If all goes well many Indian Cities are set to become Smart Cites. Make In India , Ease Of doing Business and other such initiatives are going to boost the economic scenario of Country. So no doubt many entrepreneurs must be thinking of starting their business ventures or expanding the existing set ups. This article will help in choosing the best Business Entity form suitable for such startups.
I will be focusing on most popular 5 Types of Business Entities
1. Private Limited Company (Company)
One of the most sophisticated form of doing business in India is through Company. It can be Public limited or Private limited depending upon scale of operation and need for funding. In this article I am focusing on Private Limited Company only.In this form business assets are separated from personal assets. Every shareholder is just liable for his share of the total capital. It need to maintain records of financial transactions, board and Annual General meetings, annual reports and so on.
A Pvt Ltd company consists of a group of shareholders and the total capital of the entity is made up of shares. These shares can be sold/transferred to another individual who then also becomes one of the owners of the company.
Partnership Firm is very much similar to sole proprietorship. The basic difference between partnership and sole proprietorship is that more than one individual is involved in a partnership. The roles, responsibilities and the share of each partner are specifically defined in a legal partnership agreement.
Any profit earned by the business is shared between partners according to the legal partnership agreement. In case there are losses, each of the partners is personally responsible. Personal assets of partners may be utilesed to compensate the losses incurred, if any.
3. Limited Liability Partnership
4. Sole Proprietor
A business registered in the name of an individual is called Sole Proprietorship. A single person is completely responsible for the entire business with the business and the owner not being separate from each other. The owner funds the business, takes profit or loss as the case may be.
Personal assets and business assets are not separated from each other.
5. One Person Company
OPC is a newly introduced type of company and was introduced in the Companies Act, 2013 to support entrepreneurs who on their own are capable of starting a venture by allowing them to create a single person economic entity. One of the biggest advantages of a OPC is that there can be only one member in a OPC, while a minimum of two members are required for incorporating and maintaining a Private Limited Company or a Limited Liability Partnership.
Similar to a Company, an OPC is a separate legal entity from its members, offers limited liability protection to its shareholders, has continuity of business and is easy to incorporate.
Criteria for Choosing an Ideal form of business organization
|Criteria||Most Suitable||Least Suitable|
|Formation Cost||Sole Proprietorship||Company|
|Formation Procedure||Sole proprietorship||Company|
|Transfer of Ownership||Company||Partnership|
|Legal Compliance||Sole Proprietorship||Company|
|Decision Making||Sole proprietorship||Company|
|Sourcing of Capital||Company||Sole proprietorship|
|Liability||Company / LLP||Sole proprietorship|
Regulation and Incorporation Document
|Business Entity||Regulating Body||Incorporation Documents|
|Company||Ministry Of Corporate Affairs||Certificate Of Incorporation
Article & Memorandum of Association
|LLP||Ministry Of Corporate Affairs||Certificate Of Incorporation
|Partnership Firm||Registrar OF Firms||Partnership Deed, Registration Certificate|
|One Man Company||Ministry Of Corporate Affairs||Certificate Of Incorporation
Article & Memorandum of Association
Based on above characteristics of Business entities we have to choose the one which suits our business plan. If you have enough funds , sole decision making and adequate back up arrangement then due to least legal compliances Sole Proprietorship is the best option. If you have to accommodate your family members in the business, they can be paid Remuneration instead of sharing in profits and Interest on their funds. However if family members want ownership stakes also , than its better to go for Partnership Firm or LLP. In case of doing business with relatives, friends, associates the better format is LLP or Private limited company depending upon funding requirement.
If the business has inherent risks its always better to opt for limited liability forms such as LLP or Company.
Note: Proper expert advice should be sought before choosing a business entity .
(Author is a Practicing Chartered Accountant and Past Chairman of Nagpur Branch of ICAI and can be reached at firstname.lastname@example.org)