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Types of Business Entities in India : A comparative snapshot

Embarking on a business venture parallels the construction of a successful building—it hinges on a robust foundation. The trajectory of a startup is significantly shaped by well-informed decisions, commencing with the critical choice of the right entity structure.

Several entity forms are available for consideration that include Sole Proprietorships, Unincorporated Partnerships, Limited Liability Partnerships, One Person Companies, and Private/Public Companies.

This blog meticulously explores various entity types, highlighting crucial factors such as personal liability, taxes, costs, flexibility, compliance, and financing aimed to empower emerging business leaders with the nuanced understanding necessary for a smooth and successful business initiation. 

It is highly recommended to analyze these components to ensure a successful start. Taking the time to do so can prove instrumental in avoiding potential issues and challenges down the line, setting the stage for a more resilient and prosperous business journey.

So, what are the common types of entities found in India?

1. Unincorporated entities:

Sole proprietorships and unincorporated partnerships signify entities where the business is directly owned by proprietors or partners, lacking a distinct legal identity. In this structure, the liability of the proprietor or partner is unrestricted, making them inseparable from the business.

Suitable for small businesses, family concerns.  

Not suitable if operations are at a significant level scale, there is a need for external financing/ external investors

2. Incorporated entities:

Incorporated Entities such as Limited Liability Partnerships (LLP), One-Person Companies (OPC), and Private/Public Limited Companies are characterized by their distinct legal status, offering limited liability to their owners or shareholders. This implies that the business’s liabilities are covered by its resources, safeguarding personal assets from any financial obligations. While OPCs share the benefit of limited liability with other companies, they are restricted in their ability to attract investors. In the subsequent sections, we will delve into the features, advantages, and disadvantages of LLPs and companies. 

ParticularsLimited Liability PartnershipPrivate Limited CompanyPublic Limited Company 
Limited liability (subject to exceptions such as fraud)YesYesYes
Tax RatesHigher than companies Lower than LLP and same as public company.Lower than LLP and same as private company. 
Distribution of profitsSimple Subject to rules relating to dividend distribution. Subject to rules relating to dividend distribution. 
Dividend related taxesNot applicableApplicable Applicable
Capitalisation and Fund raising Possible but for simple structures.Complex structures possible.Complex structures possible.
Listing of equity interestsNot possibleNot possible Possible
Total number of owners

Minimum 2

Maximum 200

Minimum 2

Maximum 200

Minimum 7

Maximum – Unlimited

Corporate ComplianceSimplestModerateUnless listed, marginally more complex than private companies.
Conversion to other structuresPossible PossiblePossible
Other IssuesDisputes amongst partners can affect any change in structure significantly. All partners need to sign off on a variety of items.Board and shareholder majorities can take many decisions.Board and shareholder majorities can take many decisions.
Examples (suitable for)

Asset ownership businesses.

Businesses (small and large) where external equity financing is not required. For instance, entities wholly owned by corporate entities including owned by overseas enterprises. 

Lifestyle businesses where profits are generated and expected to be distributed to owners. 

Startups that seek to scale. 

Large number of investors expected. 

Dividends are not a significant aspect value creation for owners.

Business where equity interests are proposed to be listed.  

Please note that,  there are exceptions to these principles that are not discussed in this writing. Tax rules are to be ascertained. Conversion from public to private and private to public is not subject to any taxation on account of the conversion.  

In recent years, the Government of India has instituted various initiatives to cultivate a conducive environment for startup growth. These initiatives offer an array of benefits, including tax advantages, networking opportunities, and the ability to register under patent/trademark/environmental and labor laws. Notably, these advantages are exclusively accessible to entities registered as private limited companies.

Make sure that you carefully analyze the pros and cons that each entity type carries with it as it plays a role in customer engagement and also adds to the success of your startup.

With the above information, we hope you start your business in the right cast. 

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