4B Forms of Legal Entities

Differences between a Private Limited Company and a Public Limited Company:

| Basis of Difference | Private Limited Company | Public Limited Company |
|---|---|---|
| Minimum Members | Minimum 2 members | Minimum 7 members |
| Maximum Members | Maximum 200 members | No maximum limit |
| Minimum Directors | Minimum 2 directors | Minimum 3 directors |
| Transfer of Shares | Shares cannot be freely transferred; restrictions apply | Shares are freely transferable on a stock exchange |
| Public Issue of Shares | Cannot invite the general public to subscribe to its shares | Can invite the general public to subscribe to its shares (IPO) |
| Minimum Paid-up Capital | As prescribed by the Companies Act, 2013 | As prescribed by the Companies Act, 2013 (generally higher) |
| Prospectus | Not required to issue a prospectus | Required to issue a prospectus before public issue |
| Name | Must use the words 'Private Limited' at the end of its name | Must use the word 'Limited' at the end of its name |
| Listing on Stock Exchange | Cannot be listed on a stock exchange | Can be listed on a stock exchange |
| Statutory Meetings | Not required to hold a statutory meeting | Required to hold a statutory meeting |
| Quorum | 2 members present in person | 5 members present in person |
| Managerial Remuneration | No restriction on managerial remuneration | Managerial remuneration cannot exceed 11% of net profits |

Conclusion: A private limited company is more suitable for small to medium-sized businesses where ownership is to be kept within a closed group, while a public limited company is suitable for large businesses that wish to raise capital from the general public.

Answer:

I. Nature of Partnership Firm:

A partnership is defined under Section 4 of the Indian Partnership Act, 1932 as: *'Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.'*

The persons who enter into such an agreement are individually called 'partners' and collectively called a 'firm.' A partnership firm is not a separate legal entity distinct from its partners.

II. Essential Characteristics of a Partnership Firm:

1. Agreement: A partnership arises from a contract/agreement between two or more persons. It cannot arise from status or operation of law. In this case, Ajay and Nilam have a verbal agreement.

2. Two or More Persons: There must be at least two persons to form a partnership. The maximum number is 50 (as per Companies Act, 2013).

3. Lawful Business: The business carried on must be lawful. Selling saris is a lawful business.

4. Sharing of Profits: The partners must agree to share the profits (and losses) of the business.

5. Mutual Agency: The business must be carried on by all or any of the partners acting for all. Each partner is both an agent and a principal.

6. Unlimited Liability: Each partner has unlimited personal liability for the debts of the firm. Partners are jointly and severally liable.

7. No Separate Legal Entity: Unlike a company, a partnership firm has no separate legal existence from its partners.

III. Types of Partnership Firms:

1. Partnership at Will: A partnership where no fixed period has been agreed upon for the duration of the partnership. It can be dissolved by any partner by giving notice to other partners.

2. Particular Partnership: A partnership formed for a specific venture or undertaking. It comes to an end once the venture is completed.

3. Partnership for a Fixed Term: A partnership formed for a fixed period of time. It automatically dissolves at the end of the fixed term.

IV. Registered vs. Unregistered Partnership:

Registration of a partnership firm is not compulsory under the Indian Partnership Act, 1932, but it is highly advisable. An unregistered firm suffers from the following disabilities:
- Partners of an unregistered firm cannot file a suit against each other to enforce rights arising from the contract.
- The firm cannot file a suit against third parties to enforce a right arising from a contract.
- The firm cannot claim a set-off in a suit filed against it.

V. Importance of a Written Partnership Deed:

A Partnership Deed is a written agreement between the partners that governs the terms and conditions of the partnership. Its importance is as follows:

1. Clarity on Profit/Loss Sharing: In the absence of a written deed, Section 13(b) of the Indian Partnership Act, 1932 provides that partners shall share profits and losses equally, regardless of their capital contribution. This means Nilam's contention is legally correct.

2. Avoids Disputes: A written deed clearly specifies the ratio of profit/loss sharing, capital contribution, roles, and responsibilities, thereby avoiding disputes like the one between Ajay and Nilam.

3. Legal Evidence: A written deed serves as legal evidence of the terms agreed upon between the partners.

4. Customization: Partners can customize the terms (e.g., sharing losses in proportion to capital) only if it is expressly stated in the written deed.

VI. Resolution of the Dispute between Ajay and Nilam:

Since Ajay and Nilam only have a verbal agreement and no written partnership deed specifying the ratio of loss-sharing, the provisions of the Indian Partnership Act, 1932 will apply. Under Section 13(b), in the absence of any agreement to the contrary, partners are entitled to share profits and losses equally.

Therefore, Nilam is correct — both Ajay and Nilam must bear the loss of Rs. 30,000 equally, i.e., Rs. 15,000 each, regardless of their capital contributions of Rs. 10,000 and Rs. 20,000 respectively.

Had they had a written partnership deed specifying that losses would be shared in proportion to capital contribution, Ajay's contention would have been valid.

Conclusion: This case clearly illustrates the importance of having a registered partnership with a written partnership deed to avoid disputes and protect the interests of all partners.

Answer:

Suggested Form of Legal Entity: A Co-operative Society or a Public Limited Company

After carefully analyzing the facts of the case, the best form of legal entity for the hundred weavers would be a Co-operative Society, or alternatively, a Public Limited Company. However, given the specific facts — mutual benefit, collective bargaining, fixed contribution, and the need to raise capital — a Co-operative Society appears to be the most suitable. Here is the detailed reasoning:

Facts of the Case:
- About 100 weavers want to come together.
- They want to enter the supply business formally.
- They want to increase their collective bargaining power.
- They are ready to contribute a fixed initial amount.
- They need to raise capital from investors.
- Educated children of weavers are ready to manage the entity.
- They need to handle bulk orders worth crores of rupees.

Why a Co-operative Society is the Best Form:

1. Large Number of Members: A co-operative society can accommodate a large number of members. With 100 weavers, this is ideal. The minimum number required is only 10 members.

2. Democratic Management: A co-operative society is managed on the principle of 'one member, one vote,' regardless of the capital contributed. This ensures equal say for all weavers.

3. Limited Liability: The liability of each member is limited to the extent of their capital contribution, protecting the personal assets of the weavers.

4. Separate Legal Entity: A co-operative society, once registered under the Co-operative Societies Act, 1912 (or the respective State Act), becomes a separate legal entity. It can enter into contracts, sue and be sued in its own name.

5. Raising Capital: A co-operative society can raise capital through membership fees, share capital from members, loans from banks, and grants from the government. This addresses the need to raise funds for bulk orders.

6. Collective Bargaining Power: By coming together as a co-operative, the weavers can negotiate better prices with designers and buyers, increasing their bargaining power significantly.

7. Professional Management: The educated children of the weavers can be appointed as managers/employees to handle the day-to-day operations, while the weavers retain ownership and control.

8. Government Support: Co-operative societies, especially those involved in handicrafts and weaving, often receive government subsidies, grants, and support (e.g., from the Ministry of Textiles), which would benefit the weavers.

9. Continuity: A co-operative society has perpetual succession, meaning it continues to exist even if some members leave or die.

10. Social Objective: The primary objective of a co-operative society is the welfare of its members, not profit maximization. This aligns with the weavers' goal of mutual benefit and collective growth.

Alternative: Public Limited Company

If the primary goal is to raise large amounts of capital from the public (investors), a Public Limited Company could also be considered. It can issue shares to the public, has a separate legal entity, and offers limited liability. However, it involves complex legal formalities, high compliance costs, and separation of ownership from management, which may not be ideal for village weavers.

Conclusion:

As the lawyer, I would recommend forming a Producer Co-operative Society (specifically a Weavers' Co-operative Society) under the Co-operative Societies Act. This form best serves the interests of the weavers by providing limited liability, collective bargaining power, democratic management, the ability to raise capital, and government support — all of which are essential for the success of their venture.

Answer:

I. Can the Moneylender Recover His Money?

Yes, the moneylender can recover his money. Here is the legal reasoning:

Raj's provisions store is a Sole Proprietorship firm. In a sole proprietorship, there is no distinction between the owner and the business — they are one and the same legal entity. The business has no separate legal existence.

Since Raj has borrowed Rs. 70,000 for his business, this is his personal debt as well as his business debt. In a sole proprietorship, the owner has unlimited liability, meaning his personal assets can be used to repay business debts.

Upon Raj's death, his legal heirs (wife, children, parents, etc.) will inherit both his assets and his liabilities. The moneylender can file a claim against Raj's estate (i.e., his assets left behind) through Raj's legal heirs. The legal heirs are liable to repay the debt to the extent of the assets inherited from Raj.

Therefore, the moneylender can approach the legal heirs of Raj and recover Rs. 70,000 from Raj's estate.

II. Liabilities of a Sole Proprietorship Firm:

1. Unlimited Liability: The most significant feature is that the owner has unlimited personal liability. If the business assets are insufficient to pay off debts, the owner's personal assets (house, savings, etc.) can be attached and sold to repay creditors.

2. Personal Liability: There is no distinction between personal and business assets. The owner is personally responsible for all debts and obligations of the business.

3. Liability Passes to Legal Heirs: Upon the death of the proprietor, the liability passes to the legal heirs to the extent of the assets inherited.

III. Advantages of Sole Proprietorship:

1. Easy to Form: It is the simplest and easiest form of business to start. There are minimal legal formalities and no registration is compulsory (except for specific businesses).

2. Complete Control: The owner has complete control over all business decisions. There is no need to consult anyone, leading to quick decision-making.

3. Confidentiality: The owner is not required to publish accounts or share business information with anyone, maintaining business secrecy.

4. Direct Motivation: Since the owner receives all the profits, there is a direct incentive to work hard and efficiently.

5. Flexibility: The business can be easily modified, expanded, or closed as per the owner's decision.

6. Personal Touch: The owner can maintain personal relationships with customers, leading to better customer service.

7. Tax Benefits: The income of the business is taxed as the personal income of the owner, and in many cases, the tax burden may be lower than that of a company.

8. Easy Dissolution: The business can be wound up easily without any legal formalities.

IV. Disadvantages of Sole Proprietorship:

1. Unlimited Liability: The owner's personal assets are at risk if the business incurs losses or debts. This is the biggest disadvantage, as illustrated in Raj's case.

2. Limited Capital: The financial resources are limited to the owner's personal savings and borrowings. It is difficult to raise large amounts of capital.

3. Limited Managerial Ability: The owner has to manage all aspects of the business alone, which may lead to inefficiency due to lack of specialized skills.

4. Lack of Continuity: The business is closely tied to the life of the owner. It may come to an end upon the death, insolvency, or incapacity of the owner.

5. Limited Growth: Due to limited capital and managerial resources, the scope for expansion and growth is limited.

6. No Separate Legal Entity: The business has no separate legal existence from the owner, which can create complications in legal matters.

Conclusion:

The moneylender can recover Rs. 70,000 from Raj's legal heirs from the assets of Raj's estate. This case highlights the most critical disadvantage of a sole proprietorship — unlimited liability — which puts the personal assets of the owner (and subsequently the inherited assets of legal heirs) at risk.

Answer:

I. Best Way to Enter the Indian Market:

A giant foreign cola company wishing to enter the Indian market and raise funds from the Indian public should form a Public Limited Company in India (incorporated under the Companies Act, 2013). They can do so by:

1. Incorporating a wholly-owned subsidiary as a Public Limited Company in India.
2. Entering into a Joint Venture with an Indian company and forming a Public Limited Company.
3. Listing on Indian Stock Exchanges (BSE/NSE) through an Initial Public Offering (IPO) to raise funds from the Indian public.

This is the best form because it allows the company to raise large amounts of capital from the public, enjoy limited liability, have a separate legal identity, and operate on a large scale.

II. Legal Entity: Public Limited Company

A Public Limited Company is a company that is incorporated under the Companies Act, 2013, offers its shares to the general public, and is listed (or can be listed) on a recognized stock exchange.

III. Characteristics of a Public Limited Company:

1. Separate Legal Entity: A public limited company is a separate legal entity distinct from its members. It can own property, enter into contracts, sue and be sued in its own name. The company's existence is not affected by the death or departure of any member.

2. Limited Liability: The liability of each shareholder is limited to the face value of the shares held by them. Their personal assets cannot be used to pay off the company's debts. This is a major advantage for investors.

3. Perpetual Succession: A public limited company has perpetual existence. It continues to exist regardless of changes in membership. It can only be dissolved through a legal process (winding up).

4. Large Capital: A public limited company can raise large amounts of capital by issuing shares and debentures to the general public through an IPO (Initial Public Offering). This is essential for the cola company to raise funds in India.

5. Transferability of Shares: Shares of a public limited company are freely transferable on a recognized stock exchange. This provides liquidity to investors and makes the company attractive to a large number of investors.

6. Minimum Members: A public limited company requires a minimum of 7 members to be formed. There is no maximum limit on the number of members.

7. Minimum Directors: A public limited company must have a minimum of 3 directors.

8. Prospectus: Before inviting the public to subscribe to its shares, a public limited company must issue a prospectus, which is a detailed document containing information about the company, its financials, and the purpose of raising funds.

9. Separation of Ownership and Management: The shareholders (owners) elect a Board of Directors to manage the company. This separation allows professional managers to run the company efficiently.

10. Regulatory Compliance: A public limited company is subject to strict regulatory oversight by the Registrar of Companies (ROC), Securities and Exchange Board of India (SEBI), and stock exchanges. It must publish its annual accounts and hold Annual General Meetings (AGMs).

11. Name: The company must use the word 'Limited' at the end of its name (e.g., Coca-Cola India Limited).

12. Listing on Stock Exchange: A public limited company can be listed on recognized stock exchanges like BSE (Bombay Stock Exchange) or NSE (National Stock Exchange), enabling it to raise funds from the public.

IV. Why a Public Limited Company is the Best Choice for the Cola Giant:

- It can raise large amounts of capital from the Indian public through an IPO.
- Limited liability protects the foreign parent company's assets.
- Separate legal entity allows it to operate independently in India.
- Perpetual succession ensures business continuity.
- Free transferability of shares makes it attractive to Indian investors.
- It can comply with Foreign Direct Investment (FDI) regulations in India.

Conclusion:

The best legal entity for the giant foreign cola company to enter the Indian market and raise funds from the public is a Public Limited Company incorporated under the Companies Act, 2013. This form provides the company with the legal framework to operate on a large scale, raise public capital, enjoy limited liability, and maintain a stable and continuous business presence in India.

PARTNERSHIP DEED

This Partnership Deed is entered into on this ______ day of ____________, 20____, at Bangalore.

BETWEEN:

1. Tanmay [Surname], son of ________________, aged ____ years, residing at ________________, hereinafter referred to as 'Partner 1' (of the FIRST PART);

AND

2. Pinaki [Surname], son of ________________, aged ____ years, residing at ________________, hereinafter referred to as 'Partner 2' (of the SECOND PART).

(Partner 1 and Partner 2 are hereinafter collectively referred to as the 'Partners'.)

WHEREAS the Partners have mutually agreed to enter into a partnership for the purpose of carrying on business, and have agreed to reduce the terms and conditions of their partnership into writing.

NOW THIS DEED WITNESSETH AS FOLLOWS:

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1. NAME OF THE FIRM:

The partnership firm shall be carried on under the name and style of 'T&P Enterprises' (or any other name mutually agreed upon).

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2. NATURE OF BUSINESS:

The business of the firm shall be ________________________ (e.g., retail trading / services / manufacturing — to be specified by the partners). The partners may, by mutual consent, extend or change the nature of the business.

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3. REGISTERED ADDRESS / PLACE OF BUSINESS:

The principal place of business of the firm shall be at 1, Mango Lane, Bangalore – 560002, which is the commercial property of Partner 1 (Tanmay). The firm may open branches at other places as mutually decided by the partners.

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4. COMMENCEMENT OF PARTNERSHIP:

The partnership shall commence from the date of execution of this deed, i.e., ______ day of ____________, 20____.

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5. DURATION OF PARTNERSHIP:

The partnership shall be a Partnership at Will and shall continue until dissolved by mutual consent or by notice given by either partner in accordance with the provisions of the Indian Partnership Act, 1932.

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6. CAPITAL CONTRIBUTION:

The initial capital of the firm shall be Rs. 10,000/- (Rupees Ten Thousand Only), contributed as follows:

| Partner | Capital Contribution |
|---|---|
| Tanmay (Partner 1) | Rs. 5,000/- |
| Pinaki (Partner 2) | Rs. 5,000/- |
| Total | Rs. 10,000/- |

Additional capital may be introduced by the partners as mutually agreed upon.

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7. SHARING OF PROFITS:

The net profits of the firm, after deducting all expenses, shall be shared equally between the partners, i.e., 50% each.

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8. SHARING OF LOSSES:

In the event of any loss suffered by the firm, the losses shall be borne by the partners in the following ratio:

| Partner | Share of Loss |
|---|---|
| Tanmay (Partner 1) | 60% |
| Pinaki (Partner 2) | 40% |

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9. MANAGEMENT AND CONDUCT OF BUSINESS:

a. Both partners shall have equal rights in the management and conduct of the business.

b. All decisions relating to the ordinary course of business may be taken by either partner.

c. Decisions relating to major matters (e.g., taking loans above Rs. 10,000/-, entering into new contracts, purchasing fixed assets) shall require the mutual consent of both partners.

d. Each partner shall devote their time, attention, and efforts to the business of the firm.

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10. BANK ACCOUNT:

A bank account shall be opened in the name of the firm. All receipts and payments of the firm shall be routed through this account. The account shall be operated jointly by both partners, or as mutually agreed.

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11. BOOKS OF ACCOUNTS:

Proper books of accounts shall be maintained at the registered address of the firm. Each partner shall have the right to inspect the books of accounts at any time.

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12. INTEREST ON CAPITAL:

No interest shall be paid on the capital contributed by the partners unless mutually agreed upon in writing.

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13. DRAWINGS:

Each partner may draw a sum of Rs. ______/- per month from the firm's account as drawings, subject to the availability of funds. No interest shall be charged on drawings unless mutually agreed.

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14. SALARY/REMUNERATION:

No salary or remuneration shall be paid to any partner for their services to the firm, unless mutually agreed upon in writing.

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15. ADMISSION OF NEW PARTNER:

No new partner shall be admitted into the firm without the written consent of both existing partners.

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16. RETIREMENT AND EXPULSION:

A partner may retire from the firm by giving a written notice of ______ days to the other partner. A partner may be expelled from the firm by mutual agreement of the other partner(s) in accordance with the Indian Partnership Act, 1932.

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17. DISSOLUTION AND WINDING UP:

In the event of dissolution of the firm, the assets and liabilities of the firm existing at the time of dissolution shall be shared equally between the partners, i.e., 50% each, after settling all third-party debts and obligations.

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18. ARBITRATION:

Any dispute arising between the partners in relation to this deed or the business of the firm shall be referred to arbitration in accordance with the Arbitration and Conciliation Act, 1996. The decision of the arbitrator shall be final and binding on both parties.

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19. GOVERNING LAW:

This deed shall be governed by and construed in accordance with the Indian Partnership Act, 1932 and other applicable laws of India.

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20. MISCELLANEOUS:

a. Any amendment to this deed shall be made only by a written agreement signed by both partners.

b. This deed shall be stamped and registered as required under applicable law.

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IN WITNESS WHEREOF, the parties have signed this Partnership Deed on the day, month, and year first written above.

| | |
|---|---|
| Signature of Partner 1 | Signature of Partner 2 |
| Tanmay [Surname] | Pinaki [Surname] |
| Date: | Date: |

WITNESSES:

1. Name: ________________ Signature: ________________ Address: ________________

2. Name: ________________ Signature: ________________ Address: ________________

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*Note: This deed should be executed on appropriate stamp paper as per the Stamp Act applicable in Karnataka, and may be registered with the Registrar of Firms for legal enforceability.*

Answer (OR Part — Research-Based):

a. Coca-Cola, India:

- Legal Form: Coca-Cola India operates as Coca-Cola India Private Limited, which is a Private Limited Company incorporated under the Companies Act.
- Details: It is a wholly-owned subsidiary of The Coca-Cola Company, USA. As a private limited company, it has a separate legal entity, limited liability for its shareholders, and its shares are not available to the general public.
- Liability of Stakeholders: The liability of shareholders is limited to the amount unpaid on their shares. The personal assets of shareholders are protected.

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b. KFC India:

- Legal Form: KFC India operates through Devyani International Limited and Sapphire Foods India Limited, both of which are Public Limited Companies listed on Indian stock exchanges. They are franchise operators of KFC in India.
- Details: As public limited companies, they have raised capital from the public through IPOs. They are listed on BSE and NSE.
- Liability of Stakeholders: The liability of shareholders is limited to the face value of their shares. The company has a separate legal entity.

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c. An E-Commerce Giant that Started as a Sole Proprietorship in India:

- Example: Flipkart — Flipkart was founded by Sachin Bansal and Binny Bansal in 2007. It started as a small online bookstore, initially operating as a sole proprietorship/partnership before being incorporated as Flipkart Private Limited (a Private Limited Company). It later became Flipkart Internet Private Limited.
- Current Legal Form: Private Limited Company (now owned by Walmart Inc.).
- Liability: As a private limited company, the liability of shareholders is limited. In its initial sole proprietorship stage, the founders had unlimited personal liability.

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d. A Law Firm that is a Partnership:

- Example: Amarchand & Mangaldas & Suresh A. Shroff & Co. (now split into Cyril Amarchand Mangaldas and Shardul Amarchand Mangaldas) — one of India's oldest and largest law firms, traditionally operated as a Partnership Firm.
- Legal Form: Partnership Firm under the Indian Partnership Act, 1932.
- Liability of Partners: All partners have unlimited and joint liability for the debts and obligations of the firm. Each partner is personally liable for the acts of other partners done in the ordinary course of business.

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e. The First Limited Liability Partnership (LLP) Firm of India:

- First LLP in India: The Limited Liability Partnership Act was enacted in India in 2008. The first LLP to be registered in India was Apollo Tyres LLP (or as per some records, the first LLP registered under the LLP Act, 2008 was registered in April 2009 after the rules came into force).
- Legal Form: Limited Liability Partnership (LLP) under the Limited Liability Partnership Act, 2008.
- Characteristics of LLP:
- It is a hybrid form combining features of a partnership and a company.
- It has a separate legal entity distinct from its partners.
- Partners have limited liability — they are not personally liable for the wrongful acts of other partners.
- It has perpetual succession.
- It is governed by the LLP Act, 2008 and regulated by the Ministry of Corporate Affairs.
- It must have a minimum of 2 designated partners.
- It is required to file annual returns with the Registrar of Companies.

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Summary Table:

| Entity | Legal Form | Liability of Stakeholders |
|---|---|---|
| Coca-Cola India | Private Limited Company | Limited to share value |
| KFC India | Public Limited Company | Limited to share value |
| Flipkart (initially) | Sole Proprietorship → Pvt. Ltd. | Initially unlimited; now limited |
| Amarchand Mangaldas | Partnership Firm | Unlimited and joint |
| First LLP of India | Limited Liability Partnership | Limited; separate legal entity |