While starting the business, an entrepreneur has many options on the choice of business entity that he should start with and larger the number of options larger the chances of confusion. In India, one can register Company, Limited Liability Partnership, One Person Company, or Partnership firm for purpose of carrying the business. This decision of selecting the right entity is very crucial and depends upon certain factors like liability, nature of business, number of owners, scale of business, taxation, estimated tenure of the business, future plans, closing etc.
The first step towards start-up should be getting the business entity incorporated. The incorporation of business can be generally done in 5 ways:
- Private Limited Company
- Public Limited Company
- Sole Proprietorship Company
- Partnership Company
- Limited Liability Partnership (LLP)
- One Person Company (OPC)
Private Limited Company
Private Limited Companies are the most preferred option for any startup that is looking at scaling up by external funding as it is very easy in Private Limited Company to issue fresh equity shares in lieu of funding received.
A Private Limited Company is the most popular form of business entity used for Foreign Investment in India.
A private company has the following characteristics:
- shareholders right to transfer shares is restricted;
- the number of shareholders is limited to 200; and
- an invitation to the public to subscribe to any shares or debentures is prohibited.
A Pvt Ltd Company must have a minimum of two directors and a maximum of fifteen directors. A minimum of two shareholders is required for legal registration of a Private Limited company.
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.
Public Limited Company
|A public limited company is a voluntary association of members which is incorporated and, therefore has a separate legal existence and the liability of whose members is limited. Its main features are :-
Ø The company has a separate legal existence apart from its members who compose it.
Ø Its formation, working and its winding up, in fact, all its activities are strictly governed by laws, rules and regulations. The Indian Companies Act, 2013 contains the provisions regarding the legal formalities for setting up of a public limited company.
Ø A company must have a minimum of seven members but there is no limit as regards the maximum number.
Ø The liability of a member of a company is limited to the face value of the shares he owns. Once he has paid the whole of the face value, he has no obligation to contribute anything to pay off the creditors of the company.
Ø The shareholders of a company do not have the right to participate in the day-to-day management of the business of a company
Sole Proprietorship Company
This is the easiest way to start a business in India. When the business is owned and managed by a single person Sole Proprietorship Company may be formed. A business can be up and running in this format within 15 days.
The proprietorship is not taxed as separate entity. Note that the earnings of the business are taxed at the individual level, whether or not they are actually in cash. There is no vehicle for sheltering income. For liability purposes, the individual and the business are also one and the same.
There is no separate registration required for Sole Proprietorship firm. Tax and other mandatory registrations like VAT, Service Tax, Professional Tax, Shops & Establishments Registration, etc., will certify the existence of this firm.
It is best for business owners with no or few employees, such as consultants, who can handle legal risks with adequate insurance or do not have assets to protect but this model is not suited for ventures where there are two or more founders.
Note: No foreign investment is allowed in a sole proprietorship.
In a partnership firm two or more individuals manage and operate a business in accordance with the terms and objectives set out in the Partnership Deed.
The Partnership deed has to be printed on a Stamp Paper and has to be notarized. After this, an application is to be made to registrar of Firms of the state to get registered. The registrar of firms accepts the request and allots a registration number to the firm.
Limited Liability Partnership (LLP)
LLP is a significant improvement on Partnership firms, which give Limited Liability to the Partners involved and also it has lesser compliance’s compared to a Pvt Ltd.
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.
A minimum of two partners will be required for formation of an LLP. There will not be any limit to the maximum number of partners whereas in partnership it is 20.
An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A “Statement of Accounts and Solvency” in prescribed form shall be filed by every LLP with the Registrar every year.
It gives operational ease to partners to manage the business and creates a system of accountability through the mandatory ROC filings.
Note: Foreign investment is permitted in this but only after government’s approval.
One Person Company (OPC)
One Person Company is the improvement over Sole Proprietorship firm which gives complete control to one founder and gives a benefit of Limited Liability to the founder.
OPC is registered with Registrar of Companies (ROC) under Ministry of Corporate Affairs (MCA).
In terms of capital, an OPC, requires a minimum authorized and subscribed capital of Rs. 1,00,000.
In case the subscribed capital goes beyond Rs. 50,00,000 or the turnover exceeds Rs. 2,00,00,000, OPC has to file the requisite forms with the ROC to get its status converted into a private limited. OPC is best suited for a single founder who wishes to launch his/her/its product/service in a more structured manner and get a taste of how to run a private limited company.
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