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Business Structure For Startup

The types of business chosen for startups must best suit their needs. The options available include Pvt Ltd company, LLP, OPC, Partnership, and Proprietorship Firms. You can check out their comparison table and make an informed choice for your startup.
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Business Structure to start business in India

Businesses in India can be categorized into various types on the basis of several parameters including the requirement for registration, the procedures for registration, the size of capital investment, and the liability of the owners. Entrepreneurs in India can choose the business structure with which they want to start business, from a range of options available to them. These include, public companies, private companies, one-person companies, section 8 companies, partnership firms, proprietorship firms, LLPs, trusts, societies, and many more.
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Type of Business based on the Business Activity

The proposed set of activities plays a vital role in deciding on the type that is most appropriate to start business in India. For example, businesses involved in activities of social welfare have completely different objectives compared to businesses involved in sale of products and services for profits, and hence must be registered as different types. The table below mentions the most appropriate types of business based on the activities they are involved in.
Sale for profit Financial Service Non Profit
  1. Bank
  2. NBFC
  3. Asset Reconstruction Company
  4. Micro Finance Institutions
  5. Nidhi Company
  6. Payment Banks

FDI for different types of businesses

FDI is permitted for businesses in India via two routes, the automatic route and the approval route. Most sectors are permitted to receive 100% FDI under automatic route.
Automatic Route:  For FDI received via automatic route, there is no need to obtain prior approval of the government before the shares of the business are sold to foreign investors. However, after receiving the FDI, a report in FC-GPR is to be filed to the RBI through the AD Bank.
Approval Route: Few strategic sectors and the FDI originating from a country that shares land boundaries with India, are permitted only under the Approval Route, whereby a prior approval of the Central Government is required before the FDI is received.
The table below mentions the applicability of Indian and foreign investments for different types of business in India.
100% Indian Investment Permitted 100% foreign investment permitted Investment permitted by NRI or OCI
  1. Private Limited Company
  2. OPC
  3. LLP
  4. Partnership firm
  5. Proprietorship
  6. Section 8 Company
  1. Private Limited Company
  2. LLP
  1. Company
  2. LLP
  3. Partnership*
  4. Proprietorship*
*FDI in Proprietorship and Partnership is allowed only on a Non-Repatriation Basis.

Risk & Liability of a Business Structure

We advise considering the risk or possible liability and then deciding the type with which we can start business in India . 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 structure 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 to Owners Limited Liability to Owners
  1. Proprietorship
  2. Partnership
  3. HUF
  1. Company
  2. OPC
  3. LLP
Types Of Business

Control and Management in Specific Business Type

Business structure 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 separation between ownership and management. The table below categorises each type of business according to the separation between its ownership and management. You can consider the management of the business as a viable factor to start business in India.
S.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.

Wondering How to Start a Business.

Our startup advisors are available to answer all your queries on the requirements, step-wise process, cost and the documents required for Registration of Company.

Formation Cost of Various Business Structure

The cost of setting up a startup depends on the professional fee, the government fee, stamp duty and taxes involved. Several factors affect the determination of government fee, such as the initial authorised capital, location of the registered office address, and the number of promoters of the business. You may visit our specific pages dedicated to different types of businesses, to learn more about their overall cost of formation. In case you’re still unsure, our consultants are just a click away. You are just required to contact us and we will help you start business from beginning to the end.

Cost of Compliance of Several Business Structure

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., is almost the same in every business type. However, there are differences in the overall costs majorly because of the annual filing of returns to the ROC. The table below mentions the applicability of annual filing for different business structure in India. You can choose an start business with the structure which requires the least compliances to be fulfilled.
Business Type ITR Annual Return Audit
Proprietorship
Partnership
LLP
OPC
Private Limited

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 structure in India. Considering this parameter, you can accurately decide the structure that you want to start business with.

S.No Business Type Income Tax rate
1
Proprietorship

The proprietorship is not considered as a separate entity in law, and the income of the proprietorship firm is added in the ITR of the proprietor itself. In other words, no separate ITR is filed for the proprietorship firm. The Individual slab based taxation of 5% to 30% based is applicable on a proprietorship based on the income it earns. The deduction under section 80C to U is also applicable on the income of the proprietor. The Individual tax rate slabs for a proprietorship has been mentioned below.

Under New Income Tax Regime U/s 115 BAC
NoTotal IncomeTax Rate
1.Upto Rs. 2,50,000NIL
2.Rs. 2,50,001 To Rs. 5,00,0005%
3.Rs. 500001 to Rs. 7,50,00010%
4.Rs. 7,50,001 to Rs. 10,00,00015%
5.Rs. 10,00,001 to Rs. 12,50,00020%
6.Rs. 12,50,001 to Rs. 15,00,00025%
7Above Rs. 15,00,00130%
Under the old Income Tax Regime
NoTotal IncomeTax Rate
1.Upto Rs. 2,50,000Nil
2.Rs. 2,50,001 to Rs. 5,00,0005%
3.Rs. 5,00,001 to Rs. 10,00,00020%
4.Above Rs. 10,00,00130%
2
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.
3
Company
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, exemption under the income tax act, the tax rates are mentioned in the table below.

Particulars Manufacturing Company Other Company
Tax Rate 15% 22%
Surcharge 10% on tax 10% on tax
Cess 4% on tax & cess 4% on tax & Cess
Effective Rate 17.16% 25.168%
For companies that do not fall in the above mentioned category, the income tax rate is 25% in case the turnover is less than Rs.400 Crores and 30% in case the turnover is more than Rs.400 Crores. The Surcharge and education cess at the applicable rate is charged over and above the basic income tax rate.

Business Structure Comparison Chart

Features Private Limited OPC LLP Partnership Proprietorship
Popularity
*****
****
****
**
***
Applicable Law
Companies Act, 2013
Companies Act, 2013
LLP Act, 2008
Partnership Act, 1932
No Law
Number of Owners
  • Minimum - 2 Person
  • Maximum - 200 Person
  • Minimum - 1 Person
  • Maximum - 1 Person
  • Minimum - 2 Person
  • Maximum - Unlimited
  • Minimum - 2 Person
  • Maximum - 20 Person
  • Minimum - 1 Person
  • Maximum - 1 Person
Number of Directors/ Designated Partners
  • Minimum - 2 Person
  • Maximum - 15 Person
  • Minimum - 1 Person
  • Maximum - 15 Person
  • Minimum - 2 Person
  • Maximum - 15 Person
Not Required
Not Required
Need for Registration
Mandatory
Mandatory
Mandatory
Optional
Not Required
Authority for Registration
Registrar of Companies
Registrar of Companies
Registrar of Companies
Registrar of Firms
Registration not required
Tax Rates
15% for manufacturing companies, 22% for all others
15% for manufacturing companies, 22% for all others
30% for all LLPs
30% for all firms
For a small business with low turnover, there is the benefit of individual tax slabs
Statutory Compliance
High

Pvt Ltd Companies have several one-time, annual and monthly RoC and tax compliances
High

OPCs have several one-time, annual and monthly RoC and tax compliances
Low

LLP do not have any one-time or monthly compliance. THey only have 3 annual compliances that is filing annual returns in form 11, annual financial statements in Form 8, and ITR
Low

Only ITR is to be filed on the due date.
Least

ITR is required to be filed if the taxable income is more than 2.5 Lac
Foreign Investment (FDI)
Available in the automatic route
Not Allowed
Not Allowed
Available in the automatic route
Available in the automatic route
Separate Legal and Financial Identity of the business
Yes
Yes
Yes
No
No
Liability of the Owners
Limited to the unpaid subscribed capital of the shareholders
Limited to the unpaid subscribed capital of the shareholders
Limited to the unpaid subscribed capital of the partners
Liability of each partner is unlimited, and even their personal assets are at the risk for loss
Liability of the proprietor is unlimited and even his personal assets are at a risk of loss
Transfer of Ownership
Possible by selling the shares of the departed shareholder
Possible by inheritance of the nominee of the departed shareholder
Possible, if all partners give their consents for the transfer
Not Possible, as the admission or removal of a partner amounts to the new firm.
Not possible, as a proprietorship dies with the death or departure of its proprietor

Wondering How to Start a Business!

Our startup advisors are available to answer all your queries on the requirements, step-wise process, cost and the documents required to set up a business.