Updated : March 22, 2023Comparison of Business Types in India for Startup Registration
Overview : Entrepreneurs in India have several options when setting up their startups. Businesses are categorised based on registration requirements, procedures, investment, and owner liability. The article overviews India's common business types, procedures, capital requirements, and liability. Famous structures like private limited, LLP, partnership, and proprietorship are compared, with a detailed chart of their features. This article helps readers understand the different business types, their procedures, and each structure's capital and liability requirements. This knowledge helps entrepreneurs make informed decisions while setting up their startups in India.
Type of Business based on the Business Activity
The businesses must determine the set of activities they will engage in before deciding on the most appropriate business type. Different business types have different objectives depending on the activities they engage in. For example, businesses focusing on social welfare have different goals than those selling products or services for profit. Therefore, they must be registered as other business types. Below is a table that lists the most suitable business types based on their activities.
| Ordinary Business Types | Financial Services | Non-Profit |
|---|---|---|
| Private Limited Company | Bank | Section 8 Company |
| Public Limited Company | NBFC | Society |
| One Person Company | Asset Reconstruction Company | Trust |
| Limited Liability Partnership | Micro Finance Institutions | |
| Partnership Firm | Nidhi Company | |
| Proprietorship Firm | Payment Banks | |
| Hindu Undivided Family |
FDI for different types of businesses
Foreign Direct Investment (FDI) in India can be made through two routes: automatic and approval. Most sectors allow 100% FDI under the automatic route where no prior government approval is required. However, few strategic sectors and FDIs from neighbouring countries require approval before investment. A report in FC-GPR is to be filed with the RBI through AD Bank after receiving FDI. The table below mentions the applicability of Indian and foreign investments for different types of business in India.
| 100% Indian Investment Permitted | 100% FDI Permitted | Investment permitted by NRI or OCI |
|---|---|---|
| Private Limited Company | Private Limited Company | Company |
| OPC | LLP | LLP |
| LLP | Partnership firm | |
| Partnership firm | Proprietorship | |
| Proprietorship | FDI in Proprietorship and Partnership is allowed only on a Non-Repatriation Basis | |
| Section 8 Company |
Risk & Liability of a Business Structure
We advise considering the risk or possible liability in a business and then deciding its type. One can see that a small retail shop has negligible risk or liability in comparison to a business that is involved in foreign trade or dealing in hazardous chemicals. From the perspective of Risk and Liability, business structures may be divided into two categories. The first category is where the owner’s liability is limited to the capital that he has subscribed, and second category is where the liability of the owners is unlimited.
Concept of Limited Liability : For structures where the businesses and the owners are considered separate legal entities, the owners enjoy protection against the losses and liabilities of the business. Their liability of the owners in a limited liability business is restricted to the share capital that they have subscribed. The below table categorises businesses based on the liability of their owners.
| Unlimited Liability for Owners | Limited Liability for Owners |
|---|---|
| Proprietorship | Company |
| Partnership | OPC |
| HUF | LLP |
Control and Management in Specific Business Type
Business structures like proprietorships and Partnership Firms have no separation between ownership and management. The sole owner of a proprietorship is responsible for its control and management, whereas each partner in a partnership firm or as decided in the Partnership Deed, is responsible for the management and control of the firm. However, structures like a company or an LLP have a separation between ownership and management. The table below categorises each type of business according to the separation between its ownership and management.
| No | Business Type | Ownership | Management Control |
|---|---|---|---|
| 1. | Proprietorship | A single Individual known as the proprietor owns the proprietorship business. The proprietor alone invests all the capital and is entitled to the whole of the profits. | There is no separation between the ownership and the management in a proprietorship business. The proprietor controls and manages the business himself. |
| 2. | Partnership | In partnership, the partners collectively own the firm on the basis of their capital sharing ratio. | All the partners control and manage the firm, as mentioned in the terms of the partnership deed. |
| 3. | LLP | In an LLP, the partners collectively share the ownership on the basis of their capital sharing ratio | The responsibility of management and control of the LLP resides with its designated partners. |
| 4. | OPC | In OPC a single person, known as its shareholder, is the only owner of the OPC | The management and control of the OPC is the responsibility of its directors. |
| 5. | Private Limited | Shareholders own a private limited company in the ratio in the ratio of their subscribed capital | The board of directors of the company is responsible for its control and management. |
Formation Cost of Various Business Structures
The cost of starting a business can vary depending on several factors such as the professional fee, government fee, stamp duty, and taxes. The government fee is determined by the initial authorized capital, location of the registered office address, and the number of promoters involved. To learn more about the overall cost of forming different types of businesses, you can visit our dedicated pages. If you need further assistance, our consultants are just a click away. Contact us and we will guide you through the entire process of setting up your business.
Cost of Compliance of Several Business Structures
The cost of compliance varies from one business type to another based on their specific compliance requirements. The regular costs of compliance like accounting, GST, TDS, Advance Payment of Taxes, Payroll Processing, etc., are almost the same in every business type. However, there are differences in the overall costs mainly because of the annual filing of returns to the ROC. The table below mentions the applicability of annual filing for different business structures in India.
| No | Business Type | ITR | Annual Returns | Audit |
|---|---|---|---|---|
| 1. | Proprietorship | Yes | No | No |
| 2. | Partnership | Yes | No | No |
| 3. | LLP | Yes | Yes | Yes |
| 4. | OPC | Yes | Yes | Yes |
| 5. | Private Limited Company | Yes | Yes | Yes |
Taxation of Various Business Forms
The Income Tax is levied differently on different types of businesses, so we advise you to obtain a proper consultation and refer to the updated laws for the payment of taxes and filing of tax returns. Given below is a brief discussion on the taxability of the income of the common business structures in India.
Income Tax Rate for Proprietorship Firms
A proprietorship is not considered a separate legal entity. The income earned by a proprietorship firm is added to the proprietor’s income tax return. This means that no separate tax return is filed for the proprietorship firm. The tax rate applicable to a proprietorship is based on the income it earns and ranges from 5% to 30%. The proprietor can claim deductions under section 80C to U on their income. The individual tax rate slabs for a proprietorship are listed below.
Income Tax Rates for Individuals/HUF (FY 2023-24)| Annual Taxable Income | New Tax Regime | Old Tax Regime | ||
|---|---|---|---|---|
| During FY 2023-24 | Normal Rate | Normal Rate | Sr. Citizen | Super Sr Citizen |
| Up to Rs.2.5 lakh | Nil | Nil | Nil | Nil |
| Rs.2.5 lakh to Rs.3 lakh | Nil | 5% | Nil | Nil |
| Rs.3 lakh to Rs. 5 lakh | 5% | 5% | 5% | Nil |
| Rs.5 lakh to Rs.6 lakh | 5% | 20% | 20% | 20% |
| Rs.6 lakh to Rs. 9 lakh | 10% | 20% | 20% | 20% |
| Rs.9 lakh to Rs.10 lakh | 12% | 20% | 20% | 20% |
| Rs.10 lakh to Rs.12 lakh | 15% | 15% | 30% | 30% |
| Rs.12 lakh to Rs.15 lakh | 20% | 30% | 30% | 30% |
| Above Rs.15 lakh | 30% | 30% | 30% | 30% |
Partnership & LLP : Under the Income Tax Act, all the provisions applicable to the partnership firm apply to the LLP. The Income Tax Rate for the partnership firm and the LLP is 30% flat on the total income earned.
The income tax for companies ranges from 15% to 30%, depending on specific categories. There are two categories of companies as mentioned below.
Newly Incorporated Company : For companies incorporated on or after 1st October 2019, and which do not claim any concession, deduction, or exemption under the Income Tax Act, the tax rates are mentioned in the table below.
| Particulars | Manufacturing Company | Other Company | Companies with 400 Crore Turnover |
|---|---|---|---|
| Tax Rate | 15% | 22% | 25% |
| Surcharge | 10% on tax | 10% on tax | 10% on tax |
| Cess | 4% on tax & cess | 4% on tax & cess | 4% on tax & cess |
| Effective Rate | 17.16% | 25.168% |
| Feature | Company | LLP |
|---|---|---|
| Legal Structure | Separate legal entity distinct from its owners | Separate legal entity distinct from its partners |
| Liability | Shareholders' liability limited to the investment in shares | Partners' liability limited to their agreed contribution |
| Formation | More complex and regulated | Simpler and less regulated |
| Compliance | More stringent compliance requirements (filings, audits) | Less stringent compliance requirements |
| Ownership & Management | Shareholders own, directors manage (separation) | Partners own and manage (combined) |
| Minimum Members | 2 (Private Ltd.) | 2 |
| Maximum Members | 200 (Private Ltd.) | No Limit |
| Capital Raising | Can raise capital by issuing shares | Cannot raise capital by issuing shares |
| Profit Sharing | Based on share ownership | Based on partnership agreement |
| Transferability of Ownership | Shares can be easily transferred | Transfers require partner consent |
| Public Perception | Considered more established and credible | May be seen as less established |
| Suitable for | Businesses seeking investment, large-scale operations | Professional firms, partnerships with shared expertise |
