Are you considering starting a business in India but feeling overwhelmed by the number of choices regarding its structure? One of the crucial decisions entrepreneurs face is selecting the right business structure.
Why does this matter? Because the structure you choose will determine your liability, tax obligations and the level of administrative complexity you’ll need to navigate. From sole proprietorships, which are simple to set up but offer no personal liability protection, to private limited companies, which offer limited liability but come with more regulatory compliance, the choice you make needs to be informed and strategic.
Therefore, understanding the different types of business structures in India is important to make a choice that aligns with the business’s needs and goals.
Types Of Business Structures in India
From the simple structure of sole proprietorship to the complex private limited companies, each structure offers different advantages and considerations. Understanding the variations among these business structures will help entrepreneurs make informed decisions.
1. Sole Proprietorship
A sole proprietorship is the simplest business structure in India, allowing an individual full control over operations, including all responsibilities for debts and liabilities. This type of business structure in India has minimal legal formalities and there is no legal distinction between the owner and the business entity.
Features
| Liability | Liability under sole proprietorship is unlimited with regard to all debts. |
| Legal Entity | It has no separate legal entity as it is owned and managed by a single person. |
| Risk Responsibility | As there is no separation between personal and business assets the proprietor bears all the risks associated with the business. |
| Flexibility | Under this type of business structure, the owner has the freedom to make quick decisions and adapt to market changes, without the need for extensive consultations or approvals. |
| Regulatory Compliance | Business registration and an appropriate licence are beneficial but not mandatory under MSME or Shops and Establishment Act depending upon the nature of the business.[2] |
2. One Person Company
A One Person Company (OPC), as defined under section 2(62) of the Companies Act 2013, is a hybrid between a sole proprietorship and a private limited company, offering single ownership with the benefit of limited liability. OPCs are ideal for entrepreneurs wanting the credibility of a registered company and limited liability protection while maintaining sole ownership.
Features
| Liability | OPC’s provide peace of mind to the entrepreneurs by limiting their liability to the contributions to the business. |
| Legal Entity | It has a separate legal entity. |
| Risk responsibility | The risk is less under OPC in comparison to sole proprietorship |
| Flexibility | Due to less burden of compliance of One Person Company, it is easy to manage by single hand. |
| Regulatory Compliance | It is required to conduct a statutory audit, submit annual and IT returns and comply with the various requirements of the MCA.[4] |
| Conversion of OPC | According to section 18 of the Companies Act, 2013, OPCs can be easily converted into private limited companies as the business grows and expands.[5] |
| Single Ownership | An OPC is owned and controlled by a single individual thus allowing quick decision-making and has full freedom over the company’s operations and management. |
3. Partnership
A partnership involves two or more individuals, known as partners, jointly establishing a business. They share profits, losses and responsibilities. A partnership deed is drafted that details the partnership’s terms, including profit distribution, decision-making, dispute resolution and other operational aspects.
Features
| Liability | Partners have unlimited liability, meaning their personal assets can be used to settle business debts and obligations. |
| Legal Entity | Unlike corporations, a partnership is not a separate legal entity from its owners. The business and the partners are legally the same. |
| Risk responsibility | In a partnership, partners share the risks and responsibilities of the business. |
| Flexibility | Partnerships offer flexibility in terms of organisation and management. Partnerships can be formed with minimal formalities and can adapt quickly to changing business needs or market conditions. |
| Regulatory Compliance | A partnership firm is regulated by the Partnership Act, 1932.[6] |
| Profit and Loss Sharing | Partners share the profits and losses of the business according to pre-agreed ratios, typically outlined in the partnership deed. |
4. Limited Liability Partnership
In India, a Limited Liability Partnership (LLP) combines the benefits of limited liability and partnership, shielding the partner’s personal assets from business debts and liabilities. This flexible structure simplifies compliance, making it easier for startups to navigate legal requirements and focus on business growth while minimizing financial risks.
Features
| Liability | One of the key features of an LLP is that it provides limited liability protection to its partners. |
| Legal Entity | An LLP is considered a separate legal entity distinct from its partners. |
| Risk responsibility | LLP partners collectively manage and mitigate risks, by sharing profits and losses based on ownership percentages. |
| Flexibility | LLPs offer flexibility in management, allowing partners to structure the LLP as per their mutual agreement. |
| Regulatory Compliance | As LLP is governed under the LLP Act 2008 and includes filing of annual returns, maintaining proper accounting records and adherence to tax regulations is necessary.[8] |
5. Private Limited Company
A Private Limited Company (PLC) is defined under section 2(68) of the Companies Act, 2013. It is one of the most popular forms of business entities in India, especially among small to medium-sized enterprises (SMEs) and startups. This entity is recognized as a separate legal entity, offering limited liability protection to its shareholders.
Features
| Liability | The liability under the PLC of its members (shareholders) is limited. |
| Legal Entity | A PLC has a separate legal identity distinct from its shareholders. |
| Flexibility | Shares of PLC can be transferred from one shareholder to another, according to the provisions of the company’s Articles of Association and the Companies Act, 2013. |
| Regulatory Compliance | The PLC needs to meet the demands of the Ministry of Corporate Affairs (MCA) including the filing of statutory audits, annual filings with the Registrar of Companies (RoC) and annual submission of IT returns. |
| Perpetual Succession | PLC ensures the continuity of business operations even if any changes arise in ownership such as; the death or resignation of any member. |
| Paid-up Capital | A PLC is not required to have a minimum paid-up capital. |
6. Public Limited Company
A Public Limited Company (Public Company) in India is a corporate entity that offers its shares to the public. It offers significant access to capital through the stock market but has stricter compliance and reporting obligations. This business structure requires a minimum of seven (7) members with a minimum paid-up capital for its formation.
Features
| Liability | Similar to Private Limited Companies, shareholders of a Public Company enjoy limited liability. |
| Legal Entity | Public Company is a separate legal entity. |
| Flexibility | Public Companies offer flexibility in management, similar to Private Limited Companies. |
| Regulatory Compliance | Public Companies are governed under the Companies Act 2013 |
| Perpetual Succession | The continuity of a Public Company is not affected by the death of any member or shareholder. |
| Access to Capital | Public Companies can raise capital from the general public by initiating issuing of shares through an initial public offering (IPO). |
7. Joint Venture
A Joint Venture (JV) is a business structure formed through a partnership between two or more entities, often companies, to undertake a specific project, venture or business activity. A JV can be formed by creating a separate legal entity or by entering into a partnership or consortium agreement. In case of a separate legal entity, it will have the same characteristics as mentioned above of PLC or public limited company, whereas in case of partnership or consortium agreement, it is considered as an unincorporated joint venture. Joint ventures are established to combine the strengths, resources and expertise of the entities to achieve common business goals and objectives. The entities involved are known as Joint Venture Partners who contribute capital, technology, management skills or other resources to the joint venture.
Features
| Liability | Liability depends on the structure of the JV and the agreement between the parties involved. |
| Legal Entity | A JV is considered a legal entity if it is formed as a separate company (e.g., private limited or public limited), but not if it operates as a partnership or a consortium agreement. |
| Risk responsibility | In case of partnership or consortium agreement, risk is typically shared among the partners according to their agreement, which outlines each party’s contribution, liability and profit sharing. |
| Flexibility | JVs offer flexibility in structuring the partnership arrangement to suit the specific needs and objectives of the parties involved. |
| Regulatory Compliance | JVs include adherence to corporate laws, sector-specific regulations, tax compliances, and registration with relevant authorities. |
8. Section 8 Company or Non-Profit Company
Section 8 Company, also known as a non-profit company, is a distinct form of business structure established under Section 8 of the Companies Act, 2013. This business structure is particularly suitable for organisations and individuals seeking to establish entities dedicated to charitable or social causes while enjoying the advantages of corporate status and limited liability protection.
Features
| Liability | The limited liability protection is afforded to members of Section 8 Companies. |
| Legal Entity | Section 8 company is a legal entity, recognized as such under the Companies Act, 2013. |
| Taxation | Section 8 companies are exempted from income tax subject to certain compliances. |
| Risk responsibility | Risk is limited to the extent of the members’ contributions or guarantees provided in the memorandum of association. Members are not personally liable for the company’s debts beyond their agreed contributions. |
| Flexibility | A Section 8 company operates with decision-making flexibility within its non-profit goals and legal compliance, guided by its charter documents and the applicable law. Decisions are mainly made by the board, with member and stakeholder input enhancing its mission-focused governance. |
| Regulatory Compliance | This includes adherence to the Companies Act, 2013, obtaining necessary approvals from the Ministry of Corporate Affairs, fulfilling annual filing requirements, maintaining proper accounts and complying with tax exemption conditions under the Income Tax Act, 1961. |
Frequently Asked Questions
1. What are the main types of business structures in India?
The main types of business structures in India are-
- Sole Proprietorship
- One-Person Company
- Partnership
- Limited Liability Partnership
- Private Limited Company
- Public Limited Company
- Joint Venture
- Section 8 Company or Non-Profit Company
2. What factors should entrepreneurs consider when deciding on a business structure in India?
Entrepreneurs in India should consider factors such as:
- Liability
- Tax implications
- Cost and complexity of formation
- Ownership and management structure
- Compliance requirements and regulations
- Growth Plans
3. Which structure is recommended for startups in India?
The most preferred business structures for a startup are private limited companies and LLPs. It combines the benefits of limited liability with flexibility in management and taxation.
4. Which business structure offers more flexibility in management in India?
The LLP structure offers more flexibility in management compared to other business structures. In an LLP, partners have the freedom to manage the business directly without the strict structure required in other companies.
5. How do business structures in India differ in regulatory requirements?
Business structures in India differ in regulatory requirements based on their formation. Sole proprietorships and partnerships have minimal formalities, while LLPs and companies (private or public) entail more compliance obligations under specific laws like the LLP Act or the Companies Act.
6. Which structure provides the simplest process for closing operations in India?
In India, a sole proprietorship offers the simplest process for closing operations. Since there is no legal distinction between the business and the owner, closing a sole proprietorship typically involves settling outstanding debts, and informing relevant authorities. This process is generally less complex as compared to other structures which may involve legal formalities.
Conclusion
This article provides an overview of different business structures in India. By understanding the benefits and feasibility of various business structures, entrepreneurs can make informed decisions that lay a foundation for sustainable growth and success in the dynamic Indian business landscape.
As you explore the diverse structures of business in India, it’s essential to have expert guidance to navigate the complexities and make decisions. Burgeon Law’s expertise in setting up businesses in India enables it to offer comprehensive support at every step of establishing the business. To know more about how to set up a business in India according to your goals, we are here to assist you in navigating the intricacies of the Indian market.
