There are five different types of business entities that can be set up in India. Depending on the nature of the business and the amount of money one wants to invest, any one type of business entity can be chosen for setting up business in India. There are various factors that determine the type of business entity that would be most suitable for an entrepreneur. These factors include tax implications, liability of the owner, compliance issues, availability of funds, etc. The India Entry Strategy of foreign entities that want to do business in India should take into account all these factors. A brief description of the five types of business entity legally permitted in India is provided below.
This is the easiest and the most common type of business set up in India. As the name indicates, it’s a single owner entity. Typically, when a person wants to start a business with a limited capital, sole proprietorship is the right choice. There are not many legal formalities that need to be done. With the consolidation of different taxes into one single Goods and Services Tax, registration has also become very easy. Even a separate PAN in the name of the firm is not required the PAN of the owner is all that is needed. Ownership of sole proprietorship is non-transferable. Proprietors have unlimited liability, that is, the personal assets of the owner can be attached to pay off debts and other liabilities.
As per the Partnership Act 1932, two or more persons can join hands to form a partnership. There can be a maximum of 20 partners. A partnership deed is prepared which has details of capital contribution and profit sharing of each partner. There are two types of partners, sleeping partner and working partner. Working partners are also allowed to draw a salary. Though a partnership is required to have a separate PAN, it doesn’t have a legal standing of its own. The partners in a partnership firm have unlimited liability. Each partner is equally responsible for the profit and loss.
It is not compulsory for partnership firms to be registered with the Registrar of Firms. If the partnership is not registered, the partnership deed is not considered as a legal document.
Limited Liability Partnership
The basic structure of Limited Liability Partnership (LLP) firm is quite similar to that of partnership except for a few differences. Unlike a partnership firm, the liability of the partners are no unlimited. Liability of each partner is limited to the amount of investment made by them. An LLP has its own legal status and a PAN. In an LLP, each partner enjoys protection against any unauthorised or illegal actions of another partner. Setting up LLP in India is not that difficult.
Private Limited Company
A Private Limited Company in India is a separate legal entity. It can be formed by registering the company name with the Registrar of Companies. Memorandum and Articles of Associations are prepared and signed by the promoters. It can have between two to fifty shareholders. Owners of a Private Limited Company subscribe to the shares of the company and become its shareholders. Minimum share capital is Rs1,00,000. Tax implications and liability of Private Limited Company are separate from its owners. The personal liability of the shareholders is limited to their share capital. Minimum two Directors must be appointed by the shareholders to manage the company.
Existing owners can exit and new shareholders can enter the company without affecting its legal status. Because of its flexibility in terms of ownership and operations, it attracts more venture capital investments. Investors can exit without any liability towards the company. Private Limited Company is much preferred type of business set up in India.
Public Limited Company
The basic structure of a Public Limited Company is similar to that of a Private Limited Company except that the number of shareholders is not limited, subject to minimum seven members. It is not easy to establish a Public limited Company as a lot of regulatory compliances have to be met. A Public Limited Company can be either listed or unlisted. Shares of a listed company are traded freely on the stock exchange. A Public Limited Company has to be more compliant towards government and SEBI regulations and has to make public disclosures of its functioning. Like a Private Limited Company, a Public Limited Company is also an independent legal entity and it is not affected by the personal status of its shareholders.