If you are planning to start a business or even are just beginning, the legal structure for your business would act as a great essential part regarding operation.
Every single business owner in India must select the best suitable entity type for their business, hence they must know their options and possess a legal structure for their business.
Choosing the proper legal structure is usually aligned to the particular goals of the business and the regional and key laws and regulations where it wants to establish its business.
Well-defined goals allow the entrepreneur to choose the best legal structure for his/her business.
For example, specific companies wish to get the advantages of becoming a startup within India. For this particular purpose, there is a requirement to register the entity as a Private Limited Company or even a Limited Liability Partnership.
Following would be the most common types associated with business structures in India.
Most Common Business Structures in India
- Sole Proprietorship
- Partnership
- Limited Liability Partnership
- Private Limited Company
- Public Limited Company
- One-Person Company
Differences Are as Follows:
1. Meaning:
This point speaks about the meaning of each entity type, how the one entities meaning is different from another
| Type of Entity | |
|---|---|
| Sole Proprietorship | A sole proprietorship is a business owned and operated by a single person with no legal difference between the owner and the business entity. |
| Partnership | A partnership is a legally binding agreement between two or more parties to jointly manage and operate a business and share profits. |
| Limited Liability Partnership | A limited liability partnership (LLP) is a business structure in which some or all of the members have limited liability. |
| Private Limited Companies | The term "private limited company" refers to a firm that is not publicly traded and whose shares are held privately by its members. |
| Public Limited Companies | A public limited Companies one that is listed on a well-known stock exchange and whose shares are freely exchanged by the general public. |
| One-Person Companies | A one-person corporation (OPC) is a company founded by one person. |
2. Minimum Number of Members:
This heading speaks about the minimum number of members are required to start a business entity, if someone does not meet this requirement they will not be able to form the entity.
| Type of Entity | |
|---|---|
| Sole Proprietorship | Only one person can be a member. |
| Partnership | To form a partnership, you'll need at least two people or entities |
| Limited Liability Partnership | To form an LLP, you'll need at least two people or entities. |
| Private Limited Companies | Minimum 2 members |
| Public Limited Companies | Minimum 7 members are required |
| One-Person Companies | Only 1 person is required to start the entity. |
3. Transferability/Perpetual Succession:
Transferability or perpetual succession means in case of death of the owner or if the owner wants to transfer his shares to another person will he/she be able to transfer it to another person.
| Type of Entity | |
|---|---|
| Sole Proprietorship | Non-Transferable |
| Partnership | Non-Transferable |
| Limited Liability Partnership | Transferable |
| Private Limited Companies | Transferable |
| Public Limited Companies | Transferable. |
| One-Person Companies | Transferable to only its nominee |
4. Maximum Number of Members/Shareholders:
This point speaks about the maximum number of members or shareholders an entity can have.
| Type of Entity | |
|---|---|
| Sole Proprietorship | Can have max 1 member. |
| Partnership | Only 20 people are allowed to participate. |
| Limited Liability Partnership | The number of partners in an LLP is limitless. |
| Private Limited Companies | There can only be 200 members in a Private Limited Company. |
| Public Limited Companies | Unlimited |
| One-Person Companies | Only one person can be a member of the OPC |
5. Minimum Number of Directors/Partners:
Directors/partners are the decision-makers of the company, and there is a limit on the maximum number of directors a company can have.
| Type of Entity | |
|---|---|
| Sole Proprietorship | Owner is the director |
| Partnership | Minimum 2 people are required |
| Limited Liability Partnership | Minimum 2 Partners are required |
| Private Limited Companies | Minimum 2 Directors are required |
| Public Limited Companies | Minimum 3 Directors are required |
| One-Person Companies | Minimum 1 Director is required |
6. Liability:
A liability is something a person or company owes, usually a sum of money. Limited liability means the owners are liable for only their portion of shares.
| Type of Entity | |
|---|---|
| Sole Proprietorship | Unlimited liability |
| Partnership | Unlimited liability |
| Limited Liability Partnership | Limited liability |
| Private Limited Companies | Limited liability |
| Public Limited Companies | Limited liability |
| One-Person Companies | Limited liability |
7. Taxation:
Taxation talks about the % of tax levied on the profit of an entity, each entity is taxed differently.
| Type of Entity | |
|---|---|
| Sole Proprietorship | Taxed as specific, based on typically the total income involving the Proprietor. |
| Partnership | Partnership gains are taxed on 30% plus overcharge and cess like applicable. |
| Limited Liability Partnership | Limited Liability Partnerships are taxed at 30% and also surcharge and cess as applicable. |
| Private Limited Companies | Private Limited Company gains are taxed on 25 % plus overcharge and cess like applicable. |
| Public Limited Companies | It is eligible for tax under Income tax Act, 1961. tax rate of 25% on the complete income |
| One-Person Companies | One person Company profits happen to be taxed at 25% plus surcharge together with cess as pertinent. |
8. Transfer of Shares:
Transfer of shares refers to the intentional transfer of shares from one person/entity to another person/entity.
| Type of Entity | |
|---|---|
| Sole Proprietorship | Transfer of share not possible |
| Partnership | Not freely transferable |
| Limited Liability Partnership | Freely transferable |
| Private Limited Companies | Freely transferable |
| Public Limited Companies | Freely transferable |
| One-Person Companies | Transfer of share not possible |
9. Legal Status of Entity:
A Legal Entity is a separate body corporate, that has legal rights and obligations related to agreements, contracts, payments, penalties, etc.
| Type of Entity | |
|---|---|
| Sole Proprietorship | Proprietorship is not recognised as a different legal entity and the proprietor is personally liable for the liabilities of the Proprietorship. |
| Partnership | Partnership is not recognised as a separate legal entity and the partners are personally responsible for the liabilities of the relationship. |
| Limited Liability Partnership | LLP is a separate legal entity registered under the LLP act, 2008. The partners of any LLP are not personally responsible for the financial obligations of the LLP. |
| Private Limited Companies | Private Limited company is an independent legal entity signed up under the Companies Act, 2013. |
| Public Limited Companies | A Public limited company is a separate legal entity under the companies Act 2013 |
| One-Person Companies | One Person company is a different legal entity registered under the Companies act, 2013. |
10. Foreign Ownership:
This point speaks about if a foreigner can own a type of entity in India, this is applicable for Non-Resident Indians (NRI) as well.
| Type of Entity | |
|---|---|
| Sole Proprietorship | Foreign ownership is not possible |
| Partnership | Foreign ownership is not possible |
| Limited Liability Partnership | Foreigners are permitted to invest within a LLP just with prior authorization of Reserve Bank of India plus Foreign Investment Advertising Board (FIPB) authorization. |
| Private Limited Companies | Foreigners can invest in a Private Limited Company through the Automatic approval route in many industries. |
| Public Limited Companies | Foreigners can invest in a Public Limited Company through the Automatic approval route in many industries. |
| One-Person Companies | Foreign ownership is not possible |
CONCLUSION:
This article provides a brief overview of different legal structures. However, regardless of which business entity you think best suits you, a qualified professional is most suitable to address such questions.
Therefore, it is advised to find a suitable firm with expertise in start-up and incorporation services to ensure the proper legal structure is followed for your business. If you need any help feel free to reach out to us at info@bbnc.in
