A business entity is an organization that uses economic resources to provide goods or services to customers in exchange for money or other goods and services.
There are different types of businesses to choose from when forming a company, each with its own legal differences. Typically, there are five main types of businesses: Private Limited Company, Limited Liability Partnership, General Partnership, Sole Proprietorship, and One Person Company. Before creating a business, entrepreneurs should clarify what is important to them when running their business.
- Private Limited Company: A private limited company is a company which is privately held for small businesses. The liability of the members of a Private Limited Company is limited to the amount of shares respectively held by them. Shares of Private Limited Company cannot be publically traded.
Features of Private Limited Company
(a) Limited Liability
The greatest benefit of private limited companies is limited liability. Private limited companies, according to Apex, are treated as a single entity, making the company responsible for all debts. If anything happens to the company, its members are not personally affected; members are only liable for unpaid shares.
(b) Tax Advantages
Private limited companies enjoy tax advantages in addition to limited liability. These companies pay corporation tax on their taxable profits and tend to be exempt from higher personal income tax rates. Forming a company instead of continuing as a sole trader or sole proprietor opens the door to more tax-deductible costs and allowances redeemable against profits.
(c) Finance and Resources
When more resources or large-scale production is necessary, forming a private limited company protects the interests of lenders. With adequate funding, your company can produce goods at a lower cost, thus increasing profits and customer satisfaction. Furthermore, the future of the business becomes more secure.
(d) Start-up Cost
A private limited company costs around Rs. 8000 to start at the very least, excluding professional fees. However, this will be higher in some states; in Kerala, Punjab and Madhya Pradesh, in particular, the fees are much higher. You also need some paid-up capital, which can be as little as Rs. 5000 to begin with. The annual compliance costs are around Rs. 13,000
- Limited Liability Partnership: A limited liability partnership is a newer form of business partnership where all of the owners have limited personal liability for the financial obligations of the business. There are no general partners in a limited liability partnership, but an LLP is similar to a general partnership. Each limited liability partner contributes to the everyday business operations. However, each partner enjoys limited personal liability for the other partners’ acts. All states allow some form of LLP, though state laws vary. Note that some states only allow LLP status for professional partnerships, like accountants, lawyers or architects. In all states, limited liability partnerships can only be formed by registering with the appropriate state office.
Features of Limited Liability Partnership
(a) Limited Liability
This is the foremost and most important feature of a limited liability partnership. This is also the primary reason because of which LLPs came into existence. Like a company, in an LLP all its partners enjoy limited liability, that is, they are liable only up to their respective capital contributions. Their personal estates too will not be used for recovery of debts and losses beyond their respective liabilities.
(b) Body Corporate
Partnership firm does not have a separate legal entity. It is merely an association of person which doesn’t enjoy a distinct legal entity. But an LLP does. An LLP formed under the Act is a body corporate with a separate legal entity, like a company. It has its own PAN, legal status and can get into transactions in its own name.
The income earned by an LLP is taxed @30% in its own hands. The income is not distributed to the partners for taxation purpose.
(d) Start-up Cost
Much cheaper than starting a private limited company, with government fees of Rs. 5000, no paid-up capital and low compliance costs
- General Partnerships: General Partnerships are sometimes preferred over an LLC or incorporation when a business is still small or in the conception phase. While many partnerships exist, the legal liability will be that of the owners. If you’re planning to start a business for profit, a partnership does provide flexibility and control to the partners.
Features of General Partnership
(a) Share of Risk and Rewards
All individuals share the risks and rewards of the business.
(b) Share of Profits
Each partner is entitled to share the net profits of the business. A contract need not provide for equal shares. It may depend upon how much the partner has invested.
(c) Liability, without limit
Partners are jointly and severally responsible for all the debts and obligations of the business without any limit, including loss and damages arising from wrongful acts or omissions of their fellow partners and potential liability to third parties.
(d) Decision Making
Partners have the right to make the decisions that affect the business or the business assets.
(e) Share of Ownership
All individuals share the ownership of the assets of the business, although they may have agreed that the firm will use an asset which belongs to one of the partners individually.
The partnership structure is flexible, with complete freedom to agree how the business is managed and financed.
The financial and constitutional matters of the partnership are entirely private. Disclosure is governed by the partners’ interests.
(h) Membership Changes
No need for cumbersome arrangements for shares to change hands without unavoidable tax consequences whenever there is a change in membership.
- Sole Proprietorship: A sole proprietorship is a business that is owned and managed by a single person. You could have one up and running within 10 days, which makes it very popular among the unorganised sector, particularly small traders and merchants. There is no such thing as registration; proprietorships are recognised by other registrations, such as a service or sales tax registration.
Features of Sole Proprietorship
(a) Individual Ownership
One person is the owner in a sole proprietary form of organisation. He provides the entire capital either from his private resources or through loans etc.
(b) Risk Bearing
In this form of organisation, the proprietor is the sole beneficiary of profits. If there is a loss, he alone has to bear it. Thus, the risks of business are borne by the proprietor himself.
(c) Management and Control
Management and control of this type of organisation is the responsibility of the sole proprietor. He may, however, employ a manager or other people for the purpose.
(d) Minimum Government Regulations
The government does not interfere in the working of the sole proprietorship organisation. However, they have to comply with the general laws and rules laid down by government.
(e) Unlimited Liability
The sole proprietor has to bear the losses and is personally responsible for the liabilities of the business. If the business assets are not sufficient to meet the liabilities, he may also have to sell or pledge his personal property for that purpose.
(f) Individual Financing
Financing of such organisations are done by the individuals i.e., owner or through his personal resources.
(g) Individual Accountability
The managers and other employees of such organisations are accountable to the sole-proprietor i.e., the owner of enterprise.
(h) Flexibility of Organisation
If any change in business is called for, he does not have to consult anyone and is able to make the necessary changes without delay. This lends flexibility to this type of organisation. A good number of giant sized concerns fail on account of their inability to change their policies promptly with a change in situation.
(i) No Sharing of Profits or Losses
The sole proprietor does not share the profits or losses of the business with any one. He alone gets all the profits and bears all the losses of the proprietary firm. The proprietor bears the complete risk and is solely responsible for success or failure of the business.
- One Person Company (OPC): The constitution of a One Person Company (OPC) was recently introduced as a strong improvement over sole proprietorship. It gives a single promoter full control over the company while limiting his/her liability to contributions to the business. This person will be the only director and shareholder. Hence, there is no scope of raising equity funding or offering employee stock options.
Features of One Person Company
(a) Private Company
Section 3(1)(c) of the Companies Act says that a single person can form a company for any lawful purpose. It further describes OPCs as private companies.
(b) Single Member
OPCs can have only one member or shareholder, unlike other private companies.
A unique feature of OPCs that separates it from other kinds of companies is that the sole member of the company has to mention a nominee while registering the company.
(d) No Perpetual Succession
Since there is only one member in an OPC, his death will result in the nominee choosing or rejecting to become its sole member. This does not happen in other companies as they follow the concept of perpetual succession.
(e) Minimum One Director
OPCs need to have minimum one person (the member) as director. They can have a maximum of 15 directors.
(f) No Minimum Paid-Up Share Capital
Companies Act, 2013 has not prescribed any amount as minimum paid-up capital for OPCs.
(g) Special Privileges
OPCs enjoy several privileges and exemptions under the Companies Act that other kinds of companies do not possess.