How to choose the right business entity type for you in India?


If you are planning to start a company or a partnership firm in India, it is important to choose the right business type. Proprietorship, partnership, LLP and Private Limited Company - which one is the right option for you? Learn more here.

In a recent article, I wrote about different business types in India. Just to recap, the following are the various business types in India:

1. Sole Proprietorship

2. Partnership

3. Limited Liability Partnership

4. Private Limited Company

5. Public Limited Company

Having so many options, it may be difficult for you to choose the right type of business. You need to consider several factors before you choose a business type.

Which business entity type is better?


Each business type has its own advantages and disadvantages. I have described the pros and cons of each entity type in detail below.

Sole Proprietorship - best suited for single owner, localized business

If you are the only owner and there are no other partners involved, you could register as Sole Proprietorship. However, in this case, you will not be able to attract investments from external investors since a sole proprietorship is considered as a personal business with no proper structure and no requirements to maintain official records. If you are looking for business with several customers, expect investors and the credibility of the business is a factor in the success of the business, you must consider LLP or Company.

Sole Proprietorship is pretty easy and straightforward to get started since the business and the business owner are pretty much the same entity.

Partnership - best suited for multiple partners, localized business

If you running a local business but have multiple partners involved, then you can go for Partnership business model.

Partnership require mutual understanding and agreement between the shareholders and need to prepare a partnership deed.

LLP - easy to setup and operate

Limited Liability Partnership is a registered legal business entity. Compared to partnership, there are some formalities involved in starting the business. However, compared to private limited companies, LLPs have less formalities and requirements for day to day running the business.

The primady advantage for LLPs over Partnership is, in case of LLP, the personal assets of partners are separated from the business loss. For example, if the business make a huge loss, the responsibility of LLP partners is limited to the paid capital of the partners. The personal assets of the partners do not need to be used to pay out the debts of the business. (However, in case of corruption, fraud, illegal activities etc, a court can order to sieze the assets of the partners.)

Many people are confused on choosing between partnership and LLP. Partnership is easy and convenient if the business success does not depend much on the credibility of the business. If there are higher chances of business loss, it will be a good idea to go for LLP so that the personal assets of the share holders are not at risk. The disadvantage of LLP is, additional formalities, longer registration process, requirements to maintain records etc. However, the additional process gives higher credibility to the business. In many cases, an LLP is considered equivalent to a Private Limited Company, but have much less legal formalities to operate the business.

Private Limited Company - well structured business and more credibility

If you are expecting foreign investments, business with international clients and chances of acquisition by other companies, it will be a good idea to go for Private Limited Company. In case of companies, it is easy to sell or transfer shares without affecting the business. Any of the share holders can sell the shares and can bring in new members to the business. Companies are operated by designated members and the management is well structured. Accounts of the company are audited and financial records are maintained properly and are available for inspection by share holders.

Compare Partnership, LLP and Private Limited Company


Both LLPs and companies run the business in a structured manner. However, companies are required to have periodic director board meetings and are required to maintain records of the decisions etc.

In short, LLP is a business entity more structured than Partnership but less complex than running a Company.

In case of partnerships, the partners represent the business. It may be hard to change the partners since the business runs based on the partnership agreement between the partners and changing partners require creating new partnership agreement.

LLP is a new concept introduced in 2009 and is the most attractive business entity type for new enterpreneors. LLPs also require a partnership agreement, like the partnership. The initial process to start an LLP or Company is not very different.

All directors of a Company are required to apply and get a "Director Identification Number" (DIN), which is mandatory and uniquely identify a company director in India. In order to make sure a person cannot have more than 1 DIN, government has made it mandatory to incldue PAN in the DIN application.

Similar to DIN for company directors, all partners of LLP are required to apply and get a "Designated Partner Identification Number" (DPIN). A DPIN has the same purpose as a DIN. As per a recent directive from government, if someone has a DIN, it can be used as a DPIN as well and vice versa.

When I started a business in 2004, there was no LLP and I was trying to decide between Partnership and Company. After a lot of confusion, we decided to go for Private Limited Company. Since I deal with international clients and wanted more credibility than a partnership firm, Private Limited Company was a better choice for us at that time. Since atleast 2 share holders are required to form a company, some of my relatives were also included in the Private Limited Company. Regular formalities in running the company include maintaining proper records of financial transactions, conducting director board meetings, maintaining meeting minutes, auditing and filing tax returns etc.

This year (2011), I wanted to start another business entity in Bangalore. This time, I didn't have to think at all since LLP was an obvious choice for us. LLP gives much more credibility than a partnership, protects my personal assets from my business and have no requirements to have board meetings etc. I can have informal chat with partners and make decisions. Even though it is not mandatory to maintain minutes of meetings, it is a good practice to keep all records to avoid confusion and misunderstanding between partners.


Article by Tony John
Tony John is a professional blogger from India, who started his first Weblog in 1998 at Tripod.com. Tony switched to blogging as a passion blended business in the year 2000 and currently operates several popular web properties including IndiaStudyChannel.com, Techulator.com, dotnetspider.com and many more.

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