Legal Types of Business Entities.
As a designated partner of Big Business Accountants LLP, myaccountants.in, a brand they’re under, I meet with many people who want to start their own startups. Out of the many queries, one is very common that asked by those people. So, for resolution of this query, I am posting this article. Some people who not met to me may possible to have doubt relates to this type of question. Without wasting more time now I’m reaching to the point.
People face confusion about whether they should start their business as a Sole Proprietorship, a Registered Partnership Firm, an Unregistered Partnership Firm, a Limited Liability Partnership Firm (LLP), a One-Person Company (OPC), a Private Limited Company or a Public Limited Company.
Before give the answer of this question that with which status they should start, we need to understand the factors that should be considered before take this decision.
To understand in detail, we should discuss one by one about the legal status mentioned above.
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Sole Proprietorship is the type of business which state, control, managed by a single person only. In this a person do business on his name. Sole Proprietorship has no any separate legal status, it means a person is itself a business.
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a) Liability of business is treated as personal liabilities of proprietor.
b) Unlimited Liabilities. If in any case business has to pay the amount to its creditors (parties from goods buy), bank, Govt Taxes etc then the liabilities will be unlimited and it will be beard by proprietor from it personal property.
c) He can’t do business with someone else so he faces difficulty in raising funding for business.
d) Less reliable in market. Generally Sole Proprietorship traded as small business and less capable to do business on a large scale so sometime proprietors face difficulty to do contracts and crack the deals.
e) No legal right of another person on Sole Proprietorship business other than proprietor e.g. If proprietor want to start business with his friend, family member or another person then all legal right and legal control will be in the hands of proprietor only and another person has nothing.
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a) Full control in the hands of a single person i.e. Proprietor.
b) Beneficial for small-scale businesses.
c) Less legal compliances and its complexity.
d) Easy to start and winding up (close).
e) No compulsion to maintain books of accounts and appointment of auditor (except in case of tax audit u/s 44AA and maintenance of books of accounts u/s 44AB of Income Tax Act, 1961) means if a business has turnover more than a specified limit then it requires to maintain books of accounts and tax audit.
f) Lower income tax rates.
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No legal registration is required for formation of Sole Proprietorship Business. Business simply can obtain following certificates and registrations:
a) Trade License (issued by local body)
b) Certificate under shop and establishment act
c) MSME certificate
d) PAN number
e) GST registration, if liable.
f) Specific License (as per the law required. E.g. Pharmacy License in case of medical store)
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A registered partnership firm is a form of business where two or more than two persons bound to each other legally for doing business activities, such persons called partners. A partnership deed need to sign by all the partners, which legally bound to each other, and required to register the partnership deed with District Firm and Society Registrar. Partnership firm has its own separate legal existence. Partnership firm run business in its own name, it can buy property, enter into any contract and agreement in its own name. Its existence is separate from its partners.
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a) Higher income tax rate i.e. 30% flat rate. It means partnership firm cannot take advantage the benefit of slab rate in income tax, if partnership firm is earning even Re. 1 then also its required to pay income tax at the rate of 30%.
b) Unlimited liabilities of partners. If during the closure of the partnership firm, all assets of the firm not sufficient to meet out the all liabilities (payables) then such burden will transfer to its partners and partners will personally liable to meet out the balance liabilities.
c) All partners and firm will liable on the act of any partner. Partners treated as agents of the firm and any act done by any partner it will be bound on firm and another partners.
d) Less reliable in market. Generally, partnership firm traded as less reliable than limited companies, so sometime partnership firm face difficulty to do contracts and crack the deals.
e) Difficulties in growing the business, partnership firm cannot raise money form market in the form shares, debentures, bonds or deposits. Partnership firm only depends on loan from its partners, relatives of partners, another person, banks or NBFCs.
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a) Separate legal existence. Its existence is separate from its partners.
b) Partnership firm can sue or can be sued on its own name.
c) Any partner can sue on another partner or on firm.
d) Generally treated as mote reliable than sole proprietorship firm.
e) No any regular legal compliance required to full fill.
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a) A Partnership Deed to be signed by all the partners as mentioned in Partnership Firm Act, 1932 and notarized
b) Registration of firm is not mandatory but if partners want to register it then registration with District Firm and Society Registrar is required.
c) Separate bank account in the name of the firm.
d) Trade License (issued by local body)
e) Certificate under shop and establishment act
f) MSME certificate
g) PAN number
h) GST registration, if liable
i) Specific License (as per the law required. e.g. Pharmacy License in case of medical store)
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An unregistered partnership firm is a partnership firm which is form on partnership deed but not registered with District Firm and Society Registrar. It has no advance but all disadvantages i.e. in an unregistered partnership firm, firm cannot sue on another party and another party cannot sue on firm, partners cannot sue on each other and not on firm.
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A LLP is a partnership firm having limited liabilities of the partners, means at the time of closer of firm if the assets of the firm is unable to pay out its all liabilities then partners will not be personally liable to pay out the balance amount but they will liable to the amount which will be limited to their unpaid Obligation of Contribution. That’s why we called it Limited Liabilities Partnership Firm because liabilities of partners are limited to a certain amount. Having its separate legal existence.
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a) Higher income tax rate i.e. 30% flat rate. It means LLP cannot take advantage the benefit of slab rate in income tax, if LLP is earning even Re. 1 then also its required to pay income tax at the rate of 30%.
b) Less reliable in market. Generally, LLP traded as less reliable than limited companies, so sometime LLP face difficulty to do contracts and crack the deals.
c) Difficulties in growing the business, LLP cannot raise money form market in the form shares, debentures, bonds or deposits. LLP only depends on loan from its partners, relatives of partners, another person, banks or NBFCs.
d) More regular legal compliances than simple Partnership Firm.
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a) Liabilities are limited of the partners. Partners are not personally liable to dispose of the obligations of the firm.
b) More reliable than simple Partnership Firm.
c) Beneficial for large scale businesses.
d) Less regular legal compliances than Limited Companies.
e) Separate legal existence.
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a) Registration required with Registrar of Companies (RoC) under Limited Liabilities Partnership Act, 2008.
b) Separate bank account in the name of the firm.
c) Trade License (issued by local body)
d) Certificate under shop and establishment act
e) MSME certificate
f) PAN number
g) GST registration, if liable
h) Specific License (as per the law required. E.g. Pharmacy License in case of medical store)
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OPC is a company having only one owner, who will be the shareholder and director of the company. It has its separate legal existence. Liability is limited to the unpaid amount of share of shareholder.
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a) Less reliable in market. Generally, OPC traded as less reliable than limited companies, so sometime OPC face difficulty to do contracts and crack the deals.
b) Difficulties in growing the business, OPC cannot raise money form market in the form shares, debentures, bonds or deposits from common public. OPC only depends on the paid-up capital of its shareholder, loan from relatives of shareholder, another person, banks or NBFCs.
c) More regular legal compliances than simple Partnership Firm and LLP.
d) Low amount of resources and skills in management of business because of one shareholder only.
e) Less reliable than LLP because LLP have more than one partners and OPC have only one shareholder and director.
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a) Liabilities are limited of the shareholder. Shareholder is not personally liable to dispose of the obligations of OPC.
b) More reliable than simple Partnership Firm.
c) Beneficial for small scale of businesses.
d) Less regular legal compliances than Limited Companies.
e) Separate legal existence.
f) More govt support to boost the economics. E.g. recently MCA reduced the corporate tax rate from 30% to 25% and it will reduce more in some days.
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a) Registration required with Registrar of Companies (RoC) under Companies Act, 2013.
b) Separate bank account in the name of the firm.
c) Trade License (issued by local body)
d) Certificate under shop and establishment act
e) MSME certificate
f) PAN number
g) GST registration, if liable
h) Specific License (as per the law required. E.g. Pharmacy License in case of medical store)
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A private limited company is a company having limited liabilities of its shareholders. To form private limited company its required to have minimum of 2 shareholders and 2 directors, maximum of 50 shareholders.
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a) Generally, less reliable than Public Limited Company.
b) High cost of legal regular compliances.
c) Mandatory to maintain proper book of accounts.
d) Mandatory to appoint statutory auditor.
e) Pvt Ltd company cannot take deposits from public.
f) It cannot issue share to the public.
g) It Cannot issue debentures and bond to public.
h) Less resources and less scope to grow more and expand the business.
i) More regular legal compliances to be full fill than OPC and LLP.
j) Cannot list its shares in stock exchanges.
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a) Limited liabilities of its shareholders.
b) Having more potential than LLP and OPC to grove business because there more and 1 share holder and director.
c) Generally, more reliable than OPC and LLP.
d) It can easily take loans from banks and NBFCs.
e) Suitable for medium scale of business.
f) More govt support to boost the economics. E.g. recently MCA reduced the corporate tax rate from 30% to 25% and it will reduce more in some days.
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a) Registration required with Registrar of Companies (RoC) under Companies Act, 2013.
b) Obtain certificate of incorporation and certificate of commencement of business.
c) Separate bank account in the name of the firm.
d) Trade License (issued by local body)
e) Certificate under shop and establishment act
f) MSME certificate
g) PAN number
h) GST registration, if liable
i) Specific License (as per the law required. e.g. Pharmacy License in case of medical store)
j) RBI compliances in case of foreign trade.
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A public limited company is a company having minimum of 7 shareholders and 3 directors and maximum of endless shareholders. It has limited liabilities up to the amount of unpaid amount of shares holder by its shareholders. These types of companies more accountable towards public because it run its business activities on the fund invested by common public.
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a) Less control of founders on business. Because it conducts its activities on the money invested by its shareholders hence it is more accountable towards its shareholders.
b) Huge amount of legal compliances towards Ministry of Corporate Affairs (MCA).
c) Not beneficial for small scale of business.
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a) Liabilities of shareholders are limited, means shareholders are not personally liable of failure of company.
b) It can accept deposited from public.
c) It can issue shares, debentures and bonds to common public.
d) Best option for large scale of industries.
e) It can list its shares in stock exchanges.
f) Shares of public limited companies can be trade in stock exchanges.
g) Big status and more reliable than Pvt Ltd Companies.
h) More govt support to boost the economics. e.g. recently MCA reduced the corporate tax rate from 30% to 25% and it will reduce more in some days.
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a) Registration required with Registrar of Companies (RoC) under Companies Act, 2013.
b) Obtain certificate of incorporation and certificate of commencement of business.
c) Separate bank account in the name of the firm.
d) Trade License (issued by local body)
e) Certificate under shop and establishment act
f) MSME certificate
g) PAN number
h) GST registration, if liable
i) Specific License (as per the law required. E.g. Pharmacy License in case of medical store)
j) RBI compliances in case of foreign trade.