For every business, a good team comes into being when the separate individuals that work together, create, in essence, another separate higher entity which is better than any of those individuals can ever be on their own. This is how a business entity works.
A business entity is an organization or a structure established as a separate legal form and is created by one or more individuals to carry on a trade or business. The concept of business entity was introduced to separate individuals from their business and consider the two as distinctive, and separate identities. A business entity is an organisation set-up by the business owners after considering factors such as the size of the business, the nature of the business, the number of members involved, capital requirements, etc.
Why Do You Need A Business Structure?
The reasons why it is necessary to register a small business as a business entity is-
- For the purpose of taxes and to keep the taxation of the business separate from that of the individuals.
- Along with taxation, it helps to ease the audit process.
- It also helps to measure the performance of the business with respect to profitability and cash flow.
- It also helps to gauge the financial position and progress of the business, on any given day.
- The formation of a business entity creates a reputation in the market for the said particular business and helps it to gain the trust of the customers/clients.
- Since all businesses follow the concept of business entities and register themselves as one, it helps to compare the overall performance and progress of the particular business with others.
Types Of Business Entities
There are a number of business entities to choose from for a small business, with the popular choices being a company, a public limited company, a private limited company, a limited liability company, and a partnership among a few others.
- Proprietary Concern OR Sole Proprietorship
This type of business entity is an unincorporated concern which does have a separate legal identity and has a single owner (or a married couple who jointly own the business). This entity is not governed by any specific Government Act and the proprietor of the business is the sole, unlimited authority for all the decisions and responsibilities related to the business.
- Partnership Firm
A Partnership firm is formed by two or more people who want to do business and earn profits. It is a registered form of business and for its incorporation requires a written agreement containing responsibility, profit sharing ratio, and capital investment made by, of each partner. A partnership is governed by the Indian Partnership Act, 1932. Every partner shares an unlimited liability and profit share is according to the agreed-upon ratio.
A Company is a legal entity that is incorporated under a Governing Act and is composed of a team of people, known as members wherein the liability of the members or shareholders is limited to their shareholding within the Company. The business structures belonging to this entity are usually governed by the Companies Act, 2013. A company is further divided into the following types:
- Private Limited Company
This type of a company is private and thus restricts shareholders from transferring their shares. The number of shareholders is limited to 200. It cannot invite the public to subscribe to its debentures and shares. Additionally, there is no minimum paid-up capital requirement to start the company.
- Public Limited Company
This type of company requires a minimum of 7 shareholders, but there is no upper limit for the maximum number of shareholders. There is no restriction on share transfer. Liability of shareholders is dependent on their shares in the company. Inviting the public to subscribe to its shares is allowed. A public limited company has no minimum paid-up capital requirement.
- Limited Liability Partnership (LLP)
This is a type of business entity that combines the features of a company as well as partnership and is governed by the LLP Act of 2008. This type requires at least two designated partners and one of the partners should be necessarily an Indian resident. Further, the liability of the partners is equivalent to their contribution while forming the LLP.
What Is A Partnership Business?
While starting a business, if the business is going to be owned by more than one individual then a partnership is a suitable choice to make. This is because for a small business a single great partnership with the right person can have an incredible impact on the success of the business. However, to make a decision it is important to know what is a partnership business and how does it work.
A partnership business can be defined as a specific kind of legal relationship where the partnership is formed by the signing of an agreement between two or more individuals to conduct business as co-owners of the business. The terms and levels of involvement might vary according to the business and the type of partnership. A partnership involves the pooling in of money by the partners towards a common goal or purpose. The skills and resources of the individual partners are shared in a partnership, along with sharing the highs and lows experienced in the business while it makes profits and losses. The minimum number of partners required is 2 while the upper limit is a maximum of 10 partners in the banking-related business and 20 partners in a non-banking business.
Thus, summing up, the partnership firm agreement drawn between the partners includes details regarding-
- The capital contribution
- The ratio of the profit to be shared
- The details of the partners
- The nature of the business
- The working of the firm
- The dissolution/liquidation of the firm
How Does A Partnership Work?
One an entrepreneur is aware of the partnership business definition, the next step involves getting to know how a partnership works.
Similar to a proprietorship, the partners within the partnership firm are equally and jointly responsible for the running of the business and for all its ups and downs, including the profits and losses made by the business. Thus the liability of the partners is equal and complete for all the decisions and actions of the partnership. Even though the partners have unlimited liabilities they are saved from the long procedures and paperwork required while filing the financials of the business with the regulatory authorities. There are no legal formalities involved in the day to day functioning or filing and taxation scheme involved in a partnership once the agreement is drawn. The partnership income tax is paid by the partnership, but the profits and losses are divided among the partners, and paid by the partners, based on their agreement. Thus the profits and losses are ‘passed through’ to the partners. Decisions within the partnership can be made easily and quickly given the limited number of partners. Also, the dissolution of the partnership can be done easily via the consent of the partners and does not need legal formalities. Similarly, in the case of succession, the legal heir of a deceased can succeed the partnership including and with the consent of the other partners.
Incorporation And Application Of Partnership
A partnership is formally incorporated when it is registered under the Indian Partnerships Act, 1932 and a partnership firm agreement is drawn up. A partnership business is easy to incorporate as it has now become online and the registration process is also online. Also, the partnership firm registration documents required are not many. The mandatory documents required for the registration include-
- Application to be filed online for registration of Partnership Firm in Form A (On https://rof.mahaonline.gov.in/ website in case of Maharashtra)
- Covering letter along with a Court Fee Stamp of Rs 5/- denomination.
- Certified Copy of the Partnership Deed, that has been certified by an Advocate or a C.A
- Certified copy of the translation of the Partnership Deed in the local State language, Marathi in the case of Maharashtra.
- A blank stamp paper of Rs. 10/- or more in the name of Partner or firm.
- An authorization letter signed by all the partners in the case where the documents are submitted by an Advocate or C.A.
- Ownership proof of the place of business of the partnership firm.
Apart from this the other documents required in special cases include-
- If Company is a partner in the firm then a certified true copy of Memorandum and Articles of Association of the Company and Board resolution.
- If trust is a partner in the firm then a certified true copy of the Trust Deed.
- If the business of the firm requires a license from any Government Department, then such a license.
Once the documents are submitted and the form filled on the online registration website, which differs according to the State, the Partnership Deed takes 2 to 3 days for the drafting and the time taken by the Registrar of Firm for the actual registration of the firm.
To make a better-informed decision and for further elaboration on Partnerships and other business entities, apart from that provided here, deAsra can be approached for the requisite guidance and assistance.