A business entity is an organization founded by one or more people and administered in accordance with corporate law, namely the Companies Act, 2013. The most important thing for individuals to remember when starting a business in India is to choose a form of business entity. It is important for a business owner to choose an appropriate business structure since it will affect how much tax an entity must pay as well as other liabilities. In this blog there will be detailed information on the types of business entity in India, Startup business in India, how to open a business in India, and other related information.
Important points at the time of selecting business structure in India
- If a company wishes to launch a business that requires a large amount of capital, it should form a private corporation.
- If you are starting or running a small business, a sole proprietorship or an OPC (One Person Corporation) is a better option than forming a private company because the setup costs, taxes, and responsibility are significantly lower.
- The level of risk is proportional to the business’s size and Activities. When the related danger is higher, owners will wish to protect themselves. The correct business structure can significantly lower the owner’s personal risk.
- There is a different structure for the different types of business entity due to which it is essential for a business owner to select an appropriate business structure.
Types of business entity in India
In India, there are several different types of business entities that can be used to register a startup business in India.
- Sole Proprietorship
In India, a sole proprietorship is a type of business entity in which a single person manages the entire operation. All profits and losses accrue to the individual, who is also the single bearer of the business’s losses. The owner’s liability is unrestricted. When the market is small, localized, and customers value personal attention, a Sole Proprietorship business is a good fit. This form of business is appropriate when the amount of money required is low and the risk involved is low. Because proprietorship does not have a legal presence, there are less legal requirements.
Characteristics of Sole Proprietorship
A sole proprietorship, like a partnership, has no distinct existence. As a result, the sole proprietor is the only person who may be sued for any debts. As a result, the owner bears limitless culpability for all obligations. This should severely inhibit any risk-taking, thus it is only appropriate for small enterprises. If you intend to conduct a business that may require a loan or that may result in penalties, fines, or restitution, you should consider registering an OPC.
Proprietorships do not require a separate registration procedure. An entity only needs a business-related government registration. A proprietor would only need a sales tax registration if they were selling products online. As a result, becoming a sole proprietor is extremely simple.
- Private Limited company
In India, a Private Limited Company (PLC) is a privately held small business firm that, once incorporation, is treated as a separate legal entity. It has a minimum of one shareholder and a maximum of 50. This popular corporate structure is chosen by start-ups and developing organizations because it allows them to readily seek outside investment, restrict the liabilities of its owners, and offer employee stock options to attract top talent. These businesses are more credible than an LLP or General Partnership since they must hold board meetings and file yearly returns with the Ministry of Corporate Affairs (MCA).
Characteristics of Private Limited Company:
Businesses frequently require financial assistance. In general partnership models, partners are directly accountable for all debt raised. If the firm cannot repay it, the partners will have to liquidate their belongings to do so. Only the money invested in launching the business would be lost in a private limited company; the directors’ personal property would be safe.
The private limited company is thought to offer numerous tax benefits, however this is not the case. There are various industry-specific benefits, but profits must be taxed at a flat rate of 30 percent, the dividend distribution tax must be paid, and the Minimum Alternate Tax must be paid. The LLP offers some superior benefits if you’re looking for the structure with the lowest tax burden.
Fast-growing enterprises that plan to raise funds from venture capitalists must register as private limited corporations. Because only private limited firms can make them shareholders and put them on the board of directors. Investors would have to be partners in an LLP, and OPCs can’t take on more shareholders.
- Partnership Firm
This form of entity can carry on lawful business with two or more people, but the number of businesses should not exceed ten in the case of banking and 20 in the case of other businesses. There is no separate legal entity for a partnership. Each partner must contribute an equal share of the profits and losses, and profits and losses must be distributed equally among all partners. In the event that one of the partners incurs obligations, each partner is equally responsible and contributes.
Characteristics of Partnership Firm:
A General Partnership is less expensive to create than a limited liability partnership and because of the low compliance requirements, it is also less expensive in the long run. You do not require the services of an auditor. This is why, despite its flaws, home-based enterprises may choose it.
If you want to register your partnership firm, all you need is a partnership deed, which may be completed in two to four working days. The method for forming a limited liability partnership is substantially simpler than that of a private limited corporation.
Because of their limitless liability, the business partners are responsible for all of the company’s debts. This means that if a partner is unable to repay a bank loan or is required to pay a fine for whatever reason, the debt or charge can be recovered from his or her assets.
Aside from the ease of setup and minimum compliance, the partnership has no advantages over an LLP. It may not even be cheaper if one chooses to register it, which is a possibility.
- One Person Company
A One Person Company (OPC) has just been introduced as a significant enhancement over a sole proprietorship. It offers a single promoter complete management of the company while restricting his or her obligation to commercial contributions. This individual will be the sole shareholder and director (there is a nominee director, but with no power until the original director is incapable of entering into the contract). As a result, there is no way to raise equity capital or issue employee stock options.
Characteristics of One Person Company:
While there will be no board meetings, you will be expected to perform a statutory audit, submit annual and IT returns, and adhere to the MCA’s various obligations.
The OPC, like the private limited company, has various advantages that are special to the industry. However, profits must be taxed at a fixed rate of 30%, and the DDT and MAT must be paid. The LLP offers some superior benefits if you’re seeking for a structure with the lowest tax burden.
With government fees of a little less than INR 7,000, it’s nearly the same as a private limited company. However, this varies by state; for example, in Punjab, Madhya Pradesh, and Kerala the fees are significantly higher.
- Limited Liability Partnership
This is a brand-new type of company. The partners are not liable, and the company’s ownership structure is flexible. Each partner’s maximum liability is restricted to the amount invested in the firm. The business will be registered with the Ministry of Corporate Affairs. This organization must have at least one member who is a resident of India. There is a requirement to keep annual accounts that are audited on a regular basis.
Characteristics of Limited Liability Partnership:
A limited liability partnership (LLP) can have as many partners as it wants. If you are starting a major advertising agency, for example, there is no need to be concerned about a partner cap.
With government expenses of INR 5000, no paid-up capital, and negligible compliance costs, it is much less expensive than forming a private limited company.
The LLP offers tax benefits, especially if your business earns more than INR 1 crore in profits. The tax surcharge and Dividend Distribution Tax that apply to corporations with profits over INR 1 crore do not apply to LLPs. Loans to partners are likewise exempt from taxation.
If you’re running a business that won’t need equity capital, you might want to consider forming an LLP, which combines the advantages of both a private limited company and a general partnership. It is similar to a types of Business private limited company in that it has limited liability and a simpler structure. Click here more:
In India, under the Companies Act 2013, no business registration can be recognized as a company until it is registered with the registrar of companies. A corporation does not become a separate legal entity from its members until it is registered. There is no ideal business structure that will provide perfection in all of these areas. However, if you can prioritize the variables that are most essential to you, you will be able to select the structure that best suits your company’s needs. For Startups in India the most preferable 5 types of business entity will be Partnership firm, Limited Liability Partnership, OPC (One Person Company), Sole Proprietorship, Private Limited Company.