The different Types of Business Entities in India

Doing business in India requires one to select a type of business organization. In India one can choose from five different types of legal entities to conduct business. These include Sole Proprietorship, Partnership Firm, Limited Liability Partnership, Private Limited Company and Public Limited Company. The choice belonging to the business entity is dependent on various factors such as taxation, ownership liabilities, compliance burden, investment options and exit strategy.

Lets look at all of these businesses entities in detail

Sole Proprietorship

This is the most easy business entity to establish in India. It won’t have its own Permanent Account Number (PAN) and the PAN of the owner (Proprietor) acts as the PAN for the Sole Proprietorship firm. Registrations with various government departments are required only on a need basis. For example, when the business provides services and service tax is applicable, then registration with the service tax department is forced. Same is true for other indirect taxes like VAT, Excise and. It is not possible to transfer the ownership of a Sole Proprietorship from one person to another. However, assets of such firm may be sold from one person diverse. Proprietors of sole proprietorship firms have unlimited business liability. This means that owners’ personal assets can be attached to meet business liability claims.

Partnership

A partnership firm in India is governed by The Partnership Act, 1932. Two or more persons can form a Partnership susceptible to maximum of 20 partners. A partnership deed is prepared that details the total amount of capital each partner will contribute towards partnership. It also details how much profit/loss each partner will share. Working partners of the partnership are also allowed to draw a salary in accordance with The Indian Partnership Act. A partnership is also allowed to purchase assets in its name. However internet websites such assets are the partners of the firm. A partnership may/may not be dissolved in case of death of this partner. The partnership doesn’t really have its own legal standing although other Permanent Account Number (PAN) is used on the partnership. Partners of the firm have unlimited business liabilities which means their personal assets can be linked with meet business liability claims of the partnership firm. Also losses incurred outcome act of negligence of one partner is liable for payment from every partner of the partnership firm.

A partnership firm may or is almost certainly not registered with Registrar of Firms (ROF). Registration provides some legal protection to partners in case they have differences between them. Until a partnership deed is registered along with ROF, it most likely is not treated as legal document. However, this won’t prevent either the Partnership firm from suing someone or someone suing the partnership firm in a court of law.

Limited Liability Partnership

Limited Liability Partnership (Online LLP Registration in India) firm is often a new type of business entity established by an Act of the Parliament. LLP allows members to retain flexibility of ownership (similar to Partnership Firm) but provides a liability immunity. The maximum liability of each partner inside LLP is bound to the extent of his/her investment in the organisation. An LLP has its own Permanent Account Number (PAN) and legal status. LLP also provides protection to partners for illegal or unauthorized actions taken by other partners of the LLP. A person or Public Limited Company as well as Partnership Firms are allowed to be converted to a Limited Liability Partnership.

Private Limited Company

A Private Limited Company in India is much a C-Corporation in the. Private Limited Company allows its owners to subscribe to company shares. On subscribing to shares, the owners (members) become shareholders of this company. A non-public Limited Company is a separate legal entity both must taxation as well as liability. Individual liability of this shareholders is proscribed to their share monetary. A private limited company can be formed by registering business name with appropriate Registrar of Companies (ROC). Draft of Memorandum of Association and Item of Association have decided and signed by the promoters (initial shareholders) on the company. All of these then sent to the Registrar along with applicable registration fees. Such company get between 2 to 50 members. To tend the day-to-day activities within the company, Directors are appointed by the Shareholders. An exclusive Company has more compliance burden n comparison to the a Partnership and LLP. For example, the Board of Directors must meet every quarter and a minumum of one annual general meeting of Shareholders and Directors must be called. Accounts of business must be prepared in accordance with Taxes Act as well as Companies Conduct themselves. Also Companies are taxed twice if earnings are to be distributed to Shareholders. Closing a Private Limited Company in India is a tedious process and requires many formalities to be completed.

One the positive side, Shareholders of any Company will vary without affecting the operational or legal standing within the company. Generally Venture Capital investors in order to invest in businesses that are Private Companies since permits great a higher separation between ownership and processes.

Public Limited Company

Public Limited Company is a Private Company utilizing difference being that quantity of shareholders of a typical Public Limited Company could be unlimited using a minimum seven members. A Public Company can be either submitted to a stock exchange or remain unlisted. A Listed Public Limited Company allows shareholders of vehicle to trade its shares freely through the stock exchange. Such a company requires more public disclosures and compliance from the government including appointment of independent directors within the board, public disclosure of books of accounts, cap of salaries of Directors and Chief executive officer. As in the case associated with Private Company, a Public Limited Clients are also a separate legal person, its existence is not affected the actual death, retirement or insolvency of some of its shareholders.