Starting your new business? Decide which type of business entity will be best suitable for you.

pwctech
pwctech
Nov 5 · 9 min read

Selecting the type of business entity is the first decision that is taken by any entrepreneur when he/she wants to start a new business.

There are various business entities that can be selected by the entrepreneur in India like:
1. Sole Proprietorship
2. One Person Company (OPC)
3. Partnership Firm
4. Limited Liability Partnership (LLP)
5. Limited Company

There are various advantages and disadvantages associated with each type of entity. However, the requirements and the future plans of the entrepreneur will be vital to choose the type of entity required to start the business.

Let’s understand various parameters that will be influential to take a decision on starting a new business.

Registration

  1. Sole Proprietorship: This is the simplest way to start any business and there is no formal registration for the sole proprietorship business. This is suitable if you are the sole owner of the business and have no other partner. You will need to have:
    a. Permanent Account Number (PAN)
    b. Aadhaar Card
    c. Bank Account opening
    d. GST registration
    e. Shops and Establishment Act (not compulsory in all States)

    There is no restriction on choosing the name of the sole proprietorship business. However, trademarked names shouldn’t be used.
  2. One Person Company (OPC): OPC is governed by the Companies Act 2013 and the registration is done basis an application to be submitted to Registrar of Companies (ROC). However, this type of business is not advisable as there are no greater advantages to register an OPC. The basic formalities of registration will include:
    a. Submission of forms to ROC (SPICe 32)
    b. Preparation of MoA & AoA and filing it with ROC
    c. Applying for Class 2 Digital Signature certificate
    d. Applying the PAN and Tax Deduction and Collection Account Number (TAN)
    e. Bank Account opening
    f. GST registration

    The name of the OPC should be approved by the ROC through the Reserve Unique Name (RUN) service of ROC. It generally takes 10–15 days for the registration of OPC.
  3. Partnership Firm: As the name suggests this type of entity is used when there is more than one promoter in the business. A Partnership Firm is governed by the Indian Partnership Act 1932. The main requirement for starting a Partnership Firm is executing the Partnership Deed. The main contents of a Partnership Deed are:
    a. Name and Address of the Partnership Firm and all their partners
    b. Nature of business
    c. Date of starting of business
    d. Capital contributed by each partner
    e. Profit/loss sharing ratio amongst the partners
    f. Right, duties and obligations of each partner
    g. Salary / Interest on capital payable to each partner
    h. Processes to be followed in case of death, retirement, sale of the shares by any partner
    i. Any other matter necessary as decided by the partners

    Once the Partnership Deed is prepared, the firm needs to apply for:
    a. PAN & TAN
    b. Bank Account Opening
    c. GST registration

    The registration of the partnership deed is not compulsory. However, it is advisable to get the deed registered. Also, there is no restriction on using any name as the firm’s name. However, trademarked names shouldn’t be used.
  4. Limited Liability Partnership (LLP): LLP is the new form of business entity introduced in India in 2009 which is governed by the LLP Act 2008. This form of business enjoys the advantages of a Limited Company and the nature of the Partnership Firm. The registration process is governed by ROC only. The basic formalities for the registration will include:
    a. Obtaining Designated Partner Identification Number (DPIN) / Director Identification Number (DIN) through DIR 3 Filing
    b. Obtaining Class 2 Digital Signature certificate
    c. Submission of incorporation forms to ROC (Form 2)
    d. Preparation of LLP Agreement and filing it with ROC (Form 3)
    e. Bank Account opening
    f. GST registration

    The name of the LLP should be approved by the ROC through the Reserve Unique Name — LLP (RUN) service of ROC. It generally takes 10–15 days for the registration of LLP.
  5. Limited Company: Limited Companies is the first choice of business registration by the new millennials because it has got various advantages than all other types of entities and they are governed by the Companies Act 2013 (earlier Companies Act 1956). However, these advantages come with a cost. Further, a limited company is divided into 2 types, i.e. Public Limited Company and Private Limited Company. The registration is done basis an application to be submitted to ROC. The basic formalities of registration will include:
    a. Submission of forms to ROC (SPICe 32)
    b. Preparation of MoA & AoA and filing it with ROC
    c. Applying for Class 2 Digital Signature certificate
    d. Applying the PAN and Tax Deduction and Collection Account Number (TAN)
    e. Bank Account opening
    f. GST registration

    The name of the Limited Company should be approved by the ROC through the Reserve Unique Name (RUN) service of ROC. It generally takes 10–15 days for the registration of a company.

Operational Information

  1. Sole Proprietorship: A sole proprietorship entity is the easiest form of business to operate.
    a. The minimum and the maximum number of persons involved in this type of entity is only one
    b. The liability of the proprietor is unlimited, i.e. the owner is personally liable for all the debts of the business
    c. A foreigner cannot do business as a sole proprietor
    d. A sole proprietor cannot transfer the share of the business to any other proprietor
  2. One Person Company (OPC): A OPC is another form of business for a single owner business. An OPC is considered as a separate legal entity.
    a. The minimum and the maximum number of persons to be appointed as the Director can be one. However, a nominee Director can be appointed to act as a Director if the main Director is deceased
    b. The liability of the Director is limited up to the Share Capital of the OPC
    c. The Directors cannot be a foreigner and they cannot raise funds as well
    d. The shares of the OPC can be transferred to other shareholders
  3. Partnership Firm: Partnership Firm is the easiest way to do the business when there are more than one promoter.
    a. The minimum of two Partners is required to form a Partnership Firm and the maximum number of partners can be twenty
    b. The liability of the partners is unlimited, i.e. the partners are personally liable for all the debts of the business
    c. Foreigners as a partner are not allowed to start Partnership Firm
    d. The shares of the Partners cannot be transferred, i.e. if any of the partners wants to exit then the firm needs to be dissolved and a new Firm needs to be created
  4. Limited Liability Partnership (LLP): A LLP is the best form of doing business with your partners if you are not planning to raise any capital from the market/investors.
    a. The minimum of two Partners is required to form a Partnership Firm and there can be unlimited partners
    b. As the name suggests, the liability of the Partners is limited upto the Share Capital brought by them in the LLP
    c. Foreigners can be partners in the LLP. However, atleast one Partner should be an Indian and the foreign investment should be approved by Reserve Bank of India (RBI) and Foreign Investment Promotion Board (FIPB)
    d. The shares of the LLP can be transferred by the partner
  5. Limited Company: A Limited Company comes with a lot of advantages when compared to all other forms of business entities.
    a. For a Private Limited company, the minimum number of members/shareholders is two and the maximum is two hundred and for public limited, the minimum number is seven and there is no maximum limit.
    b. The liability of the shareholders/members is restricted to the value of share capital only
    c. Foreigners can be the shareholders and also can invest in the company
    d. The shares of the Limited company can be transferred by the shareholders easily
    e. There are various options to raise investments by issuing Debentures, Preference shares, Equity Shares, etc.
    f. A Limited Company can also offer ESOPs to its employees, which is not possible with any other type of entity

Compliance and Taxation

  1. Sole Proprietorship: As a sole-proprietor, the compliances will be minimum.
    a. There is no reporting to ROC for any type of information
    b. There is no mandatory audit requirement by any Chartered Accountant. However, based on the turnover threshold audits will be applicable
    c. There are no requirements for conducting any board meetings or general meetings
    d. The tax rates are as applicable to the individual taxpayer
  2. One Person Company (OPC): An OPC is a separate legal entity and there are few compliances that need to be done.
    a. TheOPC must file Annual Returns and Annual Accounts with ROC
    b. The OPC must also get its books of accounts audited by a Chartered Accountant
    c. There is a requirement of conducting two board meetings if there is a nominee director along with the main director and also it requires to hold an AGM to appoint auditor
    d. The tax rate applicable to OPC is 30% plus cess
  3. Partnership Firm: A Partnership Firm is also having minimum compliance.
    a. There is no reporting to ROC for any type of information
    b. There is no mandatory audit requirement by any Chartered Accountant. However, based on the turnover threshold audits will be applicable
    c. There are no requirements for conducting any board meetings or general meetings
    d. The tax rates applicable to Partnership Firm is 30% plus cess
  4. Limited Liability Partnership: A LLP will also have some moderate compliance to be adhered to.
    a. There is a requirement to file the annual accounts and solvency statement with ROC
    b. There is no mandatory audit requirement by any Chartered Accountant. However, based on the turnover and capital contribution threshold audits will be applicable
    c. There are no requirements for conducting any board meetings or general meetings
    d. The tax rates applicable to Partnership Firm is 30% plus cess
  5. Limited Company: Every Limited Company will have to undergo all the compliances.
    a. There is a requirement to file the annual accounts and annual returns with ROC
    b. The books of accounts are mandatorily required to be audited by a Chartered Accountant
    c. There is a requirement of conducting board meetings and general meetings periodically
    d. The tax rates applicable to a Limited Company can range from 15% to 30% plus tax

Cost Involved

  1. Sole Proprietorship: Since there are minimum compliance requirements in running this type of entity the cost is also very less. The registration is very simple and doesn’t require much documentation. The major cost involved will be in filing the GST and Income Tax returns only which will be ~₹ 15,000.00 per annum (if professional service is used and based on number of transactions)
  2. One Person Company (OPC): Though there is no much benefit in registering an OPC, there is certain compliance that needs to adhere to. Also, registration of OPC is not simple. The cost of registration can be ~ ₹ 10,000.00 (this will be a one time cost and based on capital). The annual compliance costs will include Audit Fees and ROC filing fees (this needs to be certified by a professional) and will cost ~ ₹ 20,000.00 per annum (can increase based on transactions). Also if the professional service for GST and Income Tax filing is used, this will cost additional ~₹ 20,000.00 per annum (based on number of transactions)
  3. Partnership Firm: Even here there are no many compliance requirements in running this type of entity the cost is also very less. The registration requires only executing a Partnership Deed and if professional service is used, then the cost would be ~₹ 5,000.00. The major cost involved will be in filing the GST and Income Tax returns only which will be ~₹ 15,000.00 per annum (if professional service is used and based on number of transactions)
  4. Limited Liability Partnership (LLP): There are certain benefits in registering an LLP and there is certain compliance that needs to adhere to. The cost of registration can be ~ ₹ 10,000.00 (this will be a one time cost and based on capital). The annual compliance costs will include ROC filing fees (this needs to be certified by a professional) and will cost ~ ₹ 10,000.00 per annum. Also if the professional service for GST and Income Tax filing is used, this will cost additional ~₹ 20,000.00 per annum (based on number of transactions)
  5. Limited Company: There are various advantages in registering a Limited Company, also there are various compliance that needs to adhere to. The cost of registration can be ~ ₹ 15,000.00 (this will be a one time cost and based on capital). The annual compliance costs will include Audit Fees and ROC filing fees (this needs to be certified by a professional) and will cost ~ ₹ 20,000.00 per annum (can increase based on transactions). Maintaining the records of minutes of the meetings, conducting General Meetings and Board meetings and filing of various ROC forms based on transactions will also add up the cost. Also if the professional service for GST and Income Tax filing is used, this will cost additional ~₹ 25,000.00 per annum (based on number of transactions)

We have articulated the basic differences between various types of entities that be used by an entrepreneur to start their business.

Every entrepreneur has their technical skills and innovative attitude but in this process, they might not like to spare additional time for the regulatory and financial aspects of doing business. We pitch in there and be a virtual CFO to the startups to handle the entire financial and regulatory aspects.

Kindly get in touch with us by writing to contact@pwctech.in or visit www.pwctech.in or call us on +91 9703525310 to get an expert opinion for kick-starting your business.

pwctech

Written by

pwctech

We make business easy

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade