Let’s try and understand the types of business structures available in India. Here is a list of some of them:

1. One Person Company (OPC)

Recently introduced in the year 2013, an OPC is the best way to start a company if there exists only one promoter or owner. It enables a sole-proprietor to carry on his work and still be part of the corporate framework.

2. Limited Liability Partnership (LLP)

A separate legal entity, in an LLP the liabilities of partners are only limited only to their agreed contribution.

3. Private Limited Company (PLC)

A company in the eyes of the law is regarded as a separate legal entity from its founders It has shareholders (stakeholders) and directors (company officers). Each individual is regarded as an employee of the company.

4. Public Limited Company (PLC)

A PLC is a voluntary association of members which is incorporated under company law. It has a separate legal existence and the liability of its members are limited to shares they hold.

You can choose what business structure suits your business needs best and accordingly register your business. Other forms of business structures include Sole proprietorship, Hindu Undivided Family, and Partnership firms. Please bear in mind, these structures do not come under the ambit of company law.

It is important to choose your business structure carefully as your Income Tax Returns will depend on it. While registering your enterprise, remember that each business structure has different levels of compliances that need to be met with. For example, a sole proprietor has to file only an income tax return. However, a company has to file an income tax return as well as annual returns with the registrar of companies.

A company’s books of accounts are to be mandatorily audited every year. Abiding by these legal compliances requires spending money on auditors, accountants and tax filing experts. Therefore, it is important to select the right business structure when thinking of company registration. An entrepreneur must have a clear idea of the kind of the legal compliances he/she is willing to deal with.

While some business structures are relatively investor-friendly than others, investors will always prefer a recognized and legal business structure. For example, an investor may hesitate to give money to a sole proprietor. On the other hand, if a good business idea is backed by a recognized legal structure (like LLP, Company, etc) the investors will be more comfortable making an investment.

Let’s take a look at some important questions every entrepreneur must ask himself before he/she finally decide upon a business structure.

1. How many owners/partners will your business have?

If you are a single person who owns the entire initial investment required for the business, a One Person Company would be ideal for you. On the other hand, if your business has two or more owners and is actively seeking investment from other parties a Limited Liability Partnership (LLP) or Private Limited Company would suit you best.

2. Should your initial investment determine your choice of business structure?

The answer to that question is – Yes if you want to spend less initially, it would be wise to go in for a Sole Proprietor, or a HUF or a Partnership. But, if you are sure that you will be able to recover the setup and compliance costs, you can opt for a One Person Company, LLP or a Private Limited Company

3. Willingness to bear the entire liability of the business

Business structures like sole proprietor, HUF, and partnership firm have unlimited liability. This means, in case of any default in loans, the entire money will be recovered from the members or partners in profit sharing ratio. The risk to personal assets is high in these cases. Whereas, Companies and LLPs have a limited liability clause. This means that the liability of its members is restricted to the amount of contribution made by them or the value of shares each member holds.

4. Income Tax Rates Applicable to businesses

The income tax rates applicable to a sole proprietorship and a HUF are the normal slab rates. In case of a sole proprietorship, the business income is clubbed with the individual’s other income. But in the case of other entities like partnership and company a tax rate of 30% or more is applicable.

5. Plans of getting money from investors

As mentioned earlier, it is difficult to get investments when your business structure is unregistered. Entities like LLP and Private Limited Company are trusted when it comes to investment. Make sure you choose the right structure, seek the help of an expert so that you register under proper guidance.

In India, registration of a company can not be done without proper proof of identity and proof of address. Proof of identification and address would be required for the incorporation of all the company’s directors and shareholders.

All the particulars of the directors and shareholders is to be submitted to the registrar at the time of registration. Pan Card/Aadhar card/Diving license/passport can be submitted as proof of identity. Latest Telephone Bill /Electricity Bill/ Bank Account Statement is to be submitted for proof of address.

The organization must have a registered office in India for online business registration in India. A recent copy of an energy bill or the property tax receipt or water bill must be sent to confirm admission to the registered office. In addition to the tenancy/rental agreement, the maintenance bill or the sale deed or a letter or NOC from the landlord with his/her permission to use the office as the company’s registered office is accepted.

Along with these documents the DIN and DSC of all the directors is also to be submitted. These documents mentioned are the general documents which are to be submitted for registration of LLP, One Person Company, Private Limited and Public Limited Company.

A company registration provides many advantages. A licensed company makes it genuine, and enhances the business’ credibility.

1. Protects against personal obligation, and defends against other threats and losses.

2. Builds goodwill and also supports more customer attraction.

3. Gives reliable investors bank credits and good investment with ease.

4. Provides cover of the responsibility to protect the company’s assets.

5. Bigger commitment to wealth and greater stability.

6. Increases the ability to develop and grow large.

Selection of Company Name

The applicant needs to use the RUN (Reserve Unique Name) web services by MCA for reserving the name of the company. The type of entity and one proposed name for the company is to be entered for reserving the name of the company. The proposed name should not be similar to the existing name of any company or LLP or Trademark. If the name is rejected by the Registrar, the applicant needs to file another RUN form and pay the prescribed fees for approval of the name. An OPC should have the name in the form of “XYZ (OPC) Private Limited”. Similarly, a private company should have the name in the form of “ABC Pvt. Ltd.” and a public company name in the form of “XYZ Limited”.

Capital of the company

There is no requirement of minimum paid-up capital to start a private limited company or a one-person company. However, the public limited company must have a minimum paid-up capital of Rs.5 lakh. The paid-up capital means the the amount of money a company has received from shareholders in exchange for shares of the company. It is created when a company sells its shares in the market directly to investors, usually through an Initial Public Offering (IPO).

The authorised capital of any company must be Rs.1 lakh. The authorised capital means the maximum amount of share capital that the company is authorised by its Memorandum of Association to issue to its shareholders. The authorised capital must be mentioned in the MoA.

Once, the company is registered there are certain compliance to be followed by the company annually. The company needs to follow compliances such as the Company is required to appoint its first auditor within 30 days of incorporation In the first board meeting. Every company must conduct minimum 4 board meetings during the calendar year at stipulated intervals. It has to maintain and file of profit and loss account, annual return and balance sheet every financial year together with an auditor’s report before the due date with the Registrar of Companies. Every company is required to maintain certain Statutory Registers.

For more details about compliances to be followed by the company, read our article on Compliances under the Companies Act 2013.

The company also file certain annual forms with the Registrar of Companies. Details of all forms along with the due date of filing these forms are given in our article ROC Compliance Calendar.

Proprietorship

• A maximum of 1 member is needed;
• The entity is not considered as a separate legal entity;
• The liability of members is unlimited;
• The Registration of entity is not compulsory;
• The transferability option is only as an individual;
• The profit and losses of the business should be reported in the personal income tax return of the sole proprietor. The business itself is not taxed.
• The Income Tax Return is filed with the Registrar of Companies.

Partnership Firm

• A minimum of 2 and maximum of 20 members are needed;
• The entity is not considered as a separate legal entity;
• The liability of members is unlimited;
• The Registration of entity is optional. The entity can be registered under the Partnership Act, 1932
• The transferability option is available only up to 30% of the Company profit only.
• The Partnership Firm is liable to pay income tax at the rate of 30% of Company profit.
• The Income Tax Return is filed with the Registrar of Companies.

Limited Liability Partnership (LLP)

• A minimum of 2 members are needed. There is no limit on the maximum number of members;
• The entity is considered as a separate legal entity;
• The liability of members is limited;
• The Registration of entity is done under MCA;
• The transferability option of LLP is 30% of Profit Plus CESS and Surcharges applicable;
• The LLP is liable to pay income tax at the rate of 30% of Profit Plus CESS and Surcharges applicable;
• The Income Tax Return is filed with the Registrar of Companies.

Private Limited Company (PLC)

• A minimum of 2 and maximum of 200 members are needed;
• The entity is considered as a separate legal entity;
• The liability of members is limited to the extent of share capital;
• The Registration of entity is done under MCA.
• The transferability option of Private Company LLP is 30% of Profit Plus CESS and Surcharges applicable;
• A Private Company is liable to pay income tax at the rate of 30% of Profit Plus CESS and Surcharges applicable.
• The Income Tax Return is filed with the Registrar of Companies.

One Person Company (OPC)

• Only 1 member is needed;
• The entity is considered as a separate legal entity;
• The liability of members is limited to the extent of share capital;
• The Registration of entity is under MCA and Companies Act, 2013;
• The transfer of OPC is allowed to only one person;
• An OPC is liable to pay income tax at the rate of 30% of Profit Plus CESS and Surcharges applicable.
• The Income Tax Return is filed with the Registrar of Companies.