Introduction

Generally, an entrepreneur after testing his idea is usually confused as to how to proceed with his venture. As a new business, they are obviously conscious about saving costs and future propositions and want to invest in something that gives them full freedom to do business yet doesn’t have a very high annual maintenance cost. And this informed choice of legal business structure sets the shape and path of their future growth.

Here in this article, we shall put light on options we have to work with if we opt to take forward the business with a recognized legal structure and shall discuss their advantages and disadvantages when it comes to complexity, liability, taxes, control, and capital investments.

Forms of business structure existing in India:-

1. Sole proprietorship Firm
2. Partnership Firm
3. Limited Liability Partnership Firm
4. One Person Company
5. Private Limited Company
6. Public Limited Company

1. Sole Proprietorship Firm

It is a form of business where a solo person starts his business with his own personal funds. Here there is no separate distinction made between the owner and his business. This essentially means you are your business. The firm is started in your name (or you may use a trade name), and all firm’s payables shall come from your personal expenses. 

Characteristics:-

• No Formal Structure: This form has no formal structure hence its really simple to start and run.
• Avail Easy Loan: The owner can avail loans for his business through his own creditworthiness.
• Complete Control over Business: The owner has complete control over his business.
• Less Stringent Taxation: Sole proprietorship firm is eligible for availing the benefits of the slab rate. And also tax laws like Income Tax and TDS are not as stringent as they are in the case of other entities.
• Convertible into Company: This form always has this option to convert itself into a company later on with some tax implications.
• Personally liable for Business Loss: Personally liable for business losses, debts and loans
• Partnership in business not possible: Company’s Stakes can’t be shared
• Least Preferable for Brand Building: This form is least preferable to form a brand building.
• Cannot introduce investment: These forms cannot bring investment from investors
• Need of GST Registration: Registration under Goods and Service Tax Act (GST) is preferable to show business’s separate legal existence

Documents Required for GST Registration: –

• Proof of Identity of Proprietor
• Proof of Address of Proprietor
• PAN of Proprietor
• Utility Bill & NOC from Landlord where business is situated

2. Partnership Firm

It is a form of business where two or more person join and carry on some business. The business is carried on as per either orally (Practically non-existent) or written agreement known as partnership deed. Despite partnership business being an entity separate from partners, every partner is personally liable for all the business losses, debts and liability.

Characteristics: –

• Easy Compliances: Since it is not mandatorily required to get registered under any law hence it’s easy to run without any much legal compliances.
• Avail Easy Loan: Firm’s and partner’s credit worthiness helps to avail easy loan for the business.
• Complete Control over Business: Partners have the complete control over their business.
• Less Legal Compliance: Tax compliance under tax laws like Goods and Service Tax, Income Tax  and  TDS are less stringent in comparison to body corporates.
• Convertible into Company: This form always has the option to convert themselves into company later on. Though this involves tax implications.
• Personally liable for Losses: Partners are personally and wholly liable for the losses, debts and loans of businesses.
• Investor hesitate to Invest: Since they are not regulated by any authority, practically investors are hesitant to invest in such forms.
• Mandatory TAN Registration: These firms are mandatorily required to get registered in TAN database for deduction of TDS.

Documents Required for Firm’s Registration:-

• Proof of Identity of Partners
• Proof of Address of Partners
• PAN of Partners
• Utility Bill & NOC from Landlord where business is situated
• Partnership Deed

3. Limited Liability Partnership (LLP)

It is a form of business where two or more person join and carry on some business. The business is carried on as per written agreement known as LLP Agreement. This form is governed by Limited Liability Partnership Act, 2008.

Characteristics: –

• Separate Legal Entity: In eyes of law LLP is separate from its partners.
• Partner’s Limited Liability: Partner’s are not wholly liable for business’s losses, debts or loan more that the extent of agreed contribution (capital) in the LLP Agreement.
• Partners not liable for other’s misconduct: No partner is liable on account of the independent or unauthorized action of other partners or for their misconduct.
• Complete Control over Business: Partners have the complete control over their business.
• Withdraw of Funds Allowed: In LLP partners can withdraw funds from LLP.
• Less Stringent Tax Compliances: Income tax is computed as if it’s a normal partnership firm. Tax compliance under Goods and Service Tax Act, TDS and Income Tax are less stringent in comparison to Companies.
• No requirement of Minimum Capital: Partners are not required to have minimum capital to work under the corporate veil of LLP .i.e.., LLPs can be incorporated with zero capital.
• Any Asset can be introduced as Capital: Partners can bring tangible, movable or immovable asset as their capital contribution.
• Non Convertible into company: This form of business can never be converted into company once it is formed.
• Regulated by LLP Act, 2008: LLP has an additional compliance of rules and laws mentioned under LLP Act, 2008.
• Attracts Investors: Investors do invest in LLPs but still they prefer companies than the LLPs.
• Statutory compliance fees: Filing under LLP’s Act, Audits, Income Tax Compliance and GST compliance add up their running cost. And they always need a legal professional’s backup for all their compliances.

Documents Required for Firm’s Registration:-

• Proof of Identity of Partners
• Proof of Address of Partners
• PAN of Partners
• Utility Bill & NOC from Landlord where business is situated
• Partnership Deed

4. One person company (OPC)

This is a form of business where even one person can carry on business under a corporate veil. This form is governed by Companies Act, 2013.

Characteristics: –

• Separate Legal Entity: In the eyes of law OPC is separate from it’s member.
• Only One person Required: To form OPC only one person is required.
• Perpetual Succession: The OPC keeps on existing in the eyes of law even in the case of death, insolvency, bankruptcy of any of its member and its carried on by the nominee after the member’s death. This leads to perpetual succession of the OPC. The life of the OPC keeps on existing forever.
• Limited Liability of Member: OPC is liable to the extent of its assets. Member’s liability is limited to the extent of reserve capital
• Complete Control over Business: Since there is only one member in this form hence member can always have their personal control over the business.
• Enjoys More Brand Value: OPC earns more brand value than a proprietorship & partnership business.
• Conversion into Private Ltd Company: This form has to be converted into private limited after a specified turnover and paid up capital.
• Stringent Compliances: OPC has to comply with almost all the legal compliance a normal private limited company complies with.
• Member shall be Indian Resident: NRIs and Foreign National cannot incorporate an OPC. 
• Investor’s Funds cannot be introduced: Funds from the Investors cannot be infused as dilution of ownership stake is not possible in OPC.
• Statutory compliance fees: Filing under LLP’s Act, Audits, Income Tax Compliance and GST compliance add up their running cost. And they always need a legal professional’s backup for all their compliances.

Documents Required for Incorporation:-

• Proof of Identity of Member & Directors
• Proof of Address of Member & Directors
• PAN of Member & Directors
• Utility Bill & NOC from Landlord where business is situated
• Articles of Association & Memorandum of Association
• Director Identification Number of all directors
• Digital Signature Certificate of directors.

5. Private Limited Company (PLC)

It is a form of business where two or more member can carry on business under a corporate veil. This form is governed by Companies Act, 2013.

Characteristics: –

• Separate Legal Entity: In the eyes of law members are separate from the company itself.
• Perpetual Succession: The company keeps on existing in the eyes of law even in the case of death, insolvency, bankruptcy of any of its members. This leads to perpetual succession of the company. The life of the company keeps on existing forever.
• Limited Liability of Members: PLC is liable for it’s debts and losses to the extent of its assets while member’s liability is limited to the extent of reserve capital.
• Enjoys brand Value: PLC earns the most brand value than any form of business mentioned before.
• Need one Resident Director: NRIs and Foreign National alone cannot incorporate an PLC.
• Attracts Investor the most: Investor trust this forms the most as this form works under most stringent laws
• Stringent Legal Compliances: PLC has to comply with most stringent legal compliance in comparison to above mentioned forms of business.
• Statutory compliance fees: Filing under Companies Act, Audits, Income Tax Compliance and GST compliance add up their running cost. And they always need a legal professional’s backup for all their compliances.
• Convertible into Public Limited Company: If founder wants funding from the public then they always have the option to convert their PLC into Public limited company which is not possible in any of the form mentioned above.

Documents Required for Incorporation:-

• Proof of Identity of Member & Directors
• Proof of Address of Member & Directors
• PAN of Member & Directors
• Utility Bill & NOC from Landlord where business is situated
• Articles of Association & Memorandum of Association
• Director Identification Number of all directors
• Digital Signature Certificate of directors.

6. Public Limited Company (PULC)

It is a form of business where seven or more member with a capital of over 5 Lakh can carry on business under a corporate veil. This form is a preferred form where the founders want to raise funds from general public. This form is also governed by Companies Act, 2013.

Characteristics: –

• Separate Legal Entity: In the eyes of law members are separate from the company itself.
• Perpetual Succession: The company keeps on existing in the eyes of law even in the case of death, insolvency, bankruptcy of any of its members. This leads to perpetual succession of the company. The life of the company keeps on existing forever.
• Limited Liability of Members: PULC is liable for it’s debts and losses to the extent of its assets while member’s liability is limited to the extent of reserve capital.
• Enjoys Brand Value: PULC also earns the brand value similar to PLC.
• Need one Resident Director: NRIs and Foreign National alone cannot incorporate an PULC.
• Attracts Investor the Most: Investor trust this forms the most as this form works under most stringent laws
• Stringent Legal Compliances: PULC also has to comply with most stringent legal similar to PLC.
• Statutory compliance fees: Filing under Companies Act, Audits, Income Tax Compliance and GST compliance add up their running cost. And they always need a legal professional’s backup for all their compliances.
• Desirable if Public fund is to be raised: PULC is most favourable where the founders want to scale up their business with the funds of general public.

Documents Required for Incorporation:-

• Proof of Identity of Member & Directors
• Proof of Address of Member & Directors
• PAN of Member & Directors
• Utility Bill & NOC from Landlord where business is situated
• Articles of Association & Memorandum of Association
• Director Identification Number of all directors
• Digital Signature Certificate of directors.

***Other than the above forms of business a person can also operate their activities through Liaison Office (In case of Foreign Company), Branch Office of Foreign Company, Trusts and cooperative society depending on their level of activity.