Amit & Karan – two college friends have an awesome business idea and they want to venture into a Start-up with that idea. They are, however, confused with regard to selecting the best form of business entity for their Start-up. A lot of Entrepreneurs face this dilemma. We are here to guide you in choosing the best legal structure for your business in line with the requirements of your business and your long term goals and vision. We have compared here the four most popular forms of business entities which shall help you decide the business structure you want to adopt:
Private Limited Company – Most popular among startups as well as established businesses
Business owners hold the shares of the company privately in a private limited company. Shareholders may operate the business themselves, or hire professional directors to manage the company on their behalf. Registering a private limited company helps in protection of personal assets, access to more resources, financial assistance and greater credibility. If you’re looking to raise FUNDING for your business, Private Limited Company is the best way to register your business. Banks also consider a Private Limited Company more reliable and credible while disbursing loan. Minimum 2 persons are required to incorporate a private limited company. A company has the following advantages:
- Separate Legal Entity with Perpetual Succession.
- Limited Liability up to paid up capital of the Company
- Lower Tax rate (25%)
- Preference by Banks and Financial Institutions for Loan/Finance
- Eligible for Startup India Plan
- No Tax for 3 Years if recognized under Start-Up India Plan
- Only form of Business to raise Funding
Public Limited Company – For listing shares on stock market
A public limited company has all the benefits of a private limited company. However, it has a requirement for higher minimum capital (Rs.5 lacs) and more number of shareholders (minimum 7). There’s no limit on the maximum number of members for a public limited company. If a company wants to list its shares on stock market or issue debentures, it needs to be incorporated as a public limited company.
One Person Company (OPC) – A corporate form of Proprietorship
One Person Company (OPC) has been recently introduced in India to promote business enterprises that are owned and managed by a single Entrepreneur. OPC allows for a single individual to own and manage the business. One Person Company is therefore a viable option for those looking to start a Proprietorship business with benefits of a private limited company. The compliance burden is, however, lower for an LLP as compared to a Private Limited Company.
Limited Liability Partnership (LLP) – A corporate form of Partnership
An LLP has a mix of both partnership and corporation. In LLP, one partner is not responsible or liable for another partner’s misconduct or negligence unlike a traditional partnership in which each partner has joint and several liability.
Partnership Firm
A partnership firm is one of the traditional forms of business. It requires 2 or more partners. In a partnership firm, each partner is jointly and severally liable for the acts of other partners. This form of business is mostly prevalent among small and medium sized businesses in unorganized sector. However, with the advent of LLP (which has limited liability for partners), partnership form of business is fast losing its sheen.
Indian Subsidiary of a Foreign Company
A lot of foreign and multinational companies are keen to setup their operations in India. India is one of the largest and fast growing markets in the world. It is also a hub of some of the best talents across the globe. A Foreign National (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India (other than entity incorporated in Pakistan or Bangladesh) can invest and own a Company in India by acquiring shares of the company, subject to the FDI Policy of India. TaxFino can be your legal and professional partner in India to get your New Company / Subsidiary in India started quickly and cost-effectively.
Section 8 Company (Not for Profit Company)
Section 8 of the Companies Act, 2013 provides for a establishing a company ‘for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object’, provided the profits, if any, or other income is applied for promoting only the objects of the company and no dividend is paid to its members. Therefore, Section 8 Company is a company registered under the Companies Act, 2013 for charitable or not-for-profit purposes. A Section 8 Company is similar to a Trust or Society; except, a section 8 Company has various advantages when compared to Trust or Society like improved recognition and better legal standing. Section 8 company also has higher credibility amongst donors, Government departments and other stakeholders.
The Comparison chart of prominent forms of business will give you a clear distinction between all these forms of business.
| Comparison Criteria | Private Limited Company | One Person Company (OPC) | Limited Liability Partnership (LLP) | Partnership | Proprietorship |
|---|---|---|---|---|---|
| Minimum Requirement | Members – 2 Directors – 2 | Member – 1 Director – 1 Nominee of Sole Member – 1 | Designated Partners – 2 | Partners – 2 | Proprietor – 1 |
| Minimum Capital | Rs.1 lac | Rs.1 lac | No minimum requirement | No minimum requirement | No minimum requirement |
| Regulator | Registrar of Companies | Registrar of Companies | Registrar of Companies | Registrar of Firms | None |
| Compliance Requirements | Annual Return Filing Board Meetings & General Meetings | Annual Return Filing Board Meetings & General Meetings | Annual Return Filing | None | None |
| Taxation | Taxed at 25% | Taxed at 30% | Taxed at 30% | Taxed at 30% | Taxed at slab rates |
| Credibility | High | Medium | Medium | Low | Low |
| Investor Preference | High | Low | Medium | Low | Extremely Low |
| Statutory Audit | Compulsory | Compulsory | If Contribution > Rs.25 lacs or, Turnover > Rs.40 lacs | Not Required | Not Required |
| Conversion | Can be converted into LLP | Cannot be converted before 2 years | Cannot be converted into a Company | Can be converted into a Company | Can be converted into a Company |
