The challenge for a startup is to select the best format of a business organization in which he or she should start a business. Though the most popular form of a commercial organization is a Private Limited Company, however LLP is also a favorite among small budget startups. In this post, we shall analyze & discuss in detail the most common forms of business in India. Starting a business is easy. However, changing the same to another type of business or making an exit involves a lot of legal processes and expenses. The choice of the form of your startup should be made after considerable thought and deliberation. In the following sections, we would examine the pros and cons of the most popular types of business in India. Our analysis shall be based on.
- The overall structure, ease of doing business,
- Regulations governing a specific form of business type,
- Suitability to the business object,
- The scale of operations,
- Total control on business management, capital requirements, risk and liabilities, and taxation.
In the following paragraphs, we shall be dealing with only the most common form of business, with cross-references on the distinction between various types of business. For every distinct kind of business, we have also provided further reading material on GST treatment, Taxation, Registration of Business, etc. You are encouraged to give your feedback and suggestions in the comment section at the bottom. We shall answer your comments ASAP.
Types of Business For Startup Most Common Business Types
- Sole Proprietorship
- Partnership Firms
- Limited Liability Partnership (LLP)
- One Person Company (OPC)
- Private Limited Company
Other Business/Entity Types
- Section 8 Company
- Society/Trust as NGO
- Public Limited Company
- Co-operative society
- Hindu Undivided Family (HUF)
Sole Proprietorship Firm As Business Type
The proprietorship business is owned by a single person known as proprietor. The sole proprietorship is perhaps the most simple business type. Most of the neighborhood bread and butter shops, grocery shops, miscellaneous stores are the perfect examples of proprietorship firm.
One Individual, known as the proprietor or sole owner of the business, conceives business, invests the capital, and takes all the decisions. In other words, the control and management of the business vests with only one person, who is also entitled to 100% profits. Similarly, the firm’s sole owner is responsible for losses of the firm and bears all its liabilities.
- Read the Advantages and Disadvantages of Proprietorship
- PAN Card for Sole Proprietorship Firm
- MSME Registration For Sole Proprietorship Business
- GST Registration For Sole Proprietorship Business
- Opening of Bank Account for Sole Proprietorship
- How to Start Sole Proprietorship Firm
- Trademark Registration For a Proprietorship Firm
- Sole proprietorship business by NRI or PIO
Partnership Firm As Business Type
A partnership firm can be set up by any two Indian citizens. However, the maximum number of partners is capped at 20 for business, and for the banking business, it can be up to 10 only. The partnership business has few advantages compared to a proprietorship firm, like accumulating more capital and resources. Like the proprietorship business type, the partners of a firm are also liable for the partnership’s losses and liabilities without any limit. However, we can say that liabilities would be shared among all the partners, hence some relief.
The partnership Act itself is an ancient law, which has not been changed in tune with time. New formats of business came into existence. However, the legal regime of the partnership was left out. In fact, as a replacement for the partnership form of business, LLP was introduced in 2008-09.
To start a partnership, all you have to do is draft an agreement between the partners setting the terms of association and you are ready to go. The registration of a partnership is, though, prescribed but has not been made compulsory. A firm can very well operate without registration. However, an unregistered firm suffers from a severe drawback, as per section 69 of the partnership act, an unregistered firm can not recover any money if the value of the same is more than Rs. 100.. Click here to read the stepwise process and cost of the formation of a partnership firm.
Limited Liability Partnership (LLP) As Business Type
The limited liability partnership is an advancement over the traditional form of partnerships and was introduced by the LLP Act, 2008. This is a hybrid form of business, where you will find the simplicity of partnership firm and critical features of a private limited company. It is popular among small startups. The LLP provides a platform for professionals and small service providers such as architects, advocates, chartered accountants, company secretaries, doctors, creative artists, etc.
The significant advantage of an LLP is that it provides features of the corporate form and protects innocent partners from liabilities of the LLP. IN other words, a partner shall not be held responsible for the acts of other partners, if there is dishonesty or breach of trust, then the erring partner has to pay for the liabilities, and all other partners are immune to it. The Limited Liability of LLP means that the partners shall not be held liable for the LLP debts beyond their unpaid capital.
One Person Company (OPC) As Business Type
The benefits of a corporate form of business are now available for a single person company, thanks to the introduction of One Person Company, also known as OPC in the Companies Act, 2013. People who were otherwise forced to open a proprietorship company, now have an option to start a One Person Company in India. The choice of OPC is available to you if the capital of the company is up to Rs. 50 Lakhs and the turnover is within Rs. 2 Crores.
For one person company registration, only one person is required who shall be the shareholder and director. However, another person is also needed to be nominated as the nominee of the single shareholder. The number of directors can be more than one and up to fifteen. Read more about an OPC at :OPC Registration in India
Private Limited Cmpany As Business Type
A private Limited Company is the most popular form of business in India among the startups because of its ability to issue shares to potential investors. Every successful company you will find is in this format of business. The legal regime for a company business type is fully developed and stable. The tax rates for companies are the lowest in India @ 15% for manufacturing companies and 22% for companies other than manufacturing.
We are the best when it comes to setting up a company for you; all you need is at least two people who would become the company’s first directors and shareholders. The maximum number of shareholders for a company is set at 200, whereas the directors can be up to 15. another important thing required is the registered address for the company and a NOC from the owner of the premises. Please refer to the documentation for starting a private limited company.
There are many advantages to the company form of business. The most important advantage of a company form of business is that the shareholders of the company are not held responsible for the debts of the company, and they can be called t pay their unpaid capital amount. The ability to raise funding and perpetual succession are some of the other significant advantages. We have written another article on the advantages and disadvantages of a private limited company form of business. Click here.
Setindiabiz is a consulting company, engaged in setting companies and actively working with them for their tax and regulatory compliances. We offer very competitive pricing for registration of company and tax filing. Please refer to Company Registration in India