How to Choose Legal Entity in India
In India,
there is 6 Type of the Legal Entity :
a) Private
Limited Company
b) Limited Liability Partnership
c) One Person Company
d) Sole Proprietorship Firm
e) Partnership Firm without Registrar of Firms
f) Partnership Firm with Registrar of Firms
b) Limited Liability Partnership
c) One Person Company
d) Sole Proprietorship Firm
e) Partnership Firm without Registrar of Firms
f) Partnership Firm with Registrar of Firms
So Let’s
understand from Startup Point of view about the each legal entity or option for
the business registration –
Requirements :- Need Minimum two Person for
the Registration(Even you can also include your any family member on the
paperwork if you have no partners)
Costing :- Nearby 16,500/-INR with
the Government Charges in most of the states except Punjab, Kerala, and
MP.
Advantages :- Easily raise the funds from
banks, angel investor and VC Firms. Its is one of the most Popular legal
entity in India, India’s 50% Startups or big companies started from
Private Limited Company in India.
Recommendation :- If you have the vision to
raise the funds & growing startup and need
trustworthiness among the clients with the limited liability in
the business then must go with the private limited. Remember it is one of
the most popular legal entity concepts in India. Even outside India, It’s
similar to USA Corporation, so you are able to do the business anywhere in the
world.
Reason to avoid :- It is a company so setup
costing is high and annual compliance is more as compare to the other
entities such as LLP, Partnership firms etc. so sometimes untested ideas or
business avoid this legal entity.
Requirements :- Need Minimum two
Person for the Registration(Even you can also include your any family member
on the paperwork if you have no partners)
Costing :- Nearby Rs. 10,000/-
to 12000/- with the Government Charges and stamp & notarization not included it depend on state like UP, Bihar, MP etc.
Advantages :- Doing the Business with the limited
liability and having features of a private limited company in less
costing. if you need a legal entity which can give you both advantage of the
partnership firm and private limited company then LLP is the best.
Recommendation :- If your budget is less and want
to enjoy the Limited Liability with the partners in the business and some
features of private limited then LLP is the Best for your startup.
Reason to avoid :- If you want to raise
the funds in future or next 1-2 years then must choose private limited
company instead of LLP else go for it.
Requirements :- Need 1 Person for
the Registration or on the name of any family member.
Costing :- Nearby 16500 INR with the
Government Charges in most of the states except Punjab, Kerala, and MP.
Advantage :- It’s similar to the private limited
company but no Control of another person in the Business or
Company with Limited Liability Feature.
Recommendation :- if you need company legal
status as single founder then go with the One Person Company.
Reason to Avoid :- We invest nearby 16500 INR
but in future we cannot include a partner in the business
so why not go with theprivate limited company just spending extra more 2000-3000
INR because it’s a one-time investment for your startup
d)
Sole Proprietorship Firm
Requirements
:- Need 1 Person for the Registration or on the name
of any family member.
Costing :-
Serviced Based Business :- Nearby 2000 INR across
India or more depends on the type of the registration.
Product based or Manufacturing
Business :- Nearby 3000
INR to 5000 or more depend on VAT/CST or Shop act License or MSME.
Advantage :- Easy to Start and Close
with less costing and less compliance to testing your ideas as the single
founder.
Recommendation :- if you are testing your idea in
the business, you can start with the Sole Proprietorship Firm then on
later stage you can convert or Incorporate a new private limited company or
another legal entity.
Reason to
Avoid:- It’s a simple firm and no limited liability and cannot raise the
funds for your new startup.
Requirements :- Need Minimum 2 Person
for the Registration(Even you can also include your any family member on
the paperwork)
Costing :- Nearby Rs. 2,000/- to
4000/- with the Government Charges, Stamp & notarization.
Advantages :- Less Costing and Less
Compliance for testing your Ideas.
Recommendation :- If your budget is less and
want just test your ideas then you can register a partnership the
firm without the registrar of a firm which is the optional thing.
Reason to avoid :- In Less Costing it’s not
registered with the Registrar of Firms so you can not file the case against
any partner or any third party in the business, another thing it’s a
simple firm and taxation is the same as LLP so if a budget does not issue then
choose LLP.
Requirements :- Need Min 2 Person for
the Registration as you or else you can include your any family
member on the paper.
Costing :- Nearby 7000 INR to 8000 INR with
the Government Charges & Stamp, Notarization and most important expensive
Registrar of Firms.
Advantages :- It’s a best for the Old
Family Business where the business structure is very complex on own terms.
Recommendation :- We never recommend
for the Partnership Firm with the Registrar of Firms. The reason is Costing is
nearby same as LLP then why not choose LLP which is the mixture of the
Partnership Firm and Private Limited Company.
Reason to avoid :- When LLP Gives you more
advantages in same costing or taxation then why avoid the LLP instead of
Partnership Firm with the Registrar of Firms.
Difference between business Formations
| TYPE OF COMPANY BASIS |
Proprietorship | Partnership | LLP | Private limited company | OPC |
| Registration | Not Compulsory | Optional under partnership act 1932 | Registered under MCA | Registered under MCA | Can be registered under MCA and Companies Act 2013 |
| Legal status of entity | Not considered as a separate legal entity | Not considered as a separate legal entity | Considered to have a separate legal entity | Considered to have a separate legal entity | Separate legal entity |
| Members liability | Unlimited liability | Unlimited liability | Liability of its members is limited | Limited to the extent of share capital | Limited to the extent of share capital |
| Minimum number of member | Sole Proprietorship | At least 2 persons | At least 2 persons | At least 2 persons | Minimum number of 1 person |
| Maximum number of members | Maximum 1 person | Banking Sector – 10 Other Sector – 20 |
No restriction | 200 | Maximum 2 person |
| Foreign ownership | Not allowed | Not allowed | Allowed by permission from RBI | Allowed | Allowed if one is the director and other is the nominee. Both the director and the nominee cannot be foreign citizens |
| Transferability | Not allowed | Not allowed | Can be transferred | Can be transferred | Allowed to 1 person only |
| Survival | comes to end on death or retirement of the member | comes to end with the death of its anyone member | Existence independent on partners | Life of the company will go on forever | Existence is independent on directors or nominee |
| Taxation | Taxed as an individual | Tax rate is 30% on the company’s profit | Tax rate is 30% on profits plus cess and surcharge | Tax rate is 30% on profits plus cess and surcharge | Tax rate is 30% on profits plus cess and surcharge |
| Annual filings | Income tax returns with the registrar of the company | Income tax return is filed with the registrar of the company | Filed with the registrar of the company | Filed with the registrar of the company | Filed with the registrar of the company |
Here is a quick comparison between the each legal entity so you can choose the Right Legal Entity –
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