CA Satish Sarda

Sarish SardaIf 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.

2. Partnership

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

  • LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.So it can be termed as a Hybrid Form.
  • The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
  • The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
  • Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
  • Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.
  • It is most suitable for professionals such as Chartered Accountants (CAs), Cost and Works Accountants (CWAs), Company Secretaries (css) and Advocates, etc. who as per their statute can not practice in Corporate form.
  • Compared to Partnership and Sole Proprietorship, Limited Liability Companies always have better credibility among investors. The main reasons include proper maintenance of financial records, incorporation records and Legal compliances.

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
Continuity Company/LLP Sole proprietorship
Legal Compliance Sole Proprietorship Company
Decision Making Sole proprietorship Company
Sourcing of Capital Company Sole proprietorship
Liability Company / LLP Sole proprietorship
Dissolution Sole proprietorship Company/LLP

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

LLP Agreement

Partnership Firm Registrar OF Firms Partnership Deed, Registration Certificate
Sole Proprietorship Nil Nil
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 satishsardanagpur@gamail.com)

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0 responses to “Business Startups : Which Business Entity To Choose ?”

  1. K H V says:

    Sir I want to start a new sole-proprietor business. I want to know how it will benefit me if I choose OPC form rather than sole-proprietorship? I mean what are the key points which could change this decision to OPC?

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