Different types of Business entities in India
If you like to start a business in India and want to decide which business entity to choose from, you have few options:
1. Sole Proprietorship
Proprietorship means you are running a business on your own you fund the business and you operate it. There are no partners. You don't have a lot of employees and have no complex process involved in managing the business. You run the entire show. Your business and YOU are pretty much the same entity.
A typical example is, you run a shop with no other partners. You own the shop and you are the full owner of the shop. In this case, you can register the business as a Sole Proprietorship.
In a Sole Proprietorship business, the personal assets are tightly linked with the business assets and liabilities. If someone sue your business and you are asked to pay compensation, you are liable to pay from your personal properties.
This type of business entity is suitable only for very small business and limited within a small customer circle.
It is easy to start and operate this type of business entity. There are very less formalities. There are no legal requirements regarding auditing and financial management. No public disclosure of the revenue/profit required. You may combine the income with your personal income and file the taxes together.
2. Partnership Firm
Partnership firm is pretty much same as Sole Proprietorship, except that there are more than 1 partners involved. You will have a registered agreement that defines the partnership structure and profit sharing.
In partnership firm also, your personal assets are linked to the business. In case of a business loss or liabilities, the personal properties of the partners are at risk.
The advantages of partnership firm and proprietor firms, there are no complex formalities involved to run the business. Filing taxes and managing accounts is a relatively easy process. There are no mandatory auditing required unless you exceed certain revenue limits.
Both proprietor firms and partnership firms will not have a registered business name, even though you can choose a name for your business at your will.
Partnership business is useful in bringing together skills and investments from multiple people and work together. However, it is important that partners trust each other and work together for the success of the business. In case of a business loss due to the act from any of the partners, it would affect all other partners as well. This another drawback in the Partnership business.
3. Limited Liability Partnership
Limited Liability Partnership (LLP) is a new form of business type introduced in India. The first LLP in India was registered in 2009. LLPs offer the ease of management of "Partnership Firms" but also offer the personal asset protection of business owners like "Limited Companies". LLPs define a governance structure for the business and will have a registered business name.
Records and revenue of LLPs are audited, but the process is relatively simple compated to "Companies".
After the launch, this is most attractive business entity type in India, for most small, medium and large business owners. On a high level, LLPs offers most of the benefits of both partnership firms and Companies.
4. Private (or, Public) Limited Company
This is a traditional business form in India, meant for larger business units. The Limited Companies have complex legal formalities for management. The business of Limited Companies are audited. Such companies can issue shares of the company.
Incorporating a Company is a complex process compared to other business entities. There are several legal formalities to follow regarding the governance of the business including periodic Director board meeting, maintenance of records of Director board meeting, proper auditing of financial records etc.
Which business type to register
Having too many options add confusion. Which business entity to choose depends on your specific requirements. For most beginners, LLP is the best option, which gives protection of personal assets from business liabilities but at the same time giving the trust level and reputation like a Company.
LLPs offer a lot of benefits compared to partnerships and companies. Some advantages of LLPs are mentioned in another post. After the Government of India introduced the new business type "LLP", there are not many reasons to register a business as a "Private Limited Company" in India, unless you are looking for capital investors.