The 5 Different Types of Business Entities Startups Can Register
It is one of the most sophisticated
forms of business entities in India. Here, business assets are separated
from personal assets. Every shareholder is just responsible for his
share of the total capital. Pvt Ltd Companies need to maintain records
of financial transactions, board meetings, and annual reports and so on.
A Pvt Ltd company consists of a group of
shareholders and the total capital of the entity is made up of shares.
These shares can be sold/transferred to another individual who then also
becomes one of the owners of the company.
Private Limited Company can be of three types:
i) Company limited by shares – A
company having the liability of its members limited by the memorandum
to the amount, if any, unpaid on the shares respectively held by them.
ii) Company limited by guarantee
– A company having the liability of its members limited by the
memorandum to such amount as the members may respectively undertake to
contribute to the assets of the company in the event of its being
wound-up.
iii) Unlimited company – A company not having any limit on the liability of its members.
2. Partnership
Partnership business entities are quite
similar to sole proprietorship. The basic difference between partnership
and sole proprietorship is that more than one individual is involved in
a partnership. The roles, responsibilities and the share of each
partner are specifically defined in a legal partnership agreement.
Any profit earned by the business is
shared between partners according to the legal partnership agreement. In
case there are losses, each of the partners is personally responsible.
Personal assets of partners may be used to compensate the losses
incurred, if any.
With the concept introduced in 2009, a
LLP functions as a structured business model. It is a separate legal
entity from the partnership entity and business assets are separate from
the personal assets of the partners. In case the business incurs
losses, the personal assets of partners are not put at risk as the
maximum liability of every partner is defined by his share capital in
the entity.
Compared to Partnership and Sole
Proprietorship, Limited Liability Companies always have better
credibility among investors. The main reasons include proper maintenance
of financial records, incorporation records and tax records.
A business registered in the name of an
individual is called Sole Proprietorship. A single person is completely
responsible for the entire business with the business and the owner not
being separate from each other. The owner funds the business, takes any
profits and bears any losses.
It does not involve any complex rules or
accounting. Personal assets and business assets are not separated from
each other. Any profits from the business are just added to the business
owner’s income for taxation purposes.
Similarly, any losses become the
personal losses of a business owner. In case the business starts
incurring losses and additional money is needed to compensate those
losses, the personal assets of the owner itself are put at risk.
OPC is a newly introduced type of
company and was introduced in the Companies Act, 2013 to support
entrepreneurs who on their own are capable of starting a venture by
allowing them to create a single person economic entity. One of the
biggest advantages of a OPC is that there can be only one member in a
OPC, while a minimum of two members are required for incorporating and
maintaining a Private Limited Company or a Limited Liability
Partnership.
Similar to a Company, an OPC is a
separate legal entity from its members, offers limited liability
protection to its shareholders, has continuity of business and is easy
to incorporate.
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