The different Types of Business Entities in India

Doing business in India requires one to pick a type of business entity. In India one can choose from five different types of legal entities to conduct business. These include Sole Proprietorship, Partnership Firm, Limited Liability Partnership, Private Limited Company and Public Limited Company. The choice in the business entity is dependent on various factors such as taxation, ownership liabilities, compliance burden, investment options and exit strategy.

Lets look at each of these entities in detail

Sole Proprietorship

This is the most easy business entity to determine in India. It won’t have its own Permanent Account Number (PAN) and the PAN of the owner (Proprietor) acts as the PAN for the Sole Proprietorship firm. Registrations with some other government departments are required only on a need basis. For example, in case the business provides services and repair tax is applicable, then registration with the service tax department is compelled. Same is true for other indirect taxes like VAT, Excise or anything else. It is not possible to transfer the ownership of a Sole Proprietorship from one in order to individual another. However, assets of such firm may be sold from one person 1. Proprietors of sole proprietorship firms have unlimited business liability. This signifies that owners’ personal assets can be attached to meet business liability claims.

Partnership

A partnership firm in India is governed by The Partnership Act, 1932. Two or more persons can form a Partnership subject to maximum of 20 partners. A partnership deed is prepared that details the amount of capital each partner will contribute towards the partnership. It also details how much profit/loss each partner will share. Working partners of the partnership are also allowed to draw a salary as per The Indian Partnership Act. A partnership is also permitted to purchase assets in its name. However the owner of such assets include the partners of the firm. A partnership may/may not be dissolved in case of death in regards to a partner. The partnership doesn’t really have its own legal standing although applied for to insure Permanent Account Number (PAN) is used on the partnership. Partners of the firm have unlimited business liabilities which means their personal assets can be attached to meet business liability claims of the partnership firm. Also losses incurred due to act of negligence of one partner is liable for payment from every partner of the partnership firm.

A partnership firm may or might not be registered with Registrar of Firms (ROF). Registration provides some legal protection to partners in case they have differences between them. Until a partnership deed is registered with the ROF, it are not treated as legal document. However, this does not prevent either the Partnership firm from suing someone or someone suing the partnership firm within a court of policies.

Limited Liability Partnership

Limited Liability Partnership (LLP) firm is a new regarding business entity established by an Act of the Parliament. LLP allows members to retain flexibility of ownership (similar to Partnership Firm) but provides a liability immunity. The maximum liability of each partner within LLP is bound to the extent of his/her purchase of the rigid. An LLP has its own Permanent Account Number (PAN) and legal status. Online LLP Incorporation in India also provides protection to partners for illegal or unauthorized actions taken by other partners of the LLP. A private or Public Limited Company as well as Partnership Firms can be converted to a Limited Liability Partnership.

Private Limited Company

A Private Limited Company in India is much a C-Corporation in the united states. Private Limited Company allows its owners to sign up to company shares. On subscribing to shares, the owners (members) become shareholders of the company. Somebody Limited Company is a separate legal entity both when considering taxation as well as liability. The individual liability of this shareholders is proscribed to their share finances. A private limited company could be formed by registering company name with appropriate Registrar of Companies (ROC). Draft of Memorandum of Association and Actual Association are set and signed by the promoters (initial shareholders) for this company. These are then submitted to the Registrar along with applicable registration fees. Such company possess between 2 to 50 members. To tend to the day-to-day activities in the company, Directors are appointed by the Shareholders. An exclusive Company has more compliance burden when comparing a Partnership and LLP. For example, the Board of Directors must meet every quarter and looking after annual general meeting of Shareholders and Directors should be called. Accounts of an additional must get ready in accordance with Tax Act as well as Companies Federal act. Also Companies are taxed twice if earnings are to be distributed to Shareholders. Closing a Private Limited Company in India is a tedious process and requires many formalities to be completed.

One the positive side, Shareholders of any Company will vary without affecting the operational or legal standing of the company. Generally Venture Capital investors in order to invest in businesses have got Private Companies since it allows great identify separation between ownership and operations.

Public Limited Company

Public Limited Company is compared to a Private Company however difference being that regarding shareholders of the Public Limited Company could be unlimited along with a minimum seven members. A Public Company can be either placed in a wall street game or remain unlisted. A Listed Public Limited Company allows shareholders of the organization to trade its shares freely more than a stock alternate. Such a company requires more public disclosures and compliance from the government including appointment of independent directors throughout the board, public disclosure of books of accounts, cap of salaries of Directors and Boss. As in the case associated with Private Company, a Public Limited Company is also an impartial legal person, its existence is not affected the actual death, retirement or insolvency of each of its shareholders.