Business Entities in India

A business in India falls under the categories of 5 legal entities: Sole Proprietorship, Partnership Firm, Limited Liability Partnership, Private Limited Company and Public Limited Company. 

Though India is a dynamic market, it offers investors a variety of options other than the main 5 categories. They are Unlimited Partnerships, Cooperatives and Subsidy Companies. The choice of entity differs from one business idea to another. In order to choose the ideal type of entity, one should always follow a strategy or a business plan. While choosing the most suitable legal entity, it's crucial to keep in mind the target audience, taxation policies, the level of investment required to set up the business, the types of funds needed, the life expectancy of the business, weightage of the owner's liability in the business and more. It's important to keep in mind that business could end or go under a recession after a given period. So, while choosing the type of enterprise, the owner should keep in mind dissolution and exit formalities as well.

Here are 5 major categories to help you with the decision of your new start:

  • Sole Proprietorship: Under sole proprietary rights, the person who is the owner of the enterprise becomes personally liable for all the debts. They own the complete profit from the business. The owner and the business are considered to be one single entity and hence, taxation and legal procedures are established under the same name. To know more, check out our article on sole proprietorship.
  • Partnership Firm: It runs on certain pre-established norms, whether written or not. It works with an association of two or more people, who agree on a set of guidelines. Under Section 4 of the Indian Partnership Act 1932, it's been described as "the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all". There is an unlimited liability that is distributed among the partners. There is a separate firm name and all the legal procedures are done under this name. This entity, unlike companies, cannot own any property or incur debts. It is not a separate legal entity.
  • Limited Liability Partnership: This is a fairly new kind of entity. Under LLP, the liabilities of the partners are limited and is a separate legal entity i.e. if the firm owns any property or assets, it would be dissociative of its partners. Everything owned by the firm would be under the firm's name and not the partners. Unlike a company, it cannot raise its capital from the public.
  • Private Limited Company: It is owned and operated in a private arena. The partners' count goes from a minimum of 2 to a maximum of 200. Under such an entity, there are certain tax benefits like DDT (Dividend Distribution Tax). Furthermore, there is a minimum paid-up capital of ₹100,000 and it is compulsory for such entities to use "Pvt. Ltd." after the name of the company.          As per the Companies Act 2013, an investor can choose between three types-
  1. A company limited by shares
  2. A company limited by guarantee
  3. An unlimited company
  • Public Limited Company: It is owned by the shareholders and is a separate legal entity. Such an entity should have at least 7 people on the board to form it with a minimum paid-up capital of ₹500,000. It can have unlimited shareholders and allows them to transfer their shares freely. The shares of a public limited company are listed in the stock market and are available for the general public to issue.

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