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What kind of entity should your setup here and how to measure their impact

Selecting the business entity is an important decision in itself. The type of business and it’s planned Vs. expected growth can be the basis for decision on business setup required to meet current and futuristic needs.

Business Setups
Indian markets are wide enough for business minded people to trade in products and services. The privileges for the types of entities formed differ to suit the requirements, nature of business and size of organization.
Sole Proprietorship

It is for a single handed trading and small businesses which usually has limited ability of raising capital, limited growth and profits are undivided.

The liabilities and taxes are borne by self. It is most flexible to form and dissolve setup with least legal hassles, at minimum expense and one has full authority over business decisions.

Documents required: Pan card in name of sole proprietorship, license to do business under shops and establishment act, Bank Current Account in name of business, GST registration.

Partnership

More than one person coming together for business interests inviting joint business commencement is partnership. It is Partnership formed under the Indian Partnership Act, 1932, registered with the Registrar of firms. Partners are personally accountable for an unlimited amount of Partnership liabilities hence the firm and partners do not have separate legal entity in the eyes of law.

  • Minimum 2 and maximum 20 partners can be the member of the partnership firm.
  • Minor can be a partner.

Documents required: PAN & TAN in name of partnership firm, Partnership Deed, Address Proof of all partners and firm, license to do business under shops and establishment act, Bank Current Account in name of business, GST registration.

Limited Liability Partnership (LLP) Companies

They differ from the earlier to the extent of liabilities of partners being limited to the individual partner’s contribution to the capital in the business and no personal liability other than that. LLPs are registered under the Limited Liability Partnership Act, 2008 with MCA (Ministry of Corporate Affairs); the registration costs are higher compared to partnership firm. The Partners and the firm have independent identity in the eyes of law.

  • Minimum 2 and no upper limit for maximum number of partners in LLP.
  • No minor can be partner

Documents required: PAN & TAN in name of partnership firm, Partnership Deed, Address Proof of all partners and firm, license to do business under shops and establishment act, Bank Current Account in name of business, GST registration.

About Partners
The partners can be active and contribute to the business along with the investment or simply be sleeping partner by making investments but not taking up any role in business. There are no rules of percentage of profits and losses on investment; it can be mutually agreed amongst them.

Partners are chosen based on business requirements of capital and expertise in various fields which can be included in the deed as roles and responsibilities. It has not much value in eyes of financial institutions when it comes to lending money.
D. Private Limited Company

It will be registered with the Ministry of Corporate Affairs under the Companies Act, 2013.It has no minimum capital requirements and is easy to setup, the registration costs are lesser then LLP. The shareholders have limited liability which makes them accountable only to the extent of their share capital.

  • Maximum 200 shareholders or members

Documents Required: Address Proof and ID Proof, PAN Card,of all the directors and share holders, Utility bill of Registered Office.

Public Limited Company

A form of organization which calls for general public for investing and issues shares giving away limited liability. These shares can be easily bought, sold and transferred. Minimum 7 shareholders, at least three directors are needed to form a company and should meet the requirement of minimum paid up capital of 5 lakhs.

It can raise share capital from existing or new investors, if required. A listed company has large number of shareholders and the company’s performance is observed by general public and financial institutions.

Documents Required: Address Proof and ID Proof, PAN Card,of all the directors and share holders, Memorandum of Association and Articles of Association, Digital Signatures (DSC) & Director Identification Number (DIN) of all the directors Utility bill of Registered Office.

It is a corporation formed with or without share capital where the shareholders are jointly and individually responsible to settle the debts of any form.

Through the type of entity formed the businesses continue to trade in with intention to earn profits. Each business setup serves the purpose of to an extent of control over decisions, liabilities of partners, tax implications, continuity of existence etc.

The parameters to be considered for selecting the type of business setup depends on its nature and duration for which you intend; eg. if you want limited liability then proprietorship of LLP is better option, the industries which usually require huge funds can go for Public limited set up.

While changing the type of company is not that easy but possible after closure of one or conversion with agreement of all the partners or directors. Indian laws allow us to opt for an entity type and dissolve, also change the type of company. Eg. Sole Proprietorship can be dissolved to form a Partnership Firm.

The feasibility for setting up and for changing the business setup can be crosschecked from the experienced law firm.