Corporate structures are important for any business. They decide how the business has to function and how it can be managed. Choosing the right structure can help the business to grow fast and choosing the wrong structure can cause the business to suffer. This blog will go into the different structures and help you pick the best one for your business.
There are basically 5 business entity types in India.
- Sole Proprietorship
- Partnership
- One Person Company
- Limited Liability Partnership
- Private Limited Company
Let’s discuss each and every entity in detail to understand, which entity is best suited for your business.
Sole Proprietorship:
Sole proprietorship is a business entity type in India. in which a person owns and operates it alone. This is the simplest form of business organization that consists of only one person. The business owner may hire people to run the daily affairs of the business. He/she is solely responsible for all the business decisions, policies and actions and is subject to all liabilities and obligations of the business. He/she remains the sole owner of the business and the business assets are not subject to claims of his/her creditors. However, should the business fail, his/her personal assets are subject to claims of his creditors.
This entity type is best suited for single owners, who wants to operate in a small geographical area. A foreigner or an NRI cannot start a sole proprietorship firm in India.
Partnership firm:
A partnership firm is a business entity which is owned by two or more people. The business decision of the firm is made by the owners also called as partners the profit is divided amongst the partners according to the partnership agreement among partners. The decision can be made by consensus. Heavily depending on the partners. The accounts are done by the partners periodically. The partners can be a group of individuals, small company or big companies. The liability partners involved in a partnership firm is unlimited.
It is best suited for small businesses, who does not require external funds and has more than 1 co-founders. A foreigner or an NRI cannot start a partnership firm in India.
One Person Company:
One person company is a private limited company which is formed by only one individual in India. This company type is usually used by business owners who are not in need of funding and also for people who are looking for the easy and quick way to register a company. It takes only a few days to register a one person company in India. The main benefit of registering a one person company is that an individual will be the sole shareholder, director and the only decision maker of the company. The company would be registered in the name of the individual and the individual will be responsible for all the financial transactions of the company.
Liability of the shareholders of OPC is limited. A foreigner or an NRI cannot start a One Person Company (OPC) firm in India.
Limited Liability Partnership
LLPs are a relatively new form of business enterprise in India. It is a hybrid of a partnership firm & a private limited company. In India, LLPs are governed by the Limited Liability Partnership Act 2008.
Limited Liability Partnership is a new type of partnership which was introduced in India on October 1, 2009. It provides a distinct form of partnership for providing a mechanism for continuous professional practice and a separate legal identity to the partners. It is available for both the existing partnerships as well as the entry in the future. It is based on the principle of limited liability which means that the liability of the partners in case of the firm’s bankruptcy is limited to the value of their investment.
LLP is best suited entity type for businesses who require only minimum funding and do not require foreign funding.
Private Limited Company
Private limited company is a legal entity, which is governed by the Companies Act, 2013. It means that it is a separate legal person owned by its shareholders. The company is formed when it is registered with the Registrar of companies (ROC).
Private limited company, is the most commonly preferred for business of any scale, it is because they offer protection to the investors as they don’t have unlimited liability, and the owners in these companies are also not the liable for any of the company’s outstanding debt.
It is most preferred by Start-ups, Foreigners and NRIs who wants to start a business in India, Foreign companies who wants to start a subsidiary in India. Because raising funding and receiving funding from investors is quite easy in private limited company.
It is vital to choose the right corporate structure for your business in India, to make sure you are able to optimize your tax rate, and to ensure that your business is able to grow. The structure of your business is especially important to consider if you are in a technology business, as many of the structures have particular benefits to offer small technology businesses. If you are still unsure of what the best structure for your business is, or if you would like to learn more about the different structures and how they can benefit your company, please contact us at [email protected] . Thank you for reading!
