There are different types of business entities in India depending on what your needs are and the type of business you have. One way of doing this is by establishing a business entity.
India is a country where businesses are eager to grow. This is because India has the third-largest GDP in the world and many people want a chance to capitalize on its booming economy.
A business entity is a separate legal person, with its own rights and responsibilities. A business must have a properly registered name to be recognized as a distinct identity.
India recognizes six types of business entities: Sole Proprietorship, Partnership Firm, Limited Liability Partnership (LLP), Private Limited Company, Public Limited Company, and One-Person Companies.
What are Business Entities?
Every business entity in India has a designation that distinguishes it from others, which may be called a Business Name, or Product Name, or Sales Name.
These names are essential for defining the character of the business entity in India and having the registration of the name you want associated with it.
You can change the name of your business entity by changing the designation if you want to change its legal personality.
When you form a business entity, you are signing up to create a legal person. When you form a partnership, you are creating a legal partnership; if you are forming an LLP or a company, you are forming an incorporated or unincorporated company.
6 Types Of Business Entities In India
The type of entity you form will depend on the work you do, your objectives for running the business, your personal situation and financial resources, and your tax liability.
Here, we’ll discuss different types of business entities in India so you can decide on which one will work best for you.
1. Sole Proprietorship
In India, a sole proprietorship is the least complex business entity. This means that you only have to register it with the government in India.
A sole proprietorship does not have to pay tax or submit a financial statement to the government. It has no employees and one owner and therefore has no staff or wages.
Your only responsibility is to register your name and details with the government, so that you’ll be able to conduct business in India, and so you will not lose your name if you leave India. The best way to do this is to register with an established firm and open a new one.
Alternatively, you can register as an independent sole proprietorship and create a new business entity with the government.
A Partnership is a business structure used to form a Limited Liability Partnership (LLP). An LLP is a business entity that sets up a partnership for conducting commercial activities.
Usually, when you form an LLP, you hire two or more people to manage a project with you. The LLP has three fundamental features:
Partners–When you hire a partnership as your Company Representative, one of your partners will usually be an active investor and will serve as the key person responsible for the operation of the LLP.
If your partnership is incorporated in India, it must register the name of your Company Representative in the Companies Registration Office of India.
3. Limited Liability Partnership
Limited Liability Partnerships are the simplest and cheapest type of business entity. It has no assets, liabilities, employees, offices, or branches.
All you need is one person and a monthly statement of profit and loss (P&L). You create this entity by creating a document called Articles of Association.
Only you and the other person will be considered as the responsible party. The liability is always on the partner and you are the one who is liable to the other partner for making sure he complies with the conditions of the contract and to account for the P&L.
Sole proprietors and partnership directors who want to hold a personal asset to their business prefer this kind of business entity. Because it doesn’t own assets, it needs little capital for starting.
4. Private Limited Companies
A Private limited company is a business that is not public. It is owned by one or more members of a group (an association) of people.
Members of the group appoint a nominated director, called the company secretary, to be the effective chief executive.
These companies are companies incorporated with a general board of directors. It’s a very common kind of company, used for businesses that don’t need to be public.
These are registered in a company registry and manage their affairs in the same way as other companies.
5. Public Limited Companies
As a Limited Liability Partnership, a Public Limited Company is one in which every shareholder has an equal say in how the business is run.
They also have to be financially sound. However, they must register their articles of association and other documents with the Registrar of Companies in India.
This includes details like a name for the company, a description of the nature of the business and the general legal relationship the shareholders have with the company.
6. One-Person Companies
This type of business entity is called a sole proprietorship. A sole proprietorship is a business in which the owners have 100% ownership. Ownership is vested in the owner alone.
Your sole proprietorship can be a professional LLC, sole proprietorship, partnership, limited liability company, or corporation.
A sole proprietorship operates as a small business. Because it is your sole responsibility, the owners usually handle all the finances and business decisions.
A sole proprietorship can be an active, passive, or honorary model for tax purposes. Passive LLCs are businesses that don’t qualify for the 20% corporate tax rate.
Only active LLCs qualify for this rate. Firms that are members of an LLC can allocate the profits of the business equally among the members.
Which type of business is best in India?
- A Partnership Firm
A Partnership Firm can form in two different forms. In a Partnership Firm, the partners are the actual owners and must contribute all their resources to the business. In a Limited Liability Partnership, the partners must share all financial risks and rewards.
They must recognize partnership firms as a distinct entity and can only operate as a partnership. You will need to register your business entity with the Registering Office, usually at the municipality you live.
If you are registering in Mumbai, for example, you can do it at Brihanmumbai Municipal Corporation (BMC) in Mumbai.
- A Limited Liability Partnership
If you choose to form an LLP, you should know that you can only form a limited liability partnership.
How can I become an entrepreneur?
For the first, the business entity has to be set up and registered with the authorities. You need to start a business entity.
If you have any common occupation like selling automobiles or carpentry work, then you can register as a sole proprietorship or a partnership firm. For other jobs, such as leasing or renting, you need to register as a Limited Liability Partnership (LLP).
What type of company is best for startups?
Being a sole proprietorship means that you have total ownership and responsibility for the company, but you only have a right to your shares in the company.
All you do as a sole proprietor is to offer your services to other people as a business service provider. You cannot invest any of your own money in the business. You will pay income tax on your salary, and that is it.
The major benefit of being a sole proprietor is that you do not have to get a business license for your business. All you need is to get a few forms from the government that allow you to do business in your name and pay taxes if required.
Being a partnership firm is like a sole proprietorship.
There are different types of business entities in India depending on what your needs are and the type of business you have.
If you want to run your own business as an independent person who only has control over the company’s assets, the sole proprietorship is a perfect choice.
A sole proprietorship is one of the simplest business entities to set up and is a perfect way to set up a personal brand that’s your own, and set your own hours, pay yourself a salary and decide what to do with your company’s assets.
A partnership firm is another legal entity to set up. This is where partners share all the risks and profits equally. However, it is not a joint venture in the usual sense.
It should conduct all transactions between partners on an arm’s length basis. Contracts govern the partnership and, by general partnership law.