With its fast economic growth, India is emerging to be one of the sweet spots for startup and is often considered a major player in some of the sectors. If you are planning to start a business in India, it is very important to choose the right business entity before you register. Here is a brief introduction of different types of business entities in India.
1. Sole Proprietorship
Also known as Proprietorship, it is one of the most common and oldest forms of business in India.
- Businesses involving moderate risk
- Small financial resources and small capital requirements
- Generally used by small businesses in unorganized sections, the business entity is owned and run by one person who bears the sole responsibility and control of the entire business
- Legally, there is no distinction between owner and the business, and the individual is responsible for all business activities
- The owner receives all profits (subject to taxation specific to the business) and has unlimited liability for all losses and debts
- Very easy to start and have no elaborate legal formalities
- No separation of ownership and the business ceases to exist if the owner dies
- Difficulty in raising capital
Partnership firms in India are governed by the Indian Partnership Act, 1932. A partnership can be defined as a relation between two or more persons who have agreed to share the profits of a business carried on by all of them or any of them acting for all.
Medium size businesses, involving limited capital.
- Similar to Sole Proprietorship, they are easy to form (no elaborate legal activities). Registration is not essential.
- Number of partners – Minimum – 2; Maximum – 10 (in banking), 20 for all other businesses.
- Unlimited liability for partners
- Limited span of life (must be dissolved if one partner is unable to continue)
- No separation of legal existence
- Ownership of property carries right of management for each partner
- Restrictions on the transfer of interest
- Raising a large amount of capital is difficult
3. Limited Liability Partnership
The Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle that provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement.
It is governed by the provisions of the Limited Liability Partnership Act, 2008 and the Indian Partnership Act, 1932 shall not be applicable to Limited Liability Partnerships.
Small and medium enterprises, in general, and for the enterprises in services sector, in particular.
- Separate legal entity
- At least 2 partners needed to form a LLP, with a maximum of 50
- Perpetual succession- entity survives if the partners die (or unable to continue)
- Provides flexibility in devising partnership agreement
- Partners not accountable for actions of other partners. Liability is limited to their contribution in the LLP. Share transfer is restricted
- Obligation to maintain annual accounts
- Central government has investigative powers
- A firm, private company or an unlisted public company is allowed to convert into a LLP
- Difficult to raise capital from investors
- Provisions of The Companies Act, 1956 may also be included
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4. Private Limited Company
A private limited company is defined as a voluntary association of not less than two and not more than 50 members, whose liability is limited, the transfer of whose shares is limited and not allowed to invite the general public to subscribe to its shares or debentures.
People seeking to take advantage of limited liability, but at the same time desire to keep control over the business within a limited circle and maintain the privacy of their business.
- Independent legal existence
- Less cumbersome to organise and operate as it has been exempted from many rules and regulations a public limited company is subjected to. Some of them are:
- Prospectus filing is not required
- Not required to obtain a Certificate for Commencement of business
- Not required to hold statutory general meeting nor need it file the statutory report
- Restrictions placed on the directors of the public limited company do not apply to its directors
- Liability of its members is limited
- Shares allotted are not freely transferable between members
- Enjoys continuity of existence
- Need a registered office and name
- Requires signed Memorandum of Association and Articles of Association.
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5. One Person Company
An One Person Company (OPC) is introduced by the companies act 2013 as a strong improvement over the sole proprietorship. In case of a One person company, only one person is required who can be a shareholder as well as the Director. It gives a single promoter full control over the company while limiting his/her liability to contributions to the business. One Person Company is a hybrid of Sole-Proprietor and Company form of business, and has been provided with concessional/relaxed requirements under the Companies Act, 2013.
Small businesses and service providers that have low finance and capital requirements
- Only one shareholder that holds 100% of the shareholding
- Shareholder’s nominee is required
- Only a natural person who is an Indian citizen and resident in India shall be eligible to act as a member and nominee of an OPC
- Must have a minimum of One Director
- Limited Liability
- Freedom from complying with many requirements as normally applicable to other private limited Companies
6. Public Limited Company
A public limited company is a voluntary association of members which is incorporated and, therefore has a separate legal existence and the liability of whose members is limited.
Medium to large enterprises with large capital and financial requirements
- Separate legal existence
- Governed by The Indian Companies Act, 1956
- Minimum of 7 members, no upper limit
- Collects capital via shares
- Shares are freely transferable, without any prior notice to the company
- Liability of a member of a company is limited to the face value of the shares he/she owns.
- Shareholders do not own management rights. This ensures separation of ownership and management. Power of decision making given to Board of Directors.
- Existence of company not threatened by insolvency, death of its shareholders
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