Types of Businesses

 

Start-up founders can be overwhelmed by legal information that is out there. The sheer number of requirements the government places on businesses can be confusing. To make this process simpler, we have specified the main features of each structure and analysed which businesses they suit best.

 

1 Private Limited Company

Start-ups and growing companies pick this popular business structure because it allows outside funding to be raised easily, limits the liabilities of its shareholders and enables them to offer employee stock options to attract top talent. As these entities must hold board meetings and file annual returns with the Ministry of Corporate Affairs (MCA), they tend to be viewed with more credibility than an LLP or General Partnership.

Features of Private Limited Company

  • For Businesses Raising Funding: Fast-growing businesses that will require funding from venture capitalists (VCs) need to register as private limited companies. This is because only private limited companies can make them shareholders and offer them a seat on the board of directors. LLPs would require investors to be partners and OPCs cannot accommodate additional shareholders. If you’re raising funding, therefore, the points that follow scarcely matter; your decision is made
  • Limited Liability: Businesses often need to borrow money. In structures such as General Partnership, partners are personally liable for all the debt raised. If it cannot be repaid by the business, the partners would have to sell their personal possessions to do so. In a private limited company, only the amount invested in starting the business would be lost; the directors' personal property would be safe
  • Start-up Cost: A private limited company costs around Rs. 8000 to start at the very least, excluding professional fees. However, this will be higher in some states; in Kerala, Punjab and Madhya Pradesh, in particular, the fees are much higher. You also need some paid-up capital, which can be as little as Rs. 5000 to begin with. The annual compliance costs are around Rs. 13,000
  • Requires Greater Compliance: In exchange for the convenience of easily accommodating funding, the private limited company set-up needs to meet the demands of the Ministry of Corporate Affairs (MCA). These range from a statutory audit, annual filings with the Registrar of Companies (RoC), annual submission of IT returns, as well as quarterly board meetings, the filing of minutes of these meetings, and more. If your business isn’t yet geared to meet these requirements, you may want to wait a while before you jump into registering a private limited company
  • Few Tax Advantages: The private limited company is assumed to have many tax advantages, but this is not actually the case. There are some industry-specific advantages, but taxes are to be paid at a flat rate of 30% on profits, the dividend distribution tax (DDT) applies, as does Minimum Alternate Tax (MAT). If you’re looking for the structure with the lowest tax burden, the LLP does offer some better benefits
2 Limited Liability Partnership

A relatively cheaper approach to incorporate as compared to a Private Limited Company and requires fewer compliances; its main improvement over General Partnership is that it limits the liabilities of its partners to their contributions to the business and offers each partner protection from negligence, misdeeds or incompetence of the other partners

Features of Limited Liability Company

  • Start-up Cost: Much cheaper than starting a private limited company, with government fees of Rs. 5000, no paid-up capital and low compliance costs
  • For Non-Scalable Businesses: If you’re running a business that’s unlikely to require equity funding, you may want to register an LLP as it combines several benefits of the private limited company and general partnership. It has limited liability, like a private limited company, and has a simpler structure, like a general partnership
  • Fewer Compliances: The MCA has made given some concessions to the LLP. For example, an audit needs to be performed only if your turnover is greater than Rs. 40 lakhs or paid-up capital is more than Rs. 25 lakhs. Furthermore, whereas all structural changes need to be communicated to the RoC in the case of private limited companies, the requirement is minimal for LLPs
  • Tax Advantages: Particularly if your business is earning over Rs. 1 crore in profits, the LLP offers tax benefits. The tax surcharge that applies on companies with profits over Rs 1 crore doesn’t apply to LLPs, nor does Dividend Distribution Tax. Loans to partners are also not taxable as income
  • Number of Partners: There is no limit to the number of partners there may be in an LLP. If you’re building a large advertising agency, for example, you need not worry about any cap on the number of partners
3 General Partnership

A General Partnership is a business structure in which two or more individuals manage and operate a business in accordance with the terms and objectives set out in the Partnership Deed. This structure is thought to have lost its relevance since the introduction of the LLP because its partners have unlimited liability, which means they are personally liable for the debts of the business. However, low costs, ease of setting up and minimal compliance requirement make it a viable option for some, such as home businesses that are unlikely to take on any debt. Registration is optional in the case of General Partnerships.

Features of General Partnership

  • Unlimited Liability: On account of unlimited liability, the partners in the business are liable for all of its debts. This means that if, for whatever reason, a partner is unable to repay a bank loan or is liable to pay a fine, this can be recovered from his or her personal possessions. So the bank, institution or supplier would have right to their jewellery, house or car. Furthermore, aside from ease of set-up and minimal compliance, the partnership offers no benefits over the LLP. If one opts to register it, which is optional, it may not even be cheaper. Therefore, unless one is running a very tiny business (let’s say you offer a lunch pack service in your area and would like to set a profit ratio with your partner), you should not opt for a partnership
  • Easy to Start: If you choose not to register your partnership firm, all you need to get started is a partnership deed which you can have ready in just two to four working days. Even registration, for that matter, can be completed in a day once you have the appointment with the registrar. As compared with a private limited company or LLP, the procedure for starting-up is much simpler
  • Relatively Inexpensive: A General Partnership is cheaper to start than an LLP and even over the long-term, thanks to the minimal compliance requirements, is inexpensive. You would not need to hire an auditor. This is why, despite its shortcomings, home businesses may opt for it
4 Sole Proprietorship

A sole proprietorship is a business that is owned and managed by a single person. You could have one up and running within 10 days, which makes it very popular among the unorganised sector, particularly small traders and merchants. There is no such thing as registration; proprietorships are recognised by other registrations, such as a service or sales tax registration.

Features of Sole Proprietorship

  • Unlimited Liability: Just as a partnership, a sole proprietorship has no separate existence. Therefore, all debts can only be recovered from the sole proprietor. Therefore, the owner has unlimited liability with regard to all the debts. This should heavily discourage any risk-taking, which means that it’s suited to only small businesses. If you plan on running a business that requires a loan or may end up paying penalties, fines or compensation, it’s best you look into registering an OPC
  • Easy to Start: There is no separate registration procedure for proprietorships. All you need is a government registration relevant to your business. If you’re selling goods online, a proprietor would only need a sales tax registration. Therefore, starting up as a sole proprietor is relatively easy
5 One Person Company

The constitution of a One Person Company (OPC) was recently introduced as a strong improvement over sole proprietorship. It gives a single promoter full control over the company while limiting his/her liability to contributions to the business. This person will be the only director and shareholder (there is a nominee director, but with no power until the original director is incapable of entering into contract). Hence, there is no scope of raising equity funding or offering employee stock options.

Features of One Person Company

  • For Solo Entrepreneurs: A big improvement over the sole proprietorship firm, given that your liability is limited, the OPC is meant for solo entrepreneurs. However, do note that if it has revenues of over Rs. 2 crore and paid-up capital of over Rs. 50 lakh, it needs to be converted into a private limited company. Furthermore, given that there must be a nominee director (to enable perpetual existence of the OPC), you may as well consider starting a private limited company, which will also have flexibility of raising funding
  • High Compliance Requirements: While there are no board meetings, you will be required to conduct a statutory audit, submit annual and IT returns and comply with the various requirements of the MCA
  • Minimal Tax Advantages: The OPC, like the private limited company, has some industry-specific advantages. But taxes are to be paid at a flat rate of 30% on profits, the DDT applies, as does MAT. If you’re looking for a structure with the lowest tax burden, the LLP does offer some better benefits
  • Start-up Costs: Nearly the same as a private limited company, with government fees, a little less than Rs. 7,000. However, this will change for different states, for example in Kerala, Punjab and Madhya Pradesh in particular, the fees is much higher

 

To know more about business establishments, go to Company Incorporation