Types of business entities in India


Are you planning to start a company in India? Learn what are the types of business entities and companies in India. It is important to choose the right business type before you register the business.

It is a common misunderstanding that when someone want to register and start a business, they call it a "company". In legal terms, the term "company" has some special meaning. A company is one of several types of business entities. This post talks about different types of business entities in India, however, many of the concepts mentioned here are applicable for other countries as well. For example, the types of business entities in USA are very similar to that of India.

Different types of business entities in India


There are 5 different types business entities in India:
  • Sole Proprietorship

  • Partnership

  • Limited Liability Partnersip (LLP)

  • Private Limited Company

  • Public Limited Company

Sole Proprietorship
This is one of the common business types in India. Sole Proprietorship means a business registered in the name of a single person. He is responsible for the whole business. The person and the business are tightly coupled. The business owner funds the business and takes the profit or bear the loss.

There is no complex rules and no complex accounting involved. All assets of the business and the personal assets are not really separated. Any profit from the business is added to the income of the business owner for the purpose of income tax purposes.

Any loss from the business will be a personal loss for the business owner. If the business goes on loss and some money need to be recovered to compensate the business loss, the personal assets of the business owner will be at risk.

Partnership


Partnership business is very similar to sole proprietorship. The primary difference between sole proprietorship and partnership is, there are more than 1 person involved in a partnership. There could be several partners and the share, roles and responsibilities of each partner is defined in a partnership agreement.

Any profit from the business will be shared between the business partners according to the partnership agreement.

In case of any business loss, partners are personally responsible. Monitory loss will be compensated from the personal assets of the partners according to the share of each partner defined in the partnership agreement.

Limited Liability Partnership (LLP)


LLP is a new type of business entity introduced in India in 2009. An LLP is a structured business model like a company, but still enjoy relatively less formalities like Partnership firms. It is a separate legal entity from the partners. The business and partners are separate. Personal assets of partners are separate from the business assets. In case of business loss, personal assets of the partners are not at risk of recovery from creditors. The maximum liability of each partner is limited to his share of the capital in the business (except in case of fraud, cheating, illegal activities etc).

LLP is a relatively new business model in India and are getting more and more acceptance among the business community. The most important attraction of this business model is, the personal assets of partners are separated and protected from business assets. Also, this model is relatively easy to setup and manage due to lower formalities compared to a Limited Company. The profit share from the LLP can be split and shared among the partners.

LLPs get better credibility among the investors compared to Sole Proprietorship and Partnership because of the proper maintenance of incorporation records, financial records and tax records.

Private Limited Company


A Private Limited Company is a more sophisticated form of business in India. The company is formed by a group of share holders. The total capital of the company is made up of "shares". Each shareholder can have variable number of shares. Shares can be sold to others, thus changing the ownership from one person to another without involving much legal formalities. (In case of partnership firms, ownership change require changing the partnership deed).

Incorporating and managing a company is a more complex process compared to sole proprietorship, partnership and LLP. A company is a well structured business model and have office bearers who run the day to day business. Not all business owners are involved in the day to day business.

The personal assets of the owners are separated from the business assets and losses. Each share holder is responsible only up to his share of the capital. Private Limited Companies are required to maintain records of board meeting minutes, financial transactions, annual reports etc. Directors of the company are required meet at specific intervals. The financial transactions of the company are subject to audit.

Major decisions in the company are made by majority votes from the share holders. Shares can be sold by the share holders to admit new members to the business. In case of the death of a share holder, the shares are transferred to his heirs and in general, the business will not be affected.

Which business type is better?


IT could be difficult to make a decision on which business type is better for you. It can depend on various factors including:

  • How many people are involved

  • What is the initial investment

  • Does it require skills of multiple people

  • Are you expecting investment from others like venture capitalists

  • What are the risks and chances of loss involved in running the business


Read more on which is the best business entity for you and how to choose the right business type.


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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Comments

Guest Author: Maggie21 Nov 2011

Very detailed information on company registration in India. Where can I find the right person to help me with company registration? Should I go for a lawyer or a chartered accountant?

Author: Timmappa Kamat28 Jan 2015 Member Level: Diamond   Points : 2

Good info Tony. This is very helpful for the upcoming entrepreneurs who might have been contemplating starting their own business. This article can give them an opportunity to gain some insight into the legal understanding.



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