Types of Business Structures in India

 

Whether you are a startup or having an existing business, legal structure would serve as an essential part of running a business. Companies that are registered in India must be registered under Companies Act, 2013. For this purpose every establishment must understand its options and have a legal structure that is permitted by the government of India. One must take advice from a legal expert for their smooth running of their business and to achieve success.

Choosing the best legal structure would help the entity and local and central laws where it desires to establish its base. Well designed goals help an entity to choose the best legal structure for achieving its goals. 

For instance certain firms need to avail benefits of being a startup in India, so for this it is important for firms to register themselves as a Private Limited Company or a Limited Liability Partnership.

A registered entity can easily be transferred into a corporate entity. There are certain types of companies which protect the rights of partners/Directors in case of losses or debts. 

Following are the common types of business structures in India and their notable features to help decide the best legal structure for our proposed entity.

Types of Business Structures in India

• Sole Proprietorship

A sole proprietorship is a type of business structure which is wholly owned by one person. Many entrepreneurs start their businesses in their name and continue as sole proprietorship. Their entity is not considered as a separate entity from their owner. In such a type of company there is no formal registration requirement to start a business in India under sole ropeirtoship.

In such companies the proprietor is solely responsible for all the liabilities. The practical implication of such an agreement is that the entire profit made by the sole proprietor will go in the hands of the owner. 

Many businesses opt for this legal structure for following benefits-

1. Cost effective- This kind of legal structure barely requires any cost, however conducting business in a separate area may require a shop and establishment requirement, Trademark registration etc.

2. Flexibility in decision making- The decisions are solely made by the proprietor , therefore they are easy to make and implement.

3. Workplace relationship- It is essential to maintain relationships with employees and customers. 

For instance Flipkart and Snapdeal have started their business as a sole proprietorship firm in India.

• Partnership Firms

Partnership Firm requires a minimum of two or more people to come together to form a  Partnership Firm. The registration for Partnership firms is not mandatory. However it requires a Partnership deed  or an agreement between the partners to form a partnership firm. The partnership deed specifies the invested interest of each partner and their profit sharing ratios along with other terms of business functioning and operations.

Following are the benefits for having a Partnership Firm-

1. FundRaising- It is easier to raise funds in a Partnership firm as financial institutions.

2. Shared Responsibility- This structure provides for better accountability of the shareholders and enjoys a shared responsibility amongst them.

3. Mutual Trust- there is a sense of mutual trust amongst the partners. All partners can have collectively or any one of the partners and act on behalf of others.

• Limited Liability Partnership

Limited Liability Partnerships are governed by Limited Liability Partnership Act, 2009. Unlike partnership firms, Partners in an LLP are not burdened with unlimited liabilities caused by the business. 

Their losses towards losses or debts are limited to the investments made by them. A LLP and its partners are considered as a separate legal entity. Further no partner will be held liable for the actions of another partner. Some of the benefits of having a LLP registration are as follows-

1. No Minimum Capital Requirement- a LLP can be started with any minimum amount of capital distribution.

2. Suitability- LLP is an easy process when compared to a Private Limited Company.

3. Less Compliance- LLPs are obligated to submit only two statements i.e. Annual return statement and Statement of accounts. 

• Private Limited Company

As per Section 2(68) of the companies Act 2013, A private company is defined as a ‘private company means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,

 (i) restricts the right to transfer its shares;

 (ii) except in case of One Person Company, limits the number of its members to two hundred:

 (iii) prohibits any invitation to the public to subscribe for any securities of the company.’

Benefits of a Private Limited company Registration are-

1. Separate Legal Entity- A private limited company is said to be a separate legal entity and therefore the company can sue and can be sued in its name.

2. Borrowing capacity- Private Limited companies enjoy more borrowing of money than LLPs.

3. Ability to sue and be sued- Since a pirate limited company is considered as the separate legal entity therefore it can sue and be sued in its own name.

4. Dual Relationship- A person in a company can be shareholder/ employee/ and director at the same time.

• Public Limited Companies

For formation of a public limited company there is a requirement of minimum of 7 members with a minimum paid up capital. The company can be listed in the stock exchange and thereafter shares are traded openly. There are more legal restrictions when compared to a Private Limited Company.

• One Person Companies

In one person company (OPC) there will be only one member. The owner can manage its company alone. All shares can be owned by one company and there must be an additional nominee director to register this firm. The introduction of this kind of company under the legal system is believed to not only cater to economic growth but to also create a good amount of employment opportunities.

Conclusion

Therefore this blog caters to you to understand the overview of different legal structures. However, to decide which company you should choose a lawyer will help you to address such questions.