The 5 Different Types of Business Entities Startups Can Register As
India is without doubt one of the emerging markets in the world economy, if not already considered a major role player in it. While the larger corporates have taken their place in even the Forbes 500 list and taken India to the world, the vibrant community of upcoming startups in the country is doing their bit in bringing the world to India.
Since KSIDC has long been involved in the support of the startup community in Kerala and has endlessly contributed to their upliftment, as part of our series of blog posts targeted at the benefit of the said community, we’ll be discussing in brief about the different types of business entities in India.
1. Private Limited Company
It is one of the most sophisticated forms of business entities in India. Here, business assets are separated from personal assets. Every shareholder is just responsible for his share of the total capital. Pvt Ltd Companies need to maintain records of financial transactions, board meetings, and annual reports and so on.
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.
Private Limited Company can be of three types:
i) Company limited by shares – A company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.
ii) Company limited by guarantee – A company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound-up.
iii) Unlimited company – A company not having any limit on the liability of its members.
Partnership business entities are quite similar to sole proprietorship. The basic difference between partnership and sole proprietorship is that more than one individual is involved in a partnership. The roles, responsibilities and the share of each partner are specifically defined in a legal partnership agreement.
Any profit earned by the business is shared between partners according to the legal partnership agreement. In case there are losses, each of the partners is personally responsible. Personal assets of partners may be used to compensate the losses incurred, if any.
3. Limited Liability Partnership
With the concept introduced in 2009, a LLP functions as a structured business model. It is a separate legal entity from the partnership entity and business assets are separate from the personal assets of the partners. In case the business incurs losses, the personal assets of partners are not put at risk as the maximum liability of every partner is defined by his share capital in the entity.
Compared to Partnership and Sole Proprietorship, Limited Liability Companies always have better credibility among investors. The main reasons include proper maintenance of financial records, incorporation records and tax records.
A business registered in the name of an individual is called Sole Proprietorship. A single person is completely responsible for the entire business with the business and the owner not being separate from each other. The owner funds the business, takes any profits and bears any losses.
It does not involve any complex rules or accounting. Personal assets and business assets are not separated from each other. Any profits from the business are just added to the business owner’s income for taxation purposes.
Similarly, any losses become the personal losses of a business owner. In case the business starts incurring losses and additional money is needed to compensate those losses, the personal assets of the owner itself are put at risk.
5. One Person Company
OPC is a newly introduced type of company and was introduced in the Companies Act, 2013 to support entrepreneurs who on their own are capable of starting a venture by allowing them to create a single person economic entity. One of the biggest advantages of a OPC is that there can be only one member in a OPC, while a minimum of two members are required for incorporating and maintaining a Private Limited Company or a Limited Liability Partnership.
Similar to a Company, an OPC is a separate legal entity from its members, offers limited liability protection to its shareholders, has continuity of business and is easy to incorporate.