When setting up a business in India, the term ‘company’ is commonly used. However, most people have a common misunderstanding about this term. In legal terms, ‘company’ has a completely different meaning; a company is just one of the many different types of business entities there exist. In this article, we will talk about the different types of business entities available for company incorporation in India.
1. Sole Proprietorship
This is one of the most common business entities in India. A business registered in the name of an individual is called Sole Proprietorship. A single person is completely responsible for the entire business. The business and the owner are not separate from each other. The owner funds the business, takes any profits and bears any losses.
Sole Proprietorship does not involve any complex rules or accounting. Personal assets and business assets are not separated from each other. Any profits from the business are just added to the business owner’s income for taxation purposes.
Similarly, any losses become the personal losses of a business owner. In case the business starts incurring losses and additional money is needed to compensate those losses, the personal assets of the owner itself are put at risk.
Partnership business entities are quite similar to sole proprietorship. The basic difference between partnership and sole proprietorship is that more than one individual is involved in a partnership. In fact, there could be several partners involved in a partnership business. The roles, responsibilities and the share of each partner are specifically defined in a legal partnership agreement.
Any profit earned by the business is shared between partners according to the legal partnership agreement. In case there are losses, each of the partners is personally responsible. Personal assets of partners may be used to compensate the losses incurred, if any.
3. Limited Liability Partnership (LLP)
This is a relatively new business entity. It was introduced in India in 2009. A Limited Liability Company functions as a structured business model. It is a separate legal entity from the partnership entity. Business assets are separate from the personal assets of the partners. In case the business incurs losses, the personal assets of partners are not put at risk. The maximum liability of every partner is defined by his share capital in the entity.
Compared to Partnership and Sole Proprietorship, Limited Liability Companies always have better credibility among investors. The main reasons include proper maintenance of financial records, incorporation records and tax records.
4. Private Limited Company
This is one of the most sophisticated forms of business entities in India. A group of shareholders forms a Private Limited Company. Total capital of a Private Limited Company is made up of shares. Every shareholder is a partner and allowed to have a variable number of shares. Shares can also be easily sold to other individuals, thereby, changing the ownership of the company without many legal formalities. In a private limited company, business assets are separated from personal assets. Every shareholder is just responsible for his share of the total capital. Private Limited Companies need to maintain records of financial transactions, board meetings, and annual reports and so on. Moreover, Directors of a Private Limited Company need to meet at specific time intervals. All the financial transactions of a Private Limited Company need to be audited as well.
5. Public Limited Company
Public Limited Companies are quite similar to Private Limited Companies in many respects. The basic difference between the two entities is that a Public Limited Company may have an unlimited number of shareholders. The minimum number of shareholders has to be no less than seven. Incorporating a Public Limited Company can be quite difficult and time-consuming. Such a company can either remain unlisted or listed in a stock exchange. In a Listed PLC, shareholders can freely trade shares on the stock exchange. A Public Limited Company is also a separate legal entity and therefore, its existence is not affected by retirement, death or insolvency of shareholders.
Which Business Entity should you use?
While determining the best business entity to use for your business, you may want to consider some basic things before choosing a specific entity; these may include details about your initial investment, number of people involved, expectations about further investments, risks and chances of losses, any special skills required, and the nature of your business. A clear idea about all of these factors will help you choose the perfect business entity while incorporating your business.
Photo Source: Baishampayan Ghose