Legal Entity

LEGAL ENTITY FORMATION

Introduction :

A legal entity may be an individual, an association, a corporation, a partnership, or any social form permitted by the existing legal system.
Unlike a natural person, it is an entity formed at the time of legal incorporation, possessing a distinct name and identity in the eyes of law.
Various types of legal entities exist, and each possesses specific rights and obligations defined by legislation.
For instance, a sole proprietorship represents a type of legal entity that is advantageous due to its low cost and simplicity; However, the individual lacks asset protection.
This implies that any debts may ultimately be settled using the personal assets of the individual.
In case of corporations, shareholders enjoy limited responsibilities and reduced exposure to liabilities.

Types of Legal Entities :

The kind of legal entity that individuals select will greatly influence their business organization, responsibility, and tax responsibilities. Based on this, it is entirely reasonable to have multiple owners. For instance, certain types of business organizations can accommodate a considerable number of shareholders who possess portions of the company.

Below are the several types of the Legal Entities.

Sole Proprietorship:

A Sole Proprietorship represents the most straightforward legal structure; a business form where the owner and the respective enterprise are legally identical.
Although establishing it is uncomplicated, the owner accepts complete personal responsibility for the business’s liabilities and responsibilities. Instances include a freelancer or an electrician.

Partnership:

A Partnership involves two or more persons who collectively own and share profits.
Partnerships can be categorized into two primary types: general and limited.
In general partnership, every partner participates in management and liability.
At least one partner has restricted liability. A common illustration can be law firm.

Corporation:

A corporation may be classified as either a public or private legal entity distinct from its owners, the shareholders.
The most prevalent type of legal entity, it provides limited liability safeguard to shareholders, but it is typically more intricate and costlier to establish and manage. Examples include Apple and Microsoft.

Limited Liability Company (LLP)

An LLC combines the adaptability of a partnership with the limited liability feature of a corporation.
It is a favored option for small businesses because of its ease and tax benefits. A consulting firm serves as a typical example.

Legal Responsibilities and Obligations:

As a recognized legal individual, an entity has particular duties and responsibilities.

Tax Responsibilities:
Legal entities are required to submit tax returns, remit taxes, and adhere to tax laws.

Regulatory Compliance:
Legal entities are obligated to follow industry-specific rules and secure necessary permits to function legally.

Financial Reporting:
They are required to keep precise financial documentation and reports.

Limited Liability:

This indicates that the debts and obligations of the business are usually distinct from the personal assets of the owners.
If the business experiences failure or faces a lawsuit, creditors are generally unable to take the owner’s personal property.
Nevertheless, in specific circumstances, legal courts may overlook the corporate structure and hold shareholders individually accountable for debts of the company.
The phenomenon is referred to as “piercing the corporate veil” and can occur in situations such as:

Commingling of personal and corporate funds:

If the owner uses the business’s funds as if they were their own.

Undercapitalization:

If the company is insufficiently funded, it may be perceived as a façade.
Fraud or illegal activities: partaking in fraudulent or unlawful actions.

Category	]	2.Partnership firm	3.Company	4. LLP	5.OPC
Prevailing Law	No Such Law	The Partnership Act, 1932	The Companies Act, 20113	The Limited Liability Partnership Act, 2008	The Companies Act, 2013
Registration	Registration is Needed based on the nature of Business	Registration with Registrar of Firms required	Registration with Registrar of Companies required	Registration with Registrar of LLP required	Registration with Registrar of Companies required
Name of Entity	No Regulations	No Regulations	Name to contain ‘Limited’ in case of public company or ‘Private Limited’ in case of private company as suffix.	Name to contain ‘Limited Liability Partnership’ or ‘LLP’ as suffix	Name to contain ‘Private Limited’ as suffix and contain the word “One Person Company”under its name.
Perpetual Succession	No Perpetual Succession	It has perpetual succession and partners may come and go	It has perpetual succession and members may come and go	It has perpetual succession and partners may come and go	It has perpetual succession and member may appoint a nominee.
Charter	No Such Document	Partnership Deed defines scope and Operation and rights and duties of the Partners	Memorandum and Article of Association defines the scope of a company’s operation	LLP Agreement defines the scope operation and rights and duties of the partners vis-à-vis LLP	Memorandum and Article of Association will be the charter documents
Formalities of Incorporation	Based on the Nature of Business we have to get registered	Partnership Deed is to be filed with the Register of Firms along with the prescribed fees	Various e-forms along with the Memorandum & AOA are to be filed with ROC with prescribed fees	Various e-forms and the LLP Agreement are to be filed along with the prescribed fees	Similar to Company through e-forms are yet to be notified
Legal Proceedings	Proprietor can sue and be sued	A Partnership is a legal entity that can sue and be sued	A Company is a legal entity that can sue and be sued	A LLP is a legal entity that can sue and be sued	An OPC will be a legal entity that can sue and sued
Number of Members	One member	Minimum 2 Members Required	2 to 50 members in case of private company and minimum 7 members in case of public company	Minimum 2 partners and no limit on maximum number of partners	Only 1 member
Liability of Part- ners/Members	Proprietor Liability is Unlimited	Partners Liability is Unlimited	Generally limited to the amount required to be paid up on each share	Limited to the extent their contribution towards the LLP	Generally limited to the amount required to be paid up on each share
Transfer /Inherit- ance of Rights	No Such Regulation	Regulations relating transfer are governed by the Partnership Deed	Ownership is easily transferable	Regulations relating transfer are governed by the LLP Agreement	Ownership can be transferred by appointing a nominee, who can be changed anytime by the member
Annual Filing	No Such Requirement	No Such Requirement	Annual financial statement and annual return are to be filed with the Registrar	Annual statement of accounts and Solvency & annual return is required to be filed	Annual financial statement and annual return are required to be filed
Audit of accounts	All Individuals having Turnover more than 1 Crore (In Case of Business),more than 25 Lakhs (In Case of Profession) have to get Books of Accounts audited	All Partnership Firms having Turnover more than 1 Crore (In Case of Business), more than 25 Lakhs (In Case of Profession) have to get Books of Accounts audited	Companies are required to get their accounts audited annually as per the provisions of the Companies Act, 2013	All LLP except for those having turnover less than Rs. 40 lakh or Rs. 25 lakh contribution in any financial year are required to get their accounts audited annually.	Such companies will be required to get their accounts audited

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