Corporate structure most suitable for big business
BY MOHD IQBAL BUTT and ROMAAN MUNEEB
In my experience of more than 30 years of legal practice I have found very few entrepreneurs who could convincingly answer to my question as to what do they mean by ‘limited’ in the name of a company. There are also certain misconceptions connected with incorporation and management of a company which deters some entrepreneurs from using the company structure for their businesses. Leave aside the misconceptions and the ignorance of the technical knowledge as regards this most successful form of the business structure, many of us fail to realise that almost all the goods and services we are surrounded in our daily lives are provided and produced by business organisations structured as companies. Further, richest individuals of the world are shareholders of big companies.
A company has a legal personality distinct from its shareholders/owners and has rights like any other individual. These rights include the ability to enter into contracts, take loans, sue others, be sued, own assets, and so on. A company is formed when individuals agree to contribute capital to a company in exchange for shares of the company, which in turn creates a right to a portion of profits of the company.
The word ‘limited’ in the name of a company indicates ‘limited liability’. Under ‘limited liability’, a shareholder/owner of a company is liable for the losses incurred by the company limited to the amount promised by him to the company while subscribing to the shares of the company. Once a shareholder who has subscribed to the shares of the company has paid the subscription amount to the company he is not liable for the losses of the company beyond the subscription amount already paid by him to the company. In case he has not paid for the shares subscribed by him he will have to contribute to the loss of the company to the extent of the subscription amount agreed by him to the company and nothing more. This explains the concept of limited liability in simple language.
As can be understood from the explanation above, the limited liability allows individuals to avoid personal liability for company’s losses. This allows individuals who otherwise are reluctant to take risks to expose a part of their personal resources to the risks involved in starting a business. This also allows individuals to jointly contribute their resources to achieve business objectives that would otherwise be difficult to achieve individually. A corporate structure also allows labor and capital to be aggregated for the purpose of undertaking tasks that would be too large for any one person.
The roots of the company structure for business can be traced back into history. One of the biggest examples is that of The East India Company. In the 1600s, the British Crown began granting monopolies to groups of investors willing to undertake certain ventures. The East India Company was one such monopoly, in which investors pooled capital into a single company from which profits would be distributed according to capital invested. Only members of The East India Company had the privilege of conducting trade with India. We are well aware how The East India Company eventually came to form a government over large portions of India and maintain an army. This example shows that by allowing the aggregation of resources, companies can be organized to carry out tasks too big for one person, or even one government.
The common misconceptions regarding doing business through a company structure are:
· Lots of compliances;
· High tax rate for companies;
· High cost of incorporation and maintenance of records;
· Requirement of minimum turnover.
In the past, yes, it required lots of paperwork to incorporate a company. But with the advance in information technology the process of incorporation has been streamlined and it is possible to incorporate a company by just filing one combined form. It is also not correct to say that companies are taxed at a higher rate in comparison to a partnership. The maximum tax rate applicable to both a partnership and a company is same. Doing business under a company structure may be tax efficient since certain companies having turnover below a prescribed limit are liable to pay income tax at a considerably lower rate. With online process of incorporation of companies, the cost of incorporation has also reduced considerably. An entrepreneur having basic knowledge of use of computers can incorporate a company without any assistance from a consultant/lawyer and save the cost of engaging such consultant/lawyer.
As regards maintenance of records a company once incorporated has to hold minimum four meetings of its board of directors in a financial year and one annual general meeting of the shareholders to approve the accounts. The company has to maintain minutes of these meetings. There are annual requirements of filing of annual return and accounts with the registrar of companies. Again, with the advancement of information technology and the government’s focus on ‘ease of doing business’ compliance of these annual requirements has become easy. There is also no minimum turnover required for incorporation of a company. Earlier there was a minimum paid up capital requirement for incorporation of a company which has now been dispensed with. It has been left to shareholders of a company to prescribe the same in the articles of the company. Hence theoretically you can start a company with Re.1 as minimum paid up share capital of the company.
There are various disadvantages of a partnership structure.
Unlimited Liability: Each partner of a partnership firm is liable for the losses of the firm jointly and severally. This restricts carrying of any large business activity by a partnership firm. There is a risk of personal property of the partners being taken over by the creditors of the partnership if the assets of the partnership firm are not sufficient to cover the liability.
No Continuity: A partnership firm may come to an end because of death of the partner, insolvency, insanity or retirement of a partner. Hence there is a perception of instability in the structure which may not be good for big business.
Restriction on Transferability of Interest: A partner cannot transfer his partnership interest to an outsider without the consent of all partners. A partner is also not authorized to bring any new partner without the consent of other partners. This shows that there is a restriction on transfer of interest. In case of a private limited company the restriction is to the extent that the shares are first to be offered to the existing shareholders and if they refuse to buy, the same can be offered to outsiders. In case of public limited companies there is absolutely no restriction on transfer of shares.
No Formal Structure: The Indian Partnership Act, 1932, does not give independent legal status to the partnership. Registration is not mandatory hence no differentiation is made between a partnership firm and its partners. In the absence of any regulatory control over the formation and management of a partnership firm, there is lack of public confidence in the structure. In the current age of fake news and online misrepresentations a structure the details of which can be confirmed/ascertained independently from a public repository, like registrar of companies in case of companies, is a must for the business.
Risk of Implied Authority: Each partner is considered an agent of the partnership firm. He/she can bind the co-partners by his/her activities. On account of this authority of one partner, other partners have to suffer for the wrongdoing of a partner.
Limited Capital: In the partnership firm, there is a restriction on the number of members of the partnership, therefore, the total amount of capital which can be invested in case of the partnership is limited to the sum total of the individual amount invested by each partner. It is not easy for a partnership firm to collect huge capital.
Limited access to Loans: The above disadvantages are also responsible for difficulty in raising funds from banks and financial institutions due to lack of formal structure under a regulatory framework and prospects of discontinuity of the business in case of death, insolvency of a partner.
A sole proprietorship structure also suffers from similar disadvantages as applicable to a partnership firm where in case of death or incapacity of a sole proprietor the proprietorship gets dissolved. Further, a sole proprietor cannot raise capital by selling his interest in the business.
There are several advantages of a company structure, including the limited personal liability, easy transfer of ownership, business continuity, better access to capital and tax benefits.
No Personal Liability: A company provides more personal asset liability protection to its owners than any other type of business structure. If a company is sued, the shareholders are not personally liable for the company’s debts or legal obligations.
Perpetuity of Business: There is flexibility in transfer of ownership in a company and hence perpetuating the business for the long term by simply selling the shares in a company. It is easy to buy and sell ownership in a company by simply transferring of shares. If an owner of a business wants to leave the company running the business, he can simply sell off his/her shares in the company. Similarly, if a shareholder dies, his/her shares can easily be transmitted to another.
Access to Capital: Public limited companies can raise capital by selling their shares to public at large through publicly traded shares. This helps in raising large amount of funds for growing a business and also for starting new projects. When a company is incorporated it is considered more reliable and hence easy for it to raise capital.
Efficiency: A company is managed through a Board of Directors which could be distinct from the shareholders of the company. Domain experts can be appointed to the Board and for each specific function of the company which in turn leads to improved accountability and efficiency. The availability of resources makes it conducive to offer good salary packages and attract the best talent available in the market.
Availing incentive under schemes and loans: Having a separate identity and being regulated under a well-defined legal framework it is always easy for a company to meet the requirements of incentive schemes and satisfy the requirements of banks and financial institutions to avail loans. Further the efficiency the company structure brings to the business goes a long way in helping in a good appraisal for raising loans.
Establishing reputation: A business incorporated as a company is always considered as a reputable organization. It enables the entrepreneur to set a mark of reputation among its customers and the stakeholders.
Hence, an entrepreneur needs to look into various advantages and risks involved while choosing the form of business. A well thought out business structure goes a long way in deciding the future of the business especially its scalability. Incorporating business as a company provides security, credibility, scalability which is unique to a company structure only. Depending upon the size of the project and the investment required an entrepreneur can decide to incorporate:
· a private limited company which requires minimum two shareholders and maximum 200 shareholders; or
· a public limited company which requires minimum seven shareholders and no limit on maximum number of shareholders.
The Companies Act 2013 has permitted setting up of ‘one person company’. A sole proprietor now also enjoys ‘limited liability’ if he/she incorporates a ‘one person company’.
Mohd Iqbal Butt, Senior Partner IMR Law Offices
Romaan Muneeb, Partner IMR Law Offices
Originally Published on July 10, 2023 at Corporate structure most suitable for big business – Greater Kashmir
Industrial Subsidy in Jammu and Kashmir
Introduction
Jammu and Kashmir, known for its breathtaking landscapes, is now emerging as a region of industrial promise. The state’s unique geographical position, combined with government initiatives, offers a compelling opportunity for businesses, especially in the pharmaceutical sector. As India aims to become a global pharmaceutical powerhouse, Jammu and Kashmir plays a critical role in providing cost-effective manufacturing locations, supported by attractive subsidies and incentives.
Establishing a pharmaceutical manufacturing unit here not only taps into the growing global demand for medicines but also benefits from financial support offered by the central and state governments. These subsidies significantly lower the costs of setting up and operating a factory, making Jammu and Kashmir a lucrative destination for pharmaceutical entrepreneurs.
Government Schemes and Subsidies
In recognition of Jammu and Kashmir’s potential as an industrial hub, both the central and state governments have introduced several schemes to encourage investment in pharmaceutical manufacturing. These programs aim to reduce the financial burden on investors and create an enabling environment for industries to flourish.
One of the primary schemes benefiting industries in the region is the Industrial Development Scheme (IDS). This scheme offers substantial financial assistance to industries setting up in Jammu and Kashmir, particularly for capital investment. The scheme provides capital investment subsidies of up to 30% of the project cost, with an upper limit based on the size of the unit and the sector.
Additional subsidies cover areas such as:
- Interest subsidies on loans taken for setting up infrastructure.
- Power subsidies that reduce the cost of electricity, crucial for energy-intensive pharmaceutical production.
- Transport subsidies to help companies with the logistics of bringing raw materials and distributing finished products, given the region’s relatively remote location.
Special Incentives for Jammu & Kashmir
Jammu and Kashmir has its own set of special industrial packages designed to promote investment. These include tax holidays, rebates, and subsidized credit. One of the most attractive aspects for pharmaceutical manufacturers is the Production Linked Incentive (PLI) Scheme, which aims to boost domestic production of high-value pharmaceutical products.
The PLI scheme offers incentives tied to incremental sales of products made in the region. Pharmaceutical manufacturers that invest in Jammu and Kashmir can receive government payouts based on the increased volume of their production, making it more attractive for companies to expand their operations here.
Moreover, the government has introduced GST exemptions and income tax holidays for businesses in the state. These fiscal incentives are vital for offsetting the initial investment costs, especially in the capital-intensive pharmaceutical sector.
Eligibility Criteria for Availing Subsidies
While the subsidies and incentives are substantial, businesses must meet certain eligibility criteria to benefit from these schemes. Pharmaceutical factories must meet guidelines related to:
- Minimum investment thresholds, depending on the scale and scope of the unit.
- Employment generation requirements, where the business must create a specified number of local jobs as part of its operation.
- The factory should be established in designated industrial zones of Jammu and Kashmir to qualify for certain subsidies.
These criteria are set to ensure that the subsidies target serious investors and contribute to the region’s long-term economic growth.
Process of Applying for Subsidies
The application process to access these subsidies is streamlined, but thorough. Entrepreneurs must begin by registering their business through the DPIIT (Department for Promotion of Industry and Internal Trade) portal or the Jammu and Kashmir Industrial Development Corporation (JKIDC).
A step-by-step guide for applying:
- Register the pharmaceutical manufacturing unit with the state’s industrial department.
- Submit a detailed project report outlining the business plan, investment requirements, and anticipated benefits for the region.
- Complete the application forms for specific subsidies, such as the IDS or PLI schemes, through the respective government websites.
- Attach all necessary documents, including proof of investment, land ownership or lease agreements, and employment commitments.
- Once the application is submitted, it undergoes scrutiny by a committee, with approvals typically granted within 2-3 months.
Impact of Subsidies on the Pharmaceutical Industry in Jammu & Kashmir
The introduction of these subsidies has already attracted major players to Jammu and Kashmir’s pharmaceutical sector. Companies such as Sun Pharma and Cipla have shown interest in expanding their operations to this region, citing both cost advantages and governmental support as key factors.
Additionally, several smaller firms have successfully launched operations in the state, benefiting from lower costs, subsidies, and ease of doing business. As more pharmaceutical manufacturers enter the region, Jammu and Kashmir is gradually positioning itself as a significant contributor to India’s pharmaceutical exports.
Conclusion
Jammu and Kashmir’s industrial policy, focused on subsidies and incentives, is designed to attract pharmaceutical manufacturers and contribute to the state’s economic resurgence. With ample government support, businesses setting up factories in the region can significantly reduce operational costs while benefiting from the expanding pharmaceutical market.
For entrepreneurs looking to enter the pharmaceutical manufacturing space, now is the perfect time to leverage these subsidies and incentives to establish a thriving business in one of India’s most beautiful yet rapidly developing regions
Investment Climate in Kashmir – Rising Kashmir
The article “Investment Climate In Kashmir: Behind The Scenes” examines the challenges and opportunities for economic development in Jammu & Kashmir. While recent initiatives aim to attract investment, several obstacles remain. The piece explores:
- Legal constraints around land acquisition
- Power shortages affecting industrial productivity
- Inadequate waste management and infrastructure
- Bureaucratic hurdles in the single-window system
- The need for comprehensive policy reforms
To read the full Article click on Investment Climate In Kashmir: Behind The Scenes – Rising Kashmir
Kashmir Hospitality: A Businessman’s GUIDE to Hotel Agreements
The tourism industry in Kashmir is booming, attracting major hotel franchises and brand owners to this “paradise on earth”. As the sector contributes significantly to the region’s GDP, local hotel and land owners must navigate complex legal agreements to protect their interests. This comprehensive guide examines various types of hotel agreements, including franchise, management, and lease contracts, providing crucial insights for business owners in Kashmir’s hospitality sector.
To read more about this topic, check our article on Rising Kashmir at the following link: Kashmir Hospitality: A Businessman’s GUIDE to Hotel Agreements – Rising Kashmir
Here are some key highlights from the article:
- Tourism accounts for 7-8% of Kashmir’s GDP, generating over INR 8000 crores in annual revenue.
- Types of agreements covered: Franchise, Third-Party Operation/Management, Hotel Management, Lease, and Joint Development Agreements.
- Franchise fees typically include initial fees, royalty fees (3-5% of room revenues), and marketing fees (1-2% of total revenue).
- Third-party management fees usually range from 4-6% of total revenues.
- Hotel Management Agreements often include base fees (2-4% of gross revenue) and incentive fees (4-8% of Gross Operating Profit).
- Performance tests in management agreements allow owners to terminate contracts if operators underperform.
- Lease agreements offer stable income for owners but less control over operations.
- Joint Development Agreements (JDAs) allow landowners to partner with developers to construct hotels without significant financial investment.
- Local hotel owners in Kashmir have leverage in negotiations due to high demand for hospitality services.
- The article emphasizes the importance of thorough investigation, evaluation, and negotiation of legal agreements in the evolving hospitality industry.
