The choice of Business Organization’s form is the single most important decision an Entrepreneur has to make. What form your business adopts will affect a multitude of factors which in turn greatly influence, both favorably and unfavorably, your organization’s future. Aligning your goals to your business organization type is an important step, so understanding the pros and cons of each type before taking the plunge cant be over emphasized.
The legal form of your business will affect:
- How you are taxed
- Your legal liability
- Costs of formation
- Operational costs
Main types of business organizations in India are:
- Public Company
- Private Company
- Sole-proprietorship
- Partnership Firm
- Limited liability partnership or LLP
- One person company
- Branch Office
- Non-Government Organization
PUBLIC COMPANY
A Public company has minimum 3 Directors, a minimum of seven shareholders and can have maximum unlimited shareholders. Public company can be listed or unlisted on a stock exchange. The shareholders can freely trade the company’s shares once the company is listed on a stock exchange. Since the company is a separate legal entity, its existence is not affected by death, retirement or insolvency of its shareholders. Incorporating this type of a company is difficult and time-consuming.
PRIVATE COMPANY
A Private company has a separate legal entity, owned entirely by a relatively small group of individuals/groups (minimum 2), and shares cannot be publicly traded in stock markets.
A Private company:
- has separate legal entity from its owners
- does not required to publish the company’s financial positions
- must have a minimum of 2 members and a maximum number of members (usually 50) that is defined in a company law
- has limited liability
- fewer regulations and government oversight than a public company
SOLE-PROPRIETORSHIP
The simplest and most common form of business ownership, sole-proprietorship is a business owned and run by someone for their own benefit. The business’ existence is entirely dependent on the owner’s decisions, so when the owner dies, so does the business.
Advantages of sole-proprietorship:
- All profits are subject to the owner
- There is very little regulation for proprietorships
- Owners have total flexibility while running the business
- Very few requirements for starting-often only a business license
Disadvantages of sole-proprietorship:
- Owner is 100% liable for business-debts
- Equity is limited to the owner’s personal resources
- Ownership of proprietorship is difficult to transfer
- No distinction between personal and business income
PARTNERSHIP FIRM
A Partnership is one of the most important forms of a business organization, where two or more people come together to form a business and divide the profits thereof in an agreed ratio. A Partnership is easy to form, and compliance is minimal as compared to companies. Indian Partnership Act, 1932 governs the partnerships. Registration of partnership is optional and at the discretion of the partners. Although registration may be done at any time-before starting a business or anytime during the continuation of the partnership. It is always advisable to register the firm since registered firms enjoy special rights which aren’t available to unregistered firms.
LIMITED LIABILITY PARTNERSHIP or LLP
LLP is an alternative business form that provide the advantages of a limited liability company and flexibility like that of a partnership firm. LLP therefore exhibits elements of both partnerships and corporations. This innovative and most awaited form of company was introduced into the Indian corporate world in 2009 by the Limited Liability Partnership act, 2008. This unique hybrid combination of a limited and partnership company is thus suitable for small, medium-sized businesses or professionals. Minimum 2 partners can incorporate an LLP, there is no upper limit as such. In LLP, one partner is not responsible for the other partner’s misconduct or negligence. The mutual rights and the duties of the partners in LLP is governed by an agreement that is signed by the partners.
ONE PERSON COMPANY or OPC
One Person Company is a newly introduced type of company since 2013. Only a resident of India is permitted to incorporate a one person company. That means no foreigner can incorporate an OPC. It was introduced to encourage individual entrepreneurs to start their own business. This is a type of a private company and likewise can feature as a separate legal entity. The liability of the owner is limited.
BRANCH OFFICE
Foreign Companies engaged in manufacturing and trading activities abroad can set up branch offices in India. Branch offices are not allowed to carry out manufacturing activities on their own but can subcontract those to an Indian manufacturer. Before commencing operations, the branch office requires an approval from the RBI(Reserve bank of India). Commercial activities of any nature are not allowed for a branch office.
NON-GOVERNMENT ORGANIZATIONS or NGOs
NGOs or non-profit company is a citizen based association that operates independently of the government, usually to serve some social purpose. These organizations are not intended towards gaining profits and work for promoting a cause or development projects for the betterment of the society.
DISCLAIMER:
Users of the above information are expected to refer to the relevant existing provisions of the applicable laws and take appropriate advice of professional consultants. Author assume no responsibility for the consequences of the use of this information.
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