How to Choose the Best Business Entity in India: Key Features and Benefits

There is no choice of business entity available in India that can begin business without holding the registration of that entity. It makes a difference to operations, taxation, and legal obligations. Entrepreneurs can know how to run their business in a better way by understanding different business entities and also overcoming forms of business law.

Introduction

Depending on the entrepreneurial need, India has several types of business entities available to you. Paying close attention to the right business structure is important if you are a solo entrepreneur, or partners, or a big company. But Indian business law has its advantages and limitations, and with each entity there are distinct advantages, limitations and the requirements under Indian business laws. By understanding concepts like Sole Proprietorship, Private Limited Company, and other relevant concepts, you will be able to make better decisions as well as have smooth operations and growth. This guide discusses the various business forms in India and helps you decide which form of business structure is best for you.

Sole Proprietorship

The least complex form of business is a Sole Proprietorship. However, one person manages and owns it. For businesses with low investment, this type is the perfect choice.

Key Features:

• Single ownership and control.
• No separate legal entity.
• Minimal compliance with business laws.
• Owner bears unlimited liability.

Advantages:

• Easy to start and dissolve.
• Full control over profits and decisions.

Disadvantages:

• Unlimited personal liability.
• Limited access to funding.

Partnership Firm

If there are two or more persons which own the Partnership Firm then that can possibly be a Partnership Firm, whose profits will be shared similarly, but the responsibilities too can be shared. Under Partnership Deed, it operates.

Key Features:

• A minimum of two partners.
• Based on the provision of the Indian Partnership Act, 1932.
• Unlimited liability for partners.

Advantages:

• Shared investment and responsibilities.
• Simple registration process.

Disadvantages:

• Joint liability for partners.
• Risk of conflicts.

Limited Liability Partnership (LLP)

LLP is a Partnership which comprises features of Company. It is also a limited liability partnership and governed by the Limited Liability Partnership Act, 2008.

Key Features:

• Separate legal entity.
• Limited liability of partners for contributions.
• Mandatory annual filings under business laws.

Advantages:

• Limited liability protection.
• Flexible management structure.

Disadvantages:

• Better compliance than typical Partnerships.
• Penalties for non-compliance.

Private Limited Company

Most startups and small growing businesses prefer starting with a Private Limited Company. It provides only limited liability and separate legal existence.

Key Features:

• It needs at least two directors and shareholders.
• Governed by the Companies Act, 2013.
• Limits share transfer to the public.

Advantages:

• Limited liability for shareholders.
• Access to investors’ funding is easy.

Disadvantages:

• Higher compliance under business laws.
• Complex registration process.

Public Limited Company

Shares can be offered by a Public Limited Company to the public. This is ideal for large scale companies that want to boost capital through stock exchanges.

Key Features:

• Minimum of three directors and seven shareholders.
• Shares are freely transferable.
• Governed by the Companies Act, 2013.

Advantages:

• Access to public capital.
• Limited liability for shareholders.

Disadvantages:

• Strict compliance under business laws.
• Extensive disclosure requirements.

One Person Company (OPC)

An OPC is a process that ensures that an entrepreneur has a business with limited liability. The Companies Act, 2013 has governed it.

Key Features:

• Single shareholder and director.
• Separate legal entity.
• Requires nominee appointment.

Advantages:

• Limited liability.
• Better credibility.

Disadvantages:

• Restricted to small businesses.
• Higher compliance than Sole Proprietorship.

Section 8 Company (Non-Profit Organization)

A Section 8 Company operates on the basis of charitable purpose as opposed to profit. The Companies Act, 2013 governs it.

Key Features:

• It is of a promotional nature, promoting social welfare, education or charity.
• No dividend distribution.
• Strict compliance with business laws.

Advantages:

• Tax exemptions.
• Enhanced credibility.

Disadvantages:

• Complex registration process.
• Regular audits and reporting.

Hindu Undivided Family (HUF)

A Hindu Undivided Family is a special type of business entity in India that is suitable for the use of the families. It is Hindu law governed and under the management of the Eldest Member of the Family who is called Karta.

Key Features:

• A HUF can be formed only by Hindu families.
• Under the Karta having some members of the family as coparceners.
• Separate tax identity under Indian tax laws.

Advantages:

• Tax benefits for the family.
• Unified management.

Disadvantages:

• Limited to family-run businesses.
• Risk of internal disputes.

Cooperative Society

A Cooperative Society is an organization that is formed voluntarily for mutual benefit. The Cooperatives have been established under the Cooperative Societies Act, 1912.

Key Features:

• Minimum of ten members.
• Democratic management with one member, one vote.
• Non-profit motive with shared profits.

Advantages:

• Promotes mutual benefit.
• Limited liability for members.

Disadvantages:

• Limited capital generation.
• Bureaucratic management.

Trust and Society

Charitable, educational or religious trust or societies are formed. Amongst which they are governed by Indian Trusts Act, 1882 and Societies Registration Act, 1860.

Key Features:

• Made under trust deed or memorandum of association.
• No profit distribution among members.
• Regular audits and reporting.

Advantages:

• Tax exemptions for charitable activities.
• Promotes social welfare.

Disadvantages:

• Strict compliance under business laws.
• Limited to non-commercial activities.

Important Factors to Consider When Choosing a Business Entity

Several factors in choosing the right business entity include:

• Nature of Business: Small ventures are suited to Sole Proprietorships  whereas Private Limited Companies are suitable for bigger ventures.
•  Liability Protection: Choose LLP, OPC or Company for liability protection.
• Taxation: Different business entities have varying taxation.
• Compliance Requirements: Higher compliance for Companies than Partnerships.
• Investor Needs: Private and Public Limited Companies are funded by investors.

Legal Requirements and Compliance for Business Entities

Every Indian business entity must comply with the following business laws:

• Sole Proprietorship: Basic registration with local authorities.
• Partnership: Registered partnership deed.
• LLP: Annual filings and audits.
• Private and Public Limited Companies: Board meetings, filings with the Ministry of Corporate Affairs (MCA), and annual audits.

Taxation Structure for Different Business Entities

There are three different taxation structures according to the business entity:

• Income taxed like an individual income for Sole Proprietorship.
• Partnership and LLP: Taxed at a flat rate of 30%.
• Corporate tax rates apply in Private and Public Limited Companies.

Conclusion

Knowing types of business entities in India aids business entrepreneurs in determining the right structure of business entities. There are many advantages, disadvantages, and compliance regarding the business laws for each entity. Make good choices so that you do not opt for legal issues, growth will be smooth.