profit.
- Producer Company is another classification of Private and Public Company. These types of companies have the features of co-operative societies. Only 'primary producers' or 'producer institution' can form a producer company and participate in the ownership of such companies.
'Primary Producers' means people engaged in the process of Primary Produce. Primary produce means produce of farmers arising from agriculture including animal husbandry, horticulture, floriculture, pisciculture, viticulture, forestry, forest products, re-vegetation, bee raising and farming plantation products: produce of persons engaged in handloom, handicraft and other cottage industries: by - products of such products; and products arising out of ancillary industries.
Producer Company shall deal primarily with the produce of its Members for carrying out any of any of the following objects:
- production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import of goods or services for their benefit and may carry on any of the activities specified in this clause either by itself or through other institution;
- processing including preserving, drying, distilling, brewing, venting, canning and packaging of produce of its Members;
- manufacture, sale or supply of machinery, equipment or consumables mainly to its Members;
- providing education on the mutual assistance principles to its Members and others;
- rendering technical services, consultancy services, training, research and development and all other activities for the promotion of the interests of its Members;
- generation, transmission and distribution of power, revitalisation of land and water resources, their use, conservation and communications relatable to primary produce;
- insurance of producers or their primary produce;
- promoting techniques of mutuality and mutual assistance.
- welfare measures or facilities for the benefit of Members as may be decided by the Board;
- any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i) or other activities which may promote the principles of mutuality and mutual assistance amongst the Members in any other manner.
- financing of procurement, processing, marketing or other activities specified in clauses (a) to (j) which include extending of credit facilities or any other financial services to its Members.
The main features of a Producer Company are:
- The registered producer company will be treated as a private limited company.
- Ten or more 'Primary Producers' are required to form a producer company. As in the case of private company, Minimum of two persons cannot get them registered.
- The maximum number of members can exceed 50.
- Maximum number of Directors shall be 5.
- Minimum Authorised and paid-up capital should of Rs.5 Lakhs.
- It shall never become a public limited company.
- The liability of the members is limited to the unpaid amount of the shares held by them.
- Profit share will be in the ratio of business contribution and investment