If you are starting a business, then you might be thinking about what are the types of business structures in India and what will be the best one for you?
The legal structure or the type of business specifically means how your business will be registered under the government of India.
It is essential to choose the right business structure in India because all the regulations, compliances, taxes depend upon the business structure chosen by you.
There are major six types of business in India such as sole proprietorship, partnership, limited liability partnership, private limited company, one-person company, and public limited company.
Now to choose any one of them for your business entirely depends on various factors, for example, the type of business you are doing, the number of persons involved in the business, plans for your business, etc.
Let us now understand more about each of the business structure in India in detail.
Table of Content
- Sole Proprietorship
- Limited Liability Partnership
- Private Limited Company
- Public Limited Company
- One Person Company
- Frequently Asked Questions
A sole proprietor is indeed one of the most common types of business structures in India. A sole proprietor simply means that the business is owned and operated by a single person.
It is indeed one of the best types of business structure for anyone who is just starting the business at a minimal level or has a minimal amount of investment for the business.
Features Of Sole Proprietorship Business Structure
- A single person is the sole owner of the business.
- The owner of the business wholly owns the profit and loss in the business.
- The liability of a sole proprietor business is unlimited. This means that the owner is entirely responsible for all the liabilities on the business. In case of any debts, it can be recovered from the personal assets of the owner as well.
- In fact, there is no such registration required and can be easily formed. One can start without any registration or can apply for GST and MSME certificates if needed.
- The capital investment in the business is entirely made by the proprietor.
- It is very easy to form and so is advisable for small businesses just starting or which have a minimal amount of capital
- The person operating the business and the business itself are considered to be the same by the government.
- No compliances are to be done by the owner except the GST returns.
A partnership is one of the types of business having a legal relationship between two or more people. When two are more people decide to work together on a common business, they usually form partnerships.
A partnership is a legal agreement made between two or more people working on a common business.
The contract specifically describes the profit and loss ratio among the partners, the amount of capital invested by each partner, and the nature of business.
Although it is not mandatory to register a partnership but is advisable to do so because it gives it a legal status under the government.
Features Of Partnership Business Structure
- A minimum of 2 people are required to form a partnership, and a maximum of 100 people can be included in a single partnership.
- The liability of all the partners is unlimited that is the partners are entirely responsible for all the liabilities on the partnership. In case of any debts, it can be recovered from the personal assets of the partners.
- A legal agreement is made between the partners to get the partnership registered under government laws. The agreement specifically defines the profit-loss ratio and capital invested by each partner.
- It is easy to form and is mainly advisable for small businesses where there is more than one owner.
- No compliances are to be done by the owner except the GST returns.
Limited Liability Partnership
A different form of regular partnership is a Limited Liability Partnership. An LLP is a legal entity that is formed by registering it under the Ministry of Corporate Affairs.
This type of business is mostly preferred over normal partnership since in it the partners and the partnership are considered to be separate under the law.
Features Of Limited Liability Partnership Business Structure
- Less cost is involved in forming an LLP as compared to private limited or public limited company.
- The equity can only be transferred among the partners in an LLP but not to any other outside person.
- The LLP has a limited liability that is each partner is liable for only the amount he has invested at the time of the formation of an LLP.
- In case of any debts, it can be recovered from the partners only to the extent of capital invested by them, and rest has to beared by the LLP.
- There are fewer compliances for an LLP and also the cost of compliance is less as compared to private limited or public limited company.
- The is no limit in the number of partners which can be added in an LLP.
Private Limited Company
A private limited company is a company that is registered under the Ministry of Corporate Affairs.
This type of business is preferred especially by those running businesses which have a significant turnover or the startups which are in a growth stage. It can be formed with a minimum of 2 directors.
Features Of Private Limited Company Business Structure
- It can have a minimum of 2 directors and a maximum of 15 directors and a maximum of 50 shareholders.
- A private limited company has a limited liability that is all the liabilities on the company can only be recovered from the amount invested in the company but not from the director’s personal assets.
- Outside funding is possible in a private limited company by making the investor a shareholder of the company. This is also known as equity funding. But the company cannot issue the shares to the common public.
- The cost involved in the formation is higher.
- It requires more compliances to be done on an annual basis like annual filings with ROC, annual IT returns, quarterly board meetings, an audit of accounts, filing of minutes of the meeting, etc.
Public Limited Company
A public limited company is a company in which the owner is itself the common public.
This type of business structure is preferred specifically by the businesses which are looking to raise money from the common public by issuing them the shares of the company.
It can be formed with a minimum of 3 directors and 7 shareholders. The shareholders have limited liability depending upon the value of their shares.
This type of business structure is more complex to form with more number of compliances and is specifically preferred by very large businesses.
One Person Company
A one-person company is a type of private limited company but the difference is that it can be formed by a person only. It has only one director and a nominee.
This business structure is especially preferred by individuals looking to start a company on an individual basis and want to limit their liability.
Most of its features are similar to a regular private limited company. Most of the compliances of an OPC are also the same as the private limited company.
Frequently Asked Questions
Now let us discuss some FAQ’s on the types of business in India.
MOA, also known as Memorandum of Association, defines the relationship of a company with its shareholders. AOA, also known as Article of Association, explains the rules and regulations related to the functioning of the company.
Yes, it is mandatory to maintain proper books of accounts of a private company and get it audited if needed.
Authorized capital is the total number of shares that a company can issue while paid-up capital is the number of shares issued from the authorized shares.
The minimum authorized capital for a company is one lakh rupees.
There is no such minimum capital requirement to start an LLP.
Sole Proprietorship – 5% to 30% slab depending upon total annual income
LLP – 30% of its total income
Private Limited Company – 25% of its total income for companies having a turnover of less than 250 crores and 30% of its total income for companies having turnover greater than 250 crores.
A nominee can be anyone from the family member of the director or any of his authorized person who will take over in the case of the death of the director.
Generally, it takes about 15-30 working days for the formation of any type of company except in case of normal partnership and sole proprietorship.
Private Limited Company – Minimum of 2 directors and a maximum of 15 directors.
Public Limited Company – Minimum of 3 directors and a maximum of 15 directors.
Private Limited Company – Minimum of 2 shareholders and a maximum of 200 shareholders.
Public Limited Company – Minimum of 7 shareholders and no upper limit.