“LEGAL ASPECTS OF ENTREPRENEURSHIP : DE-MYSTIFIED”

A start-up, or any business is in every sense the child of the entrepreneur. The birth an idea and the development of it in a business depends upon a lot of aspects. A business for that matter is an independent concern, rather, an independent person  having its own identity apart from the entrepreneur himself. legally speaking, the business is an independent personality having its own name, face, and character.  All these three aspects carry a weight in the market, which ultimately has an effect on the  development and success of the enterprise. Since the business is a child of the entrepreneur, giving it name, face and character becomes an important aspect and responsibility of the father. Mere technical know-how and market study is not sufficient for any business to sustain, grow and develop itself. Law plays an important role in every aspect of an individual’s life, so also it plays an important role in the life of business enterprise. It therefore become very important for any person starting-up to decide as to what name, face and character to give to this child. It also becomes very important to decide upon the school that it is to be entered into.

The name and the face of any business ultimately carries with it an intellectual property right which assumes immense significance once the business spreads its strong roots and also spreads its branches in the corporate scenario. The name and the logo of the enterprise therefore need to be protected and safeguarded from being illegally used and  taken advantage of by someone later. The protection of name and logo helps the business to protect its goodwill and the share of the market that such business has created for itself. So an important aspect to be borne in mind is the registration of the name and logo of enterprise under the Trade Marks Act and Copyright Act with the concerned authorities.

The  second more important aspect is giving a character to the enterprise. Here the term character is used in an absolutely technical sense, apart from what generally is understood, to be reputation of the enterprise. In a legal sense, the character of an enterprise is the form of the enterprise. The form decides its status in the market as well as, it decides the bunch of laws that will govern the functioning of the enterprise. There are;  three chief forms of incorporating an enterprise and which further gets sub-divided into six forms. This can be enumerated as 1. Proprietary concern, 2.Partnership, 3.Company . Partnership can be of two types 1. A simple partnership firm 2. Limited Liability Partnership firm. Whereas; a company can be incorporated in three different forms namely; 1.Private Limited Company 2. Public Limited Company and 3. One Person Company.

A proprietary firm is a firm which doesn’t get registered under any law. The name and face of proprietor becomes the name and face of the firm. The proprietor is wholly and solely responsible for the business and affairs of these concern. The income of the firm and proprietor becomes one. Therefore, the rights and liability both of the firm and the proprietor are commensurate which each other.  The liability of the proprietor does not get separated from the liability of the firm. Therefore, in eventuality of satisfying the liabilities of the firm even personal properties of the proprietor can be proceeded against and be recovered there from. The proprietor has to satisfy the debts of the firm even from his personal properties if the need be, the liability therefore gets saddled 100% on the proprietor. No doubt, the profits are also the sole property of the proprietor, however the risk involved is high. Moreover, there are also limitation on obtaining financial aid from financial institutions since the firm in strict sense does not carry an independent character.

The second most popular form of an entering into business is by way of partnership firm. This however, cannot be entered into unless there are minimum two persons willing to do business together. The terms of participation in business can be decided by the persons participating, by executing a simple agreement in the form of partnership deed. The parties can also agree upon the capital each one brings in. The registration of partnership with the Registrar of Partnership’s is a comparatively easy process and doesn’t take much time. The partners at the time of agreement itself can decide the duration of partnership and how the partnership ultimately can be ended. It gives a freedom of adding to or removing the partners as per need of hour.  A partnership firm enjoys the status of an independent incorporated body and therefore can hold properties independently of the partners, obtaining finance from financial institution is also much easier because the firm independently has some capital of its own there being financially sound. Moreover, since two or more persons are attached with the conduct of the firm the responsibility get divided thereby by increasing the efficiency of the firm. The partners gets their remuneration as per their share of capital and input in the firm after the bills, liabilities and expenses are met with. In other words partners get their remuneration or income from the net profits of the firm. Partnership is therefore thus incorporation of a business enterprise.  A partnership firm therefore is quite an advisable option at the beginning and for small scale businesses.

A finer form of partnership is created by law by virtue of Limited Liability Partnership Act, 2008. The Limited Liability Partnership is a body corporate and has perpetual succession. Any change in the partners  does not affect the existence, right  or liabilities of the limited liability partnership. Even for this form there have to be at least two partners. One new important aspect that is required is that there have to be at-least two designated partners and at least one of them should be resident of India. The firm is required to file with the registrar the particulars of every individual who has given consent to become a designated partner. Every such designated partner is require to obtain a designated partner identification number (DPIN) from the Central Government. Every such designated partner is the responsible person for complaining with the provisions of the act including filing of any documents, return, statement and other report to be filed to any of the authorities. This ensures the timely updation of record and filing of the same with the various authorities. An LLP can be incorporated by executing incorporation document. The said document gets registered with registrar and a certificate is issued in the name specified therein. In a regular partnership firm with every change in the partner a new firm is constituted and it does not have perpetual succession however, in a LLP any change in the partners does not affect the existence of a LLP and outgoing partner gets entitled to receive the amount equal to the capital contribution actually made in the LLP and also to the right to share in the accumulated profits after the deduction of accumulated loses of the LLP on the date the partner ceases to be partner. The chief benefit of incorporating an enterprise as an LLP are that, the firm does not get liable for the acts of the partners who has no authority to act on behalf of the firm. However, the obligation of LLP whether it is arising out of contract or otherwise is the obligation solely of the LLP. The liabilities therefore are met out of the property of LLP. A partner therefore is not personally liable directly or indirectly for the obligation of LLP solely because he/she is partner of the LLP. A partner also will personally not be liable for the wrongful act of any other partner.

The third form of formation of body corporate is formation of company. A company can be formed as a, a public limited company or  a private limited company,  or a one person company. For public limited company the minimum requirement of seven directors  that is seven share holders. A public limited company can be limited by shares, or guarantee or can be a limited company. For incorporating such a company at least one director needs to obtain a digital signature and all the directors are required to obtain director identification number. The name of the company needs to be approved from the registrar of company One also needs to form Memorandum of Association and Article of Association.  The Memorandum of Association is the document that sets out the constitution of company it contains the objectives and the scope of activity of the company and also describes the relationship of company with the outside world. The Articles of the Association contains the rules and regulations of company for the management of its internal affairs, it also states the authorized share capital of the proposed company and the names of its first or permanent directors. A public limited company can raise funds by selling out shares and issuing public shares.

A private limited company is a comparatively smaller enterprise. One needs to have minimum two directors or board directors for incorporating  a private limited company. If you have paid up capital of Rs.1,00,000/-  a private limited company can be incorporated. Even for incorporating  private limited company the name needs to be approved from registrar of company, the directors are  also required obtain director identity number and digital signature. This type of company also needs to have Memorandum of Association Article of Association. A private limited company however, cannot publicly sell its shares but , can invite people  to buy share by issuing prospectus.

One person company is revolutionary concept to facilitate more business friendly corporate regulations. This company can be incorporated only by one person. Till today if you wanted to start business venture on your own without taking any partner the only  option  was proprietary-ship however it is not legally recognized as a separate entity. One person company gives all the benefits of private limited company which means that it can have credits, bank loans, limited liability , legal protection of business as separate legal entity. An OPC can be incorporated with a capital of Rs.1,00,000 to 50,00,000/- and the turn over  upto Rs.2 corers but if the turn over increases beyond 2 crores or the capital crosses 50,00,000/- it is mandatory to convert into private limited company.

Except proprietary firm all other forms have an independent legal status and allows the business entity to exist, operate and function as independent entities. Except proprietary ship and partnership the remaining forms have perpetual succession and an existence different from its incorporators and members. The business can be started in any of the legal forms but however, as the turn over increases one requires to convert it to higher form. Just as technical support is necessary for any business venture to succeed, a proper legal form is necessary for it to exist and survive in face of its right and liabilities. Choosing a proper form for incorporation  of a business entity plays a major role in the functioning of the day to day activities of the business enterprise. Proper documentation, definite limiting of liabilities and recognition of rights helps the business to grow and sustain in the market. Getting involved in legal issues can be a major reason for set back of an otherwise  successful business hence, proper legal decisions are advisable from an early stage.

It therefore follows that the enterprise can safely take business risks if the child that is conceived is put in a proper form and given a proper legal character.

The article is written for the Magazine SPIRIT.