What is a separate legal entity?
There are formal and informal business structures in India. Two out of all the formal business structures, ie,. Companies and limited liability partnerships have the advantage of being recognised as a separate legal entity. These advantages play a very important role in the growth of a startup. Through this blog, we will understand the concepts of perpetuity and separate legal entity in detail to know how these advantages work out in favour of startups.
Which businesses are a separate legal entity?
The following two types of business structures have their own separate legal entity and perpetuity.
Companies registered under the companies act, 2013, enjoy the status of having a separate legal existence. This protects the company and its members, both, from the actions of the other. It doesn’t matter if you opt for private limited company registration or for public company registration, these characteristics are a part and parcel of this business structure.
Limited Liability Partnerships
LLPs are a form of hybrid business structure. They have certain characteristics of PLCs and others of the partnership firms. The features of LLPs include them being a separate legal entity and having perpetuity. Nowadays, most people are going forward with online LLP registration in India due to its many benefits.
Now that we know which business structures have these two unique and advantageous features, let’s understand the importance of having a separate legal entity.
Advantages of having a separate legal entity and perpetuity
A long span of life
Perpetuity means that even if the partners/shareholders leave the organisation, the organisation can continue existing freely. Due to this, the existence of partners will not affect the company. Hence, making it easy for an organisation to exist after the life of its promoters. Usually, companies have a short life span only when they are incorporated with a purpose and the purpose is met.
Having a separate legal existence makes the company more credible to the public at large. As a result of the organisation being a separate legal entity, its identity is not completely reliable on its partners or promoters. Further, the growth that a company can achieve from its perpetual nature also reflects the image of the company.
Financial assistance for a separate legal entity
Investors tend to invest in entities where they have the trust and faith. The high credibility that the separate legal entities have helped gain the trust of investors. So, when considering financial assistance these formal business structures have a head start as compared to the informal structures.
The liabilities of the members and partners is only limited to the capital they bring in or any other amount, if expressly stated as such. The members are not personally liable to the creditors of the company.
The members and directors of a separate legal entity do not have to pay tax on the income of the company. In case of profits, the company pays tax to the government. The dividends are tax free for members of an LLP.
to the separate legal entity of a company
Everything in life comes with an exception. So does the feature of being a separate legal entity. Let’s look at the circumstances when the boon of separate legal existence ceases to exist.
Members reduce beyond the limit
There is a minimum requirement of members. For example, in a Pvt. Ltd. Companies there must have at least 2 members and in a public company, at least 7. If a situation arises where the members reduce from thai, then for such time period, all remaining members become liable for the actions of the company at a personal level.
Investigation of Company
If a company is under investigation, the inspector has the power to investigate other companies (under the same management) even if the subsidiary is a separate company.
Directors acting beyond powers
When any director steps out of their shoes and takes certain harmful actions against the company, such as defrauding the creditors, then the veil of separate legal entity is lifted, and the directors are held accountable for the wrongful actions in the name of the company.
Non-refunded application money
If the application money is not refunded to the applicant who has not allotted the shares within stipulated time then directors are liable to pay interest to them.
Improper use of name
The directors are personally liable for not using the name of the company such as LTD or PVT LTD in a proper way in any contract or bill of payment.
Promoters are personally liable for all contracts made before incorporation of the company if the company does not adopt the said contracts.
Non Payment of Taxes and Liabilities post-dissolution
The director is liable to pay any unpaid tax and repayment of loans arising after the dissolution of the company.
Directors are liable in many other cases such as not maintaining books of accounts or registers, not holding AGM and other compulsory meetings, non-filing of annual returns with MCA, default under any other ACT.
A company with its perpetual existence and a separate legal entity proves to be advantageous. With such great powers, also come the responsibilities of the directors and partners. The decision of choosing the right business structure for your startup can be overwhelming. So, connect with the experts at Legalwiz.in and get the best options suitable for you!