August 21, 2019
5 min read
SeekWiser has prepared a brief guide on the different kinds of business structures and their key features.
Starting a new business entails having the proper knowledge of not only running a business and the trade behind it, but also the local laws, rules and regulations applicable. Entrepreneurs need to evaluate the different business structures and choose the one that suits their business requirements the most. With changing laws and multiple post-incorporation requirements, it is pertinent for new entrepreneurs to understand each and every feature of the different legal structures of business in India and make a well-informed choice.
A strong foundation of a new business must be laid out to ensure that the functions of the business that come after business incorporation rum unhindered and smoothly. Each type of business structure comes with its own pros and cons and new entrepreneurs need to evaluate which business structure suits their individual needs the best.
Simply put, the different types of business structure in India have different liabilities, ROC Compliances, taxation requirements, limits to the number of members in the business, rights, and benefits. Having proper insight into these different business structures can prepare a business in making the right choice when it comes to business incorporation, but when the entrepreneur lacks the know-how on selecting the right business entity or faces confusion as to choosing the best business entity, it is essential to consult a business consultant in India.
In order to make it simpler for new entrepreneurs and help them intelligently picking the right business structure, SeekWiser has prepared a brief guide on the different kinds of business structures and their key features.
A new business venture may be started in India as any of the following most popular business structures:
Private Limited Company
Limited Liability Partnership
One Person Company
A Private Limited Company is one of the most opted business structures. A Private Limited Company enjoys a separate legal status from its members and has a perpetual existence. This means that a Pvt. Ltd. Company continues to exist even after its members and is not affected by old members leaving or new members joining. A private company has the rights to hold property in its own name and can be involved in litigation.
The liabilities of the directors, shareholders and members of a private limited company are limited to their individual share in the company. The creditors cannot hold the members accountable to pay off the company’s debt personally.
A private limited company in India can be incorporated with a minimum of 2 members and can have a maximum of 200 members. A private company can have a maximum of 15 directors, the limit to which can be increased by passing a special resolution.
The Memorandum of Association and Articles of Association of a company are needed to be drafted and filed with the Registrar of Companies for private limited company incorporation. Once the company is incorporated, it becomes liable to file its annual ROC returns every financial year.
A Limited Liability Partnership is a relatively newer kind of business structure, established under the Limited Liability Partnership (LLP) Act, 2008. A Limited Liability Partnership is like a hybrid version of a Private Limited Company and a Partnership Firm. Members of an LLP enjoy the same kinds of flexibility and limited liability as in the case of a private company, but it also provides more control over the business.
A Limited Liability Partnership business structure is most-suited for medium and small business, however, there is no limit to the maximum number of members of an LLP in contrast to a private limited company. A new business owner must consult a business expert to know if such a model is suitable for their requirement.
A Limited Liability Partnership is also a body corporate and holds a separate legal entity from its partners. No partner is liable or responsible for the acts of other partners, giving the partners of an LLP more protection from liability outside their share and activities in the business.
Once the LLP incorporation is done, the partners of a Limited Liability Partnership need to draw out an LLP agreement and fulfil the ROC compliances just as a private limited company.
The concept of a One Person Company was laid down in the Companies Act, 2013. As the name suggests, a One Person Company or OPC is a private company with only one member and director. An OPC is a hybrid form of a Private company and a Sole Proprietorship as there is no need to have a Board of Directors, and only one person can act as the director as well as the shareholder of the company.
A One Person Company has fewer annual compliances as compared to a private limited company. The member of the OPC enjoys the same limited liability and a new successor can be appointed for the company when the previous one leaves.
It is an extremely young concept and most suited for small business owners, who want complete control over the business, yet have limited liability.
A Partnership Firm is a simpler version of an LLP and has 2 or more people coming together to form a new business. A Partnership Deed is required to register a Partnership Firm and the partners of the business can lay down the objectives, rights, share, liabilities and responsibilities.
Unlike the above-mentioned types of business structure, a Partnership Firm does not have a separate legal existence and the partners are considered one and the same as the business. The partners also have unlimited liability and are directly responsible to pay off the business debts personally. A Partnership Firm is most suited for businesses with the least amount of risk and investment.
A Sole Proprietorship is the simplest form of business and can be started by a single individual. A Sole Proprietorship does not have a separate legal existence as well and the owner of the business is personally and unlimitedly responsible for the business’s losses or debts.
This kind of business requires minimal investment and has the least amount of compliances. The ITR requirements of the business are the same as the proprietor as they are considered one single entity. Businesses with the least amount of risk can opt for a Sole Proprietorship business structure.
There are no best or worst legal structures of a business and every business structure comes with its own benefits and disadvantages. Entrepreneurs need to take a calculated decision while choosing a business structure for their new business as it can have a ripple effect on the business at later stages.
When the entrepreneur is unable to make a clear choice between the different business structures, it is best for them to talk to a business consultant and get the needed guidance and opinion. A business consultant in India will guide the entrepreneur about the different pros and cons of a business structure on the business model chosen by them and provide insights on incorporating the business in the right legal structure.
SeekWiser has a wide network of best business consultants in India and across the world who can guide new entrepreneurs on deciding upon the right business structure.
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