What is the best legal form to do business? | Business Types in India
What is the best legal form to do business?
Nowadays, the term Startup is not new to us. Cities like Bangalore, Pune, Delhi, Kolkata and other metro cities of India have become Startup hub. The young generation with new ideas is coming up with the solution to address day-to-day problems happening in the society. Startups find it challenging when the question of legal entity arises to operate the business. In this article, we will focus on what will be a right legal entity to carry a startup business?
What is a legal entity?
If any business is looking to enter into any contract or agreement, then it must form certain legal entity. The term Entity in business means any separate organization created for business. Legal entity provides the legal rights to the business to enter into contracts and also gives a legal stand in front of law. If the business fails to meet the contractual agreements, then court has the right to sue and punish.
What are the types of legal entity?
There are 6 types of legal entities popular in India. Let's discuss one by one:-
- Sole Proprietorship
Insole proprietorship a single person runs the business. Therefore, it is considered to be the simplest way to start a business if you just want to give a try to your any business idea. The characteristics of sole proprietorship are as follows:-
- Single ownership.
- The sole proprietor has all the rights to make a decision into the firm. Hence result in quick decisions
Advantages of sole proprietorship
If you are a single person and looking to start your business then it is the simplest form of business. The benefits of sole proprietorship are as follows:-
- It has a simple and flexible structure.
- This type of firm is easy to close.
- Lower cost of formation.
Disadvantages of sole proprietorship
- If the sole proprietor has taken the risk and he falls into that, then it can lead to bankruptcy.
- As it is limited to a single person, it may be difficult to raise capital from others.
- This type of firm cannot add partners.
- The liability is unlimited.
If you are a sole proprietor and find a partner having same ideologies, then you can go for a partnership firm. A partnership is defined as a group of people who have same thinking and consent over a business and who agree to share the profit and loss occurred in their business.
Advantages of Partnership firm
- It is easy to form and the cost involved is also low.
- Whenever required, the firm can easily change the legal structure.
- The partners can be chosen according to their similar nature.
- Sharing of loss hence division of risk.
Disadvantages of Partnership firm
- Partners carry unlimited liability.
- Each partner is liable for partnership debt.
- Each partner is liable for the action of other partners.
- Limited Liability Partnership
This type of Incorporation is the combination of both company and partnership firm. In this type, the partners have limited liability. The characteristics of this type of Incorporation are as follows:-
- The Limited Liability Partnership firm and the partners are a separate entity.
- The minimum number of partners should be 2 but there is no maximum limit for it.
- A minimum Capital contribution is not required in this case.
Advantages of LLP
- It has a low cost of formation.
- It is easy to form as compared to the registered partnership firm.
- The liability of each partner is limited to his/her share only.
- Lesser Compliance as compared to the company.
- The partners are not liable for act of other partners
Disadvantages of LLP
- It cannot raise money from public/investors.
- It cannot offer Initial Public Offering.
- Higher Income tax rate is 30% of net profit.
- One Person Company
The term One Person Company came into existence after the formation of Company Act 2013. It helps a sole proprietor to represent himself as a company in a professional manner with one person having the power to make all the decisions. The characteristics of this company are as follows:-
- It is a private limited company with one person having 100% shares.
- Minimum Paid-up Capital is Rs 1,00,000.
- It may be a Company limited by share / a Company limited by guarantee / an unlimited Company.
- The shareholder of this type of Company can change the nominee at any time.
- The maximum number of Directors can be 15.
Advantages of One Person Company
- It has lesser compliance burden than any other company.
- It is the organized version of Proprietorship firm.
- In this case, if the company has suffered any kind of loss, then it is not going to affect the personal assets of the directors.
- In this case, it is easy to get a loan from Banks.
Disadvantages of One Person Company
- It is good only for small-scale business.
- A minor is not eligible to become a member.
- Can not do the partnership with others.
- Can not raise funds from investors.
5. Private limited Company
A private limited company is the best suitable form for startups who want raise funds from investors to expand its business. Characteristics of such company are as follows:-
â— Shareholders cannot sell their shares without offering them to other shareholders of the company.
â— They cannot offer their shares to the general public as allowed in public limited company.
â— Minimum paid-up capital for such companies should be Rs 1 lakh.
â— Such companies have limited liability. It means that in case the company faces any loss, then the shareholders need not to sell their personal assets in order to discharge liability.
â— The company must use privately limited after its original name.
Advantages of Private Limited Company
- The main advantage of this type of Incorporation is that the members know each other. So, it is easy to take a decision.
- Only two persons can easily start a business.
- A private company can easily incorporate within 2 weeks.
- Income tax rates is low (25%) for startup companies.
- Easily raise funds from investors.
Disadvantages of Private Limited Company
- Not easy to dissolve the business.
- Compliances is more as compare to other forms discussed above.
- Public Company
Public Company is the company whose at least 51% share is occupied by the general public. It has following characteristics:-
- The minimum required number of members is 7 and there is no limit to the maximum number.
- Each shareholder has the right to transfer his share to the general public without the consent of other shareholders.
- Minimum paid up capital is Rs 5,00,000.
- Minimum required number of directors is 3.
Advantages of Public Company
- The liability of shareholders is limited.
- It is a separate legal entity. It means that the business can continue even after the death of the member.
- Shareholders are free to sell their share to the public without taking consent from other shareholders of the company.
- It can raise large amount of capital from public at large
- Get list your company under stock exchange
Disadvantages of Public Company
- Registration for Incorporation of Public Company is a lengthy process.
- While taking a decision, there can be disagreement between members as there is a large number of members.
- More compliances.
We have discussed all commonly used business legal entity by an entrepreneur in India. If you are the startup with a great idea and want to turn it into serious business, we recommend you to go with a private limited company.