How to start Business in India | Different types of business entities in India
How can we start business in India and what are the types of business entities in India. If you are business management or commerce student, you might have learnt that before starting a business, most typical task is to choose the right form of business for your startup. If you choose wrong form of business, you may have to face severe difficulties in the future.
Let us understand different forms of business entities to start in India:
If you are Indian Resident you can either start your business in form of Sole-proprietorship, Partnership, Limited Liability Partnership, Private Limited Company, Public Limited Company. And if you are non-resident, you can start your business either as Limited Liability Partnership, Private Limited Company, Public Limited Company or you can just set up your branch office, liaising office or project office in India.
- Sole Proprietorship
Sole Proprietorship is that type of business entity, which is started by a single person and that single person brings capital, manages affairs, takes risk, suffers losses or enjoys profits. He is the sole responsible and owner of the business. Nature of his liability is unlimited, it means if business goes into enormous losses, his personal properties could also be attached and sold for recovering losses of business. This type of business is suited
- if you just want to try a new business idea and you are doubtful with its probable outcome
- if you are going to start a shop, retail outlet, franchisee shop, wholesale business and you do not want to keep any partners
- if you want to run your business at your business at your own and have sufficient money to invest in business
Merits of Sole Proprietorship:
- You are taxed as per slab rate and not as per flat rate as its applicable to company form of business
- Your business secrets are protected
- You have full control on your business
- Decision making is fast as you need not to take consent of your partners
- Very less regulation or compliance works
Demerits of Sole Proprietorship:
- Not suited if you want to do business on international basis
- Resource Constraint: A person might not arrange capital what a group of persons might.
- Human Constraint: Alone you might not be able to make your business grow very big. But if choose partnership or private limited company form of business, you can add partners with different educational and work backgrounds that can be very helpful.
- Unlimited Liability: If your business goes into enormous loss, your personal assets can also be sold to recover the business losses.
- Partnership
Partnership is the business entity which is formed when two or more persons enters into an agreement to do any legal works for profit and they agree to share profits as per ratios mentioned in the partnership agreement. If you and your friends or colleagues want to do business together, you can do it as partnership. This form of business is best suited if you just want to try out any business idea with very less investment. It’s very easy to start partnership as compared to LLP or Limited Company form of Business. And compliance works are also very less as compared to LLP or Company form of business. There should be at least two persons to form partnership.
Benefits of Partnership:
- Less compliance works as compared to LLP and Company Form of Business
- You get more people in your team. Their experience, knowledge can be very helpful in your business
- More Owners can bring more capital into business in compared with sole proprietorship form of business
- You can serve your customers in better way as you would have partners to manage affairs of the business
- Risks, Losses are shared among partners
Demerits of Partnership:
- Decision Making might become time consuming as you would have to take consent of all partners
- There are always chances of dissatisfaction among partners which could lead to closure of partnership or disruption of business of partnership due to sudden resignation of partners
- Unlimited Liability: Like Sole Proprietorship, your liability as partners are unlimited. In case of enormous loss, personal properties of partners might be attached and sold to recover amount.
- Your trade secrets are shares among partners which could be very distorting for your business if any partner leaves the partnership and either start same business or join your competitor
- Resource Constraint: Partners have to arrange funds for business by their own means. They cant raise funds from public like company form of business.
- Limited Liability Partnership
Limited Liability Partnership is hybrid version of Partnership form of business. It has some features of Partnership and some features of Private Limited Company. It’s Partnership as its form by making partnership agreement by two or more partners but it has limited liability. Means, suppose capital of LLP as mentioned in LLP agreement is Rs. 1 lac, and LLP goes into loss of Rs 5 lacs. Partners would only be liable to pay up to the amount they agreed to contribute in total capital of LLP i.e., Rs. 1 lac. There should be at least two persons to register a LLP.
Merits of Limited Liability Partnership:
- Liability of partners is limited.
- Limited Liability Partnership is registered form of Partnership. Therefore, Its existence is valid in eyes of laws. It’s a body corporate. Its existence is different from existence of its partners.
- Have better brand image over just partnership type of business entities. Although LLP has been introduced in India recently, but Its very famous in other countries.
- Perpetual Succession: It means life of LLP is not based on lives of its partners. Even in case any or all of partners dies, LLP continues to exist.
- LLP like company can sue or be sued in its name. It can buy properties or sell properties in it’s name. It functions like a legal entity.
- No audit required for small LLPs: LLP having turnover of less than Rs. 40 lacs are not required to get its accounts audited by Chartered Accountant.
- Less compliance as compared to companies.
Demerits of Limited Liability Partnership:
- It can’t raise capital from the public
- Its registration cost is more than partnership formation
- There are procedures and rules and regulations to be followed in registration of LLP. Its formation is not as quick and easy as partnership
- More compliances have to be done in compared to partnership
- Private Limited Company
Company is association of persons registered as per provision of Company Act, 2013. Company can be either Private Limited Company or Public Limited Company or NPO Company. NPO companies are formed for social welfare purposes. Private Limited Companies are the companies formed by one or more persons to carry out legal activities for profits. Private Limited Company can’t raise capital from family although promoters or shareholders can raise funds from their private sources like friends, family members etc. that’s why It’s called private limited company. There are one new variant of private limited company recently launched i.e., One person company. One person company (OPC) is private limited company formed by one person. It has only one shareholder and has at least one director. In case other private limited companies other than OPC, there should be minimum two shareholders and two directors. Directors and shareholders can be same persons.
Merits of Private Limited Company:
- Limited Liability: Liability of shareholders (Owners) are limited to the amount of shares that they have agreed to acquire.
- Perpetual Succession: Company never dies except by procedure of laws. Company continues to exist even on death of its shareholders and promoters.
- Company and shareholders are two separate and distinct entities.
- Company can sue and can be sued in its name.
- Company can buy or sell properties in its name.
- Private Limited Company is well known type of business entity. It has brand value.
- Shares of ownership of company is easily transferable.
Demerits of Private Limited Company:
- It’s a costly affair to Register a private limited company.
- A lot compliances have to be done. Compliance cost is more as compared to sole proprietorship, partnership and LLP.
- It’s costly to wind up company
- Private Limited Company can’t issue shares to public
- Public Limited Company
Public Limited Companies are the companies which are formed by seven or more persons. It has minimum 3 directors and 7 shareholders. Public Limited Company can raise capital from the public, therefore it is called Public Limited Company. It can register its shares on stock exchange and issue debentures, bonds, preference shares and equity shares to the public. Public Limited Company is best suited if you want to raise a large amount of capital for your project or business.
Merits of Public Limited Company:
- Limited Liability: Liability of shareholders (Owners) are limited to the amount of shares that they have agreed to acquire.
- Perpetual Succession: Company never dies except by procedure of laws. Company continues to exist even on death of its shareholders and promoters.
- Company and shareholders are two separate and distinct entities.
- Company can sue and can be sued in its name.
- Company can buy or sell properties in its name.
- Public Limited Company is well known type of business entity. It has brand value.
- Shares of ownership of company is easily transferable.
- Public Limited Company can raise funds and capital from the public.
Demerits of Public Limited Company:
- Very costly to register a public limited company as compared to other forms of business.
- Compliance costs are more than any other form of business.
- Shareholders may have less control the management of the company.
- Profits are distributed among large number of shareholders.
- Accounts and financial results are published in public.
- Decision making is not as quick as sole proprietorship or partnership.
Apart from this, there are some other types of companies as well like NIDHI Company, Producer Company, NBFC Company, NPO Company. These companies are private limited and public limited companies, but are formed for some special and fixed nature of works. For more details, regarding registration of these companies, search on our blog. You would get separate articles on each of them.