A decision to start a new business is actually a good idea. Actually most of the youngsters of present era are eager to start their own business. After all difficult conversations, approaches and new ideas, business plans and so on, the very next question that rises is – what type of entity should we pick to kick-start our business?
Even the Business registration process in India has been simplified as it can be done online from anywhere, but selecting the type of entity is the biggest task.
Most of the established start-ups are registered as a private limited company. The question is – What is so special about a private limited setup? and why do most of the founders prefer Private Limited company? Why are other types of business setup, such as a partnership firm, One Person Company (OPC), Limited Liability Partnership (LLP) or a sole proprietorship are not registered?
Through this article, you can learn about the different options for business registration which is suited for present era and their pros and cons. Following are the main types of business registrations done in India
One Person Company
This is a newly introduced type of company in the year 2013. Registering a One Person Company is only allowed to a resident of India. No foreigner can register this type of business. OPC was mainly introduced to promote individual entrepreneurs and it cannot be registered with partners. It is a type of a private company as it can feature as a separate legal entity and the liability of the entrepreneur of OPC is limited.
A is a type of business entity in which single individual manages the whole business organization. That sole person will be the sole recipient of all profits and all losses of the business. The liability is unlimited in this business and it is suitable where the capital required is limited and the involvement of risk is less or not huge. The business registration of this type of company is done with less legal formalities.
Public Limited Company
This type of Company should have a minimum of 3 directors, minimum 7 shareholders and can hold an unlimited number of shareholders. Being a Public Limited Company, it can be listed in a stock exchange where the shareholders can freely commerce the company’s shares. The existence of this type of entity is not affected by retirement, death or collapse of its shareholders. Registering such type of business can be difficult and time-consuming.
Private Limited Company
Private Limited Company can have a minimum of 2 to a maximum of 15 directors. It is an independent legal entity and held small business entity with minimum of 1 to a maximum of 50 shareholders. Private Limited Companies cannot trade its shares publicly like it is done in Public Limited Company.
As the name suggests, a Joint-Venture Company is a new business entity developed through a partnership between Indian and foreign investors. Here, in that type of company, the partners share the profits, losses, operation expenses and management responsibilities jointly.
Advantages of joint venture companies are that the foreign company can use the contact network, marketing strategies, distribution and the obtainable fund resources of the Indian partner. A joint venture also provides the partners to jointly handle the risks involved in the business and by sharing the liabilities they can also limit their individual exposure.
Partnership Firm is a type of Joint-Venture Company where the relation between the partners is with an agreement on sharing the profits of the business and also the responsibilities on their business. The owners of a partnership firm are separately known as partners and jointly known as a firm. A minimum of two and a maximum number of 10 partners are required to start a Partnership firm. The registration of a partnership firm is not mandatory.
Choose the business registration that suits your business, as it can influence people’s perception of your business and can create a big affect on your legal exposure and finance resources. Below are a few points which can help you to make the decision to pick an entity, just have a read:
To start with a new business, it always best to register as Sole props and general partnerships and as your business grows and develops, and after gaining more income, consider registering your business as an LLC or corp.
It is also important to consider all the pros and cons of each business registration process in terms of tax treatment, legal protection, financial options and government requirements.
Consult an accountant or business lawyer to get guidance and help to register your business.
If you have a definite business plan and vision and are waiting for funding, then registering as LLP or private limited company can be a best option, as you can add shareholders based on how much money they wish to invest upfront.
To experiment a new business or if you are unsure of how the business will take off then it is better to register as partnership firm or LLP.