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Types of Companies (Business entities) in India

10 October 2009 View Comments »

As newbie Entrepreneurs, when we wanted to register our personalized merchandise firm, Colon K, we were stuck by lots of doubts about types of companies and what is the best option for our firm within our limitations. We had to do a mini research to know all the details as there were lot of people out there who want to take us for a ride. So, to avoid this kind of hassle for others, I thought of posting some information regading these. In this first post (assuming I will make a series of posts), I will explain about different types of companies available and some basic details about them. I will try to keep the post short and sweet.

While registering a company it is always better to get it done by a CA rather than you doing it yourself as the process involves a lot of paper work and time. If you are from Hyderabad, I would recommend you the services of my CA - Mr. Madhusudhan Bojja in Abids Hyderabad. But, ofcourse before going to a CA, you need to decide upon which type of company are you going to start.

The companies can be classified into four types

  • Sole Proprietorship
  • Partnership Firm
  • Private/Public Limited
  • Limited Liability Partnership (LLP)
Sole Proprietorship:

Most people are not aware of this form of company but own it. A Sole Proprietorship doesn't require any legal documents, registrations etc. A Sole Proprietorship is no different than an individual. If you are planning to start a Sole Proprietorship, you need to do nothing but to start functioning your business. All taxes etc., are taken care in the Individual's IT returns only and there is no separate distinction for the business entity from individual. The Con for this kind of business entity is that,as the name itself suggests, it involves only a single individual and hence no chance of getting investors for the business. The scope of this kind of business is very limited. There is personal liability- if you go bankrupt, your personal posessions could be seized.

Partnership Firm:

A very common business entity among companies that don't require any external funding is Partnership Firm. Forming a partnership firm is not a very costly process and generally involves 3 to 6 partners. A partnership firm is officially bound by the details mentioned in the agreement made between partners known as a Partnership Deed. A partnership firm is essentially a collaborated sole proprietorship. The advantage in a Partnership firm is that the individual skills of the partners add up to provide the ultimate value.It is always preferred to form a partnership only with trusted person because in the Partnership Firm, it is unlimited liability meaning if any partner does a mistake in the business, everyone is liable to the after effects. For example, if your partner does a cheating act in your business without your knowledge, you will still be held for prosecution and jail term. Getting a VC to fund a Partnership Firm is very difficult.

Pvt./ Public Ltd.:

This is the costliest form of incorporation and involves a big amount of legal procedure. Most companies expecting a funding will form a Pvt. Ltd. company. Though the initial incorporation involves lot of time and effort, this kind of firms do have a very structured form. The company is very different entity from the shareholders in this form of business. So, the liability of the shareholders is limited. So, if you hold a share of 10% in the company, you are responsible only to that part of loss/profit. It is very easy to add new people or remove old people in this form of organization. One another advantage is that the VCs generally prefer to invest in a Pvt. Ltd. company. On the darker side, there will be additional overhead of keeping the records as they are subject to auditing at any point of time.

Limited Liability Partnership:

This is the newest form of the business entity that is legalised. Though this was available in western countries since long, it entered India only recently and hence has very less number (around 25000) of them. This business entity can be classified as a mixture of Partnership Firm and Limited Company taking the good things of them. The formation of an LLP involves lesser costs, time and effort. As a partnership firm the partners can share their profits. The advantage of this over the Partnership firm is that here the partners' liability is only limited. So, you will not be responsible for your partner's mistakes. This makes it an ideal kind of business entity. Though, the limited liability in an LLP is not the same as that in a Ltd. Company. On the other side, there are not so high chances here to get a VC funding. Chances are that your CA wouldn't even know what an LLP is.

Lastly, the registration process for a company involves some other factors too like Bank Current Accounts, Service/Sales Tax registeration etc. So don't assume the above process finishes all your legal oblogations :) Read the full story