Once you have decided to start a company in India, you need to register yourself under the Company’s Act. However, different businesses require different legal structures of business in India. These legal structures or types of company registration define the business entity and each of them have certain compliances and requirements. Moreover, each type of a company has its own advantages and disadvantages. Thus as entrepreneurs, it is important to understand the different legal structure of business in India to ensure that you make the right decision while incorporating your organisation.
Types of Business Ownership
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Sole Proprietorship
Sole Proprietorship is the best way to register a company under a single person’s name. If you are the owner and will be solely managing the company, it is best to register under sole proprietorship. Many small businesses are advised to begin as sole proprietorship if only one party is involved in the running of the organisation. Registration process is simple and since only one particular entry is involved, getting the necessary documents are easy. The cost of starting a sole proprietorship is low and you will only have to spend on other legal requirements like Shops and Establishment Registration only if required.
Moreover, there are no separate tax returns for the owner of the business. Which means, the income and profits that an owner generates from their business has to be filled in their personal tax returns. The owner of the organisation has to bear all the liabilities and has the ability to enjoy the profits. Decision making process in a sole proprietorship is under the control of a single person and thus, there is an ease of conducting business.
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Private Limited Company
In a Private Limited Company, all the parties involved must present a paid-up capital. Moreover, they are restricted from rights of transferring their shares. However, most startups prefer incorporating their business as a Private Limited Company as this form of legal structure considers a Private Limited Company as a separate legal entity. So, if things go wrong, each member owes only the sum according to their share. Moreover, debtors cannot sue individual members or directors, it is the company that will get sued.
Banks prefer giving loans to a Private Limited Company, so it is easier to gather funds at a later stage. Similarly, a private limited company has the ability to take on more debt. In case the directors or the owners want to exit, a Private Limited Company can be fully or partly sold or transferred.
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Partnership Firm
A Partnership Firm is incorporated when two or more individuals get together to run a business. The Partnership Deed specifies the interest of each involved party as well as their role or duties along with their profit sharing ratios and other agreements.
All the partners are held liable for the company. As the Partnership firm is easy to raise funds and you have shared responsibilities, it is the best option if more than one person is incorporating an organisation.
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Limited Liability Partnership (LLP)
Unlike Partnership Firms that hold all involved partners to bear the liabilities, in an LLP, the partners are only responsible as per the amount of shares they hold in the company. Moreover, an LLP and its partners are considered as separate legal entities. Furthermore, all partners are responsible for individual partner’s misconduct.
An LLP can be started with no minimum capital contribution. In comparison to a Private Limited Company, an LLP has an easier registration process. There can be two or several partners in a Limited Liability Partnership Firm.
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One Person Company (OPC)
One Person Company or OPC has been recently introduced in India and is a part of the Company’s Act 2013. Unlike a Private Limited Company that requires a minimum of two members and directors, an OPC can be incorporated with a single person. The owner of the business can be a member as well as the director of an OPC.
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Public Limited Company
A Public Limited Company can be formed by a minimum seven members with a minimum paid-up capital. In a public limited company there is scope of gaining a huge capital by selling the shares of the company to the public. They can list their organisation on the stock market and gain a strong momentum. However, there are more legal restrictions on a Public Limited Company than any other form of legal entities. Each shareholder is only liable to the amount of shares they hold and are not held accountable for the misconduct.
These are the different legal structures of business in India. Based upon the type of business and the number of entities involved, an entrepreneur must make the right choice. These legal structures help the company grow and have a sustainable future.
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