A Person may carry out business operations in India either individually or collectively by way of different legal entities. An entrepreneur has to decide upon the legal constitution of the entity depending upon the risk appetite, resources and funds available, need of administration and entailing legal compliances. The principal forms of business organisations in India are mentioned below.
Proprietorship
Sole Proprietorship concern is a legal form of entity which is owned, managed and controlled by a single person. It is an unincorporated business with one owner who pays personal income tax on profits from the business. It is the most simplest and common structure chosen to start a business in India. The capital required in the business is supplied wholly by the owner himself. The sole proprietorship concern has no legal existence separate from the owner. It requires minimal legal documentation for formation.
- 10-14 working days (If PAN is not available)
- Almost immediately (If PAN is available)
- No registration required for set up
- Trademark may be obtained
Pros & Cons Of Proprietorship
- Easy of Formation
- Secrecy of business
- Quick decision making
- Flexibility of operations
- Singular ownership of profits
- Limited capital
- Limited managerial acumen
- Unlimited liability of proprietor
- Continuity dependent on life of proprietor
- Moderate risk
- Small financial resources
- Low risk and capital requirement businesses
- Not suitable if one seeks capital funding at a later stage
- Can be converted to Company and LLP
- Advisable to consider the same at inception
- Conversion procedure may be time consuming, cumbersome and expensive
Audit Requirement
- No statutory audit required
- Tax audit requirement may arise depending upon turnover and other prescribed conditions
Partnership
Partnership firms in India are governed by the Indian Partnership Act, 1932. The said Act defines ‘Partnership’ as the relation between person who have agreed to share profits of a business carried on by all or any of them acting for all. The owners of a partnership firm are individually known as ‘Partners’ and collectively as ‘Firm’. It is not a distinct legal entity apart from the partners constituting it.
Although it is permissible to have oral partnership, it is preferable that a Deed of Partnership laying down the agreed terms is executed in writing. This partnership deed must be executed on paper duly stamped as per the laws prevalent at the place of execution. The registration of partnership deed is not mandatory but it is advisable to do so as an unregistered firm is deprived of certain legal benefits.
- 3 working days for execution and registration of deed
- Registration of partnership deed with the Registrar of Firms
- Trademark may be obtained
- Minimum 2 persons
- Maximum 20 partners (10 in case of banking business)
Pros & Cons Of Proprietorship
- Easy of Formation
- Better managerial abilities
- Greater capital and credit resources
- Limited Life
- Absence of absolute authority
- Unlimited liability of partners
- Joint liability for actions of the firm
- Moderate risk
- Small financial resources
- Low risk and capital requirement businesses
- Not suitable if one seeks capital funding at a later stage
- Can be converted to Company and LLP
- Advisable to consider the same at inception
- Conversion procedure may be time consuming, cumbersome and expensive
Audit Requirement
- No statutory audit required
- Tax audit requirement may arise depending upon turnover and other prescribed conditions
Private Limited Company
Companies incorporated in India and foreign corporations having a presence in India are regulated by the provisions of the Companies Act, 2013. The Companies Act 2013 regulates the formation, management and the dissolution of limited companies. A limited liability company may be either public, in which case its name ends with the word ‘Limited’ or, private where its name ends with the words ‘Private Limited’.
A company is a separate legal entity from its member and has perpetual succession. The requirement of minimum paid up capital has been waived off recently.
Cost of Company formation also involves stamp duty and registration fees. The amount of duty (stamp duty rates vary from State to State) and the registration fees depends on the authorized capital of the company.
- 3 working days for DSC & DIN
- 7-10 working days for incorporation (Through INC 29)
- Registration with the Registrar of Companies
- Minimum 2 shareholder; and
- Minimum 2 Directors (Directors can be the same as the shareholders)
Pros & Cons Of Proprietorship
- Limited Liability
- Easy transferability
- Perpetual succession
- Separate legal entity
- Procedural compliances
- Absence of absolute authority
- Ideal for all entrepreneurs
- Can be converted to Company
Audit Requirement
- No statutory audit required
- Tax audit requirement may arise depending upon turnover and other prescribed conditions
Limited Liability Partnership
The concept of LLP has been introduced by way of enactment of Limited Liability Partnership Act, 2008. LLP as a business structure combines the limited liability benefits of a company with the flexibility of partnership. LLP is a separate legal entity from partners and has perpetual succession.
The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners are governed by an agreement between partners or between the LLP and the partners subject to the provisions of the LLP Act 2008. However, the act provides flexibility to devise the LLP agreement as per the choice of the partners.
- 3 working days for DSC & DIN
- 3-7 working days for Name approval (subject to delay by ROC)
- 2 working days for Incorporation Form
- 5 working days for approval and LLP agreement submission
- Registration with the Registrar of LLP
- Minimum 2 persons(Atleast one partner must be resident in India)
Pros & Cons Of Proprietorship
- Limited Liability
- Perpetual succession
- Easy transferability
- Separate legal entity
- Absence of absolute authority
- Ideal for all entrepreneurs
- Can be converted to Company
Audit Requirement
- No statutory audit required
- Tax audit requirement may arise depending upon turnover and other prescribed conditions
One Person Company
The Concept of One Person Company (OPC) has been introduced in the Companies Act, 2013 to enable Entrepreneurs carrying on business in the Sole Proprietorship form of business to enter into a Company Framework. OPC has lot of operational flexibility as compared to other types of companies.
Only a natural person who is an Indian citizen and resident in India is eligible to incorporate an OPC or be a nominee for the sole member of an OPC. It must have only one member at any point of time and may have only one director. One person cannot incorporate more than one OPC or become nominee in more than one OPC. A nominee member is one, who shall, in the event of promoter member’s death or incapacitation become a member of the Company.
An OPC is incorporated as a type of private limited company. The name of an OPC ends with the words ‘Private Limited (OPC)’. It is run by individuals yet OPCs are a separate legal entity similar to that of any registered corporate. No OPC can convert voluntarily into any kind of company unless two years have expired from the date of incorporation, except in cases where capital or turnover threshold limits are reached.
Cost of OPC formation also involves stamp duty and registration fees. The amount of duty (stamp duty rates vary from State to State) and the registration fees depends on the authorized capital of the company.
- 3 working days for DSC & DIN
- 7-10 working days for incorporation (Through INC 29)
- Registration with the Registrar of Companies
- 1 Director
- 1 Nominee
Pros & Cons Of Proprietorship
- Limited Liability
- Separate Ownership
- Minimum regulations
- Perpetual succession
- Easy transferability
- Separate legal entity
- High Tax rate
- Specified businesses restricted
- Foreign participation disallowed
- Suitable only for small business
- Ideal for all entrepreneurs
- For those planning to seek funding
- Can be converted to LLP/ Partnership
Audit Requirement
- No statutory audit required
- Tax audit requirement may arise depending upon turnover and other prescribed conditions
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