Company

COMPANY

A company is an association of two or more persons in furtherance of a common business objective. A company is a “Separate Legal Entity” having its own identity distinct from its members. As a legal entity, a company can own a property in its own name, can sue and be sued in its own name and also enjoys perpetual succession, among others. Based on the activity/requirement of the promoters, different types of companies can be incorporated under the Companies Act, 2013.

TYPES OF LEGAL ENTITIES IN INDIA

Private Limited Company

• A Private Limited Company is a company whose ownership is private. A private limited company can be formed with a minimum of 2 and maximum of 200 members.

• It cannot issue a prospectus in the open market nor can it make or accept deposits from the public. The shares in a private company are not freely transferable.

• According to the Companies Act, 2013, an investor can choose between the following types of a Private Limited Company in India;

• Company Limited by shares: A company limited by shares means a company is having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.

• Company Limited by Guarantee: A company limited by guarantee means a company is having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound-up.

• Unlimited Company: An unlimited company means a company is not having any limit on the liability of its members.

Public Company

• Public Limited Company is a type of company whose securities are traded on a stock exchange.

A Public Limited Company can be formed with a minimum of 7 members. There is no restriction on the transferability of shares.

• A Public Limited Company requires more public disclosures and compliances from the government as well as other authorities like RBI (Reserve Bank of India), SEBI (Securities and Exchange Board of India) etc.

Sole Proprietorship

• The sole proprietorship is the simplest form of business under which one can operate.

• The sole proprietorship is not a separate legal entity. The person who is the owner of the business becomes personally liable for the debts of the business.

• For taxation and legal liability purpose, the owner and the business are one and the same. The proprietorship is not taxed as a separate entity.

One Person Company

• The concept of One Person Company has been introduced by Companies Act, 2013 enabling a sole proprietor form of business to enter into the corporate framework.

• This allows a sole investor to form a company alone with limited liability.

• One Person Company structure is similar to that of a proprietorship concern without the ills generally faced by the proprietors.

• One of the most important features of One Person Company is that the risks mitigated are limited to the extent of the value of shares held by such person in the company.

Partnership

• The Indian Partnership Act, 1932, Section 4, defines partnership as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.

• The partnership is an association of two or more persons who have agreed to share the profits of a business which they run together.

• This business may be carried on by all or any one of them acting for all. The persons who own the partnership business are individually called ‘partners’ and collectively they are called as ‘firm’ or ‘partnership firm’.

• Unlike a company, a partnership is not a separate legal entity distinct from its members. It cannot own a property, incur debts or sue any party in its own name.

• Moreover, the partners of a partnership firm shall be personally and severally liable for the liabilities incurred by the firm.

Limited Liability Partnership (LLP)

• Limited Liability Partnership Act, 2008 governs the principles of Limited Liability Partnership in India.

• It is a combination of a company and a partnership firm

Unlike partnership, the liability of the partners in an LLP is limited and no partner shall be held liable for the acts of the other.

It is a separate legal entity, having a distinct entity of its own separate from its members.

The main disadvantage of an LLP is that it cannot raise capital from the public by issue of an IPO unlike a company.

Section 8 Company

A Section 8 Company of Companies, 2013, is the same as Section 25 company under the old Companies Act, 1956.

Section 8 company is one of the most popular forms of Non- Profit Organisations in India.

A Section 8 company can be established for “promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object,” provided it “intends to apply its profits, if any, or other income in promoting its objects” and “intends to prohibit the payment of any dividend to its members.”

Sweat Equity Rules: Share Based Employee Benefits and Sweat Equity Regulations, 2021 (SEBI)

The SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 give the list of employees to whom stock (equity) options may be offered.

Sweat Equity: Sweat equity refers to the non-cash contributions made by a company’s founders or employees in exchange for ownership in the form of shares. This approach

is commonly used by startups facing funding constraints, offering sweat equity as a compelling form of compensation.

Issuance Limits

• Listed companies: Maximum annual issuance of 15% of paid-up capital, with a total cap of 25%.

• Innovators Growth Platform (IGP) companies: Annual cap of 15%, total cap of 50% of paid-up capital (applicable for 10 years after incorporation).

• In order to list issuers that heavily utilise technology, information technology, intellectual property, data analytics, biotechnology or nanotechnology to provide goods, services or business platforms with significant value addition, SEBI launched the Institutional Trading Platform (IGP).

Employees Stock Option Plan

Employee Stock Option is defined under Section 2(37) of the Companies Act, 2013. The employees stock option means the option provided to the directors, employees or officers of the company or its holding or subsidiary company, which gives the right or benefit to subscribe or purchase the shares of the company at a predetermined price on a future date. It is issued by a company when it wants to raise its subscribed capital. Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 regulates the procedure of the issue of ESOP.

However, the shares are not immediately given; they are held in a trust fund during a predetermined vesting period. Eligible employees must remain with the company during the vesting period to receive the shares. If they do, they can buy the shares at the grant price on the vesting date.