Understanding the forms of business entities: Types of company formation
Author : Senior Writer at Chatur Ideas
Posted : 3 years ago
  • Understanding-the-forms-of-businesses

Few weeks ago we gave you some imperative tips and knowledge on how to register your startup via Inc-29 form. We also provided you with crucial key insights on various forms of businesses and what an entrepreneur should know before registering his or company. Today we will understand the forms of organisations in a more elaborate manner. ‘Company’ is one of the simplest form of entity that can control and exercise various complexities of business. Company is different from the founder and it cannot be used interchangeably. Even if the founder of the company dies, the Company still survives. The Company board may have additions/deletions in this case..

There should be at least one or more director in a company depending upon its type and he or she should be a resident of India. Directors fundamentally handle and manage the affairs of the company. Although, company itself is a separate legal entity, but it cannot function on itself. Simply put, the people who take the decisions for the company are called the directors of the company.

Note: Every company name ends with the word ‘Limited’ which implies that the company has limited liability.

There are specifically three types of companies in India and they are

  1. One Person Company

  2. Private Limited Company

  3. Public Limited Company

 

  1. One Person Company (OPC):

OPC is more like a processed version of Proprietorship. OPC enjoys all the perks of being a limited liability company and only one person is required to form this type of company. The Legal cost of running such type of firm is minimalistic. Although it’s more flexible as there are few rules to govern it, but it also has some shortcomings. For e.g. If you are an OPC, and your turnover crosses the limit of Rs. 2 Crores than the owner is required to convert his OPC firm into a private limited. To add to the disadvantages list, as an entrepreneur you cannot raise funds when you are having an OPC.

  1. Private Limited:

This is the most preferred form of business. A Private Limited firm can be formed by two people. This form of business is mostly used by startups because the owners of these type of businesses can do multitude number of complex business transactions . For instance, they can raise capital by selling stakes, they can issue ESOPs (Employee Stock Ownership Plan), etc. Both OPC and Private Limited firm require at least Rs. 1 lakh minimum capital.

Although, Private Limited is the most trusted form of business,but if the legal compliances for the firm are not handled wisely, an entrepreneur can land himself in the hot water as it leads to various forms of penalties.

  1. Public Limited:

This is one of the most powerful forms of businesses entities in India. Minimum of seven people are required to form a Public Limited firm. Some advantages are that these businesses can raise large capital sum and there is no upper limit to the number of shareholders. Shares are easily transferable and hence have more liquidity.

Public Limited are permitted to list their shares in the stock markets. According to Entrepreneur.com, going public with your company is equal to increasing your company valuation by staggering 10 to 15 times. The minimum capital required to start a Public Limited is Rs. 5 Lakhs. Starting a Public Limited company is however an expensive affair and is time consuming, albeit the status itself proliferates the value of the business instantaneously.