Everyone planning to start on his/her own has a vision about business. The first step towards realizing this vision is to form a legal entity for your business. To help you do that today we are going to discuss the legal forms of business. So read on to find about the different forms of business recognized by the government and their characteristics.
Five Legal Forms Of Business
Sole Proprietorship Firm
A sole proprietorship firm is the most common form of business entity. It is a one man show where a single person is the owner. All the risks are borne by the owner and all the profits taken by him/her as well. Legally it is the simplest form of business and hassle free. The owner and the firm are same entity in the eyes of the law.
If you are starting on your own, providing all the capital required, managing the day-to-day activities and don’t mind bearing the risks involved, you should opt for sole proprietorship firm. It is best suited for small businesses that provide single service to the local market segment.
If two or more people pool in their resources and skills to start a business, they should form a partnership firm. In a partnership firm, the partners share the liabilities as well as the profits. The profit sharing can be done in any ratio as mutually agreed upon.
Liabilities are unlimited for the partners. These terms and conditions are decided upon be drawing up a “partnership deed.” As in sole proprietorship firms, partners and the firm are single entity in the eyes of the law.
Limited Liability Partnership
A limited liability partnership (LLP) is a company having a separate existence from its partners. Forming the LLP is easier than forming a company and has less legal hassles involved. As the LLP is a company the liabilities borne by the partners is limited to the company assets built by them. LLP is suited for small firms that don’t want to go for partnership firm but don’t want the headache of forming a full fledged company.
Private Limited Company
In case of large scale businesses where capital invested, skills required and volume of business are beyond the scope of a few individuals, it is best to form a joint stock company. The risks involved in such businesses are also proportional to scale of operations and hence best taken care of by a company. As per law, the company is a distinct entity as compared to its shareholders. The company is managed by a board of directors.
In a private limited company the maximum number of shareholders is fifty. This means that at most fifty people can invest in the company and share its profits. Also, the company cannot go public, i.e. it cannot distribute shares to the members of the public.
Public Limited Company
The maximum number of shareholders is unlimited in case of a public limited company, although minimum seven shareholders are required to start a company. The public can be invited to subscribe to the shares. The profits are shared by the shareholders in the form of premiums, which are taxable. The liabilities of the shareholders is limited to the share value held by them but the directors can have unlimited liabilities.