A lot of business ideas do get in our minds daily, but successful entrepreneurs are those who turn them into reality like Alibaba.com, Uber, Zomato, Flipkart, etc. Once the idea struck our mind and we realize that there is gap/need in the market for particular product or service it is very vital to understand how and under which business form we should start.
Further to our earlier article (Budget 2016- Proposals for New Entrepreneurs (Startup Sector), today we are going to discuss the various business forms available to start a business in India, later we will progress to understand the regulatory framework/ legal compliances required for the business in India (e.g. income tax law, service tax law, provident fund, trademarks and patents, subsidies available and so on).
Generally, a business can be owned and organized in several forms. Each form of organization has its own advantages and disadvantages. The key determinants for selecting form of business are power, control, risk and responsibility of the entrepreneur as well as the division of profits and losses.
The various forms of business in India are:
- Sole Proprietorship
It is the most common and oldest forms of business. There is no separate law that governs sole proprietorship. It does not require any formal license to start, however local trade and municipal license are required. Usually this business is preferred among small traders like tailors, artists, traders or even freelancers.
It does not have separate legal existence from its owner and liability of the proprietor is unlimited. It is not 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.
This form of business is governed by Indian Partnership Act, 1932. There is no mandatory registration under the Act, however if registration is not done with Registrar of Firms (ROF) then certain legal benefits are not available to the firm and the partners. The minimum number of partners must be two, while the maximum number can be 10 in case of banking business and 20 in all other types of business.
It has no separate legal existence of its own i.e., the firm and the partners are one and the same in the eyes of law. Liability of the partners is unlimited. Legally, the partners are said to be jointly and severally liable for the liabilities of the firm. This means that if the assets and property of the firm is insufficient to meet the debts of the firm, the creditors can recover their loans from the personal property of the individual partners.
This may include wholesale and retail trade, small scale industries small service concerns like real estate brokers, transport agencies, professional firms like charted accountants, doctors , attorney or law firms etc.
- Limited Liability Partnership
This form of business is governed by Limited Liability Partnership Act 2008. Limited Liability Partnership (LLP) firm is a new form of business entity which combines the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost and an alternative to traditional partnership. LLP is an appropriate form of ownership for medium sized business involving limited capital.
The LLP is a body corporate and a legal entity separate from its partners and has perpetual succession. Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners. The LLP shall be under an obligation to maintain annual accounts. A statement of accounts and solvency shall be filed by every LLP with the Registrar every year.
A partnership firm and private company can be converted into LLP. This form of business is gaining momentum due to its corporate form and low compliance cost.
- Private Limited Company
This form of business is governed by Companies Act 2013. It is the finest form of legal existence. A Private Limited Company is a separate legal entity both in terms of taxation as well as liability. The liability of its members is limited.
The minimum number of member required is 2 and maximum is 200. It has concept of perpetual succession. The Companies Act is amended in year 2015 there is no requirement to have minimum capital investment now.
This form of business usually acceptable for getting investment from venture capitalists, angel funding, borrowings from banks and foreign investments compared to other forms of business. A Private Limited Company has more compliance burden when compared to a Partnership and LLP, nevertheless it creates a legal and distinct corporate identity.
- One Person Company
One Person Company (OPC) is a newly introduced type of company to help the sole proprietors have a corporate form. This form of business is governed by Companies Act 2013. It allows a single entrepreneur to operate a corporate entity with limited liability protection.
One Person Company is a hybrid of Sole-Proprietor and Company form of business. OPC allows a single person to run a company with limited liability, while in case of a sole proprietorship, even though it is run and owned by one individual there is no distinction between the owner and the business as in the case of OPC and the liability is unlimited.
An existing Private Limited Company or Sole Proprietor can be converted into OPC. However the limit for OPC to have turnover is INR 2 crores. 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.
Having these business forms in mindset, it is ultimate choice of the entrepreneur who is willing to translate idea into action. Due consideration is to be given for all forms as changing from one form to another may result in additional cost to the entrepreneur and hinder smooth running of business.