Doing business in India requires one to select a type of business entity. In India one can choose from five different types of legal entities to conduct industry. These include Sole Proprietorship, Partnership Firm, Limited Liability Partnership, Private Limited Company and Public Limited Company. The choice in the business entity is an issue of various factors such as taxation, ownership liabilities, compliance burden, investment options and exit strategy.
Lets look at each of these entities in detail
This is the most easy business entity set up in India. It does not have its own Permanent Account Number (PAN) and the PAN of the owner (Proprietor) acts as the PAN for the Sole Proprietorship firm. Registrations numerous government departments are required only on a need basis. For example, in case the business provides services and service tax is applicable, then registration with the service tax department is required. Same is true for other indirect taxes like VAT, Excise many others. It is not possible to transfer the ownership of a Sole Proprietorship from one individual another. However, assets of the firm may be sold from one person to another. Proprietors of sole proprietorship firms infinite business liability. This is the reason why owners’ personal assets could be attached to meet business liability claims.
A partnership firm in India is governed by The Partnership Act, 1932. Two or more persons can form a Partnership subject to maximum of 20 partners. A partnership deed is prepared that details the amount of capital each partner will contribute into the partnership. It also details how much profit/loss each partner will share. Working partners of the partnership are also allowed to draw a salary in accordance with The Indian Partnership Act. A partnership is also in order to purchase assets in the name. However the one who owns such assets always be partners of the firm. A partnership may/may not be dissolved in case of death of any partner. The partnership doesn’t really have its own legal standing although other Permanent Account Number (PAN) is used on the partnership. Partners of the firm have unlimited business liabilities which means their personal assets can be attached with meet business liability claims of the partnership firm. Also losses incurred brought about by act of negligence of one partner is liable for payment from every partner of the partnership firm.
A partnership firm may or might not be registered with Registrar of Firms (ROF). Registration provides some legal protection to partners in case they have differences between them. Until a partnership deed is registered with the ROF, it may not be treated as legal document. However, it doesn’t prevent either the Partnership firm from suing someone or someone suing the partnership firm in a court of statute.
Limited Liability Partnership
Limited Liability Partnership (LLP) firm can be a new associated with business entity established by an Act of the Parliament. LLP allows members to retain flexibility of ownership (similar to Partnership Firm) but provides a liability protection. The maximum liability of each partner inside LLP is limited to the extent of his/her purchase of the rigid. An LLP has its own Permanent Account Number (PAN) and legal status. Online LLP Registration Procedure India also provides protection to partners for illegal or unauthorized actions taken by other partners of the LLP. A personal or Public Limited Company as well as Partnership Firms can be converted to a Limited Liability Partnership.
Private Limited Company
A Private Limited Company in India is in order to a C-Corporation in the united states. Private Limited Company allows its owners to join to company shares. On subscribing to shares, the owners (members) become shareholders in the company. A personal Limited Clients are a separate legal entity both in terms of taxation and also liability. Individual liability of the shareholders is proscribed to their share funding. A private limited company can be formed by registering the company name with appropriate Registrar of Companies (ROC). Draft of Memorandum of Association and Actual Association are able and signed by the promoters (initial shareholders) within the company. All of these then listed in the Registrar along with applicable registration fees. Such company get a between 2 to 50 members. To look after the day-to-day activities of the company, Directors are appointed by the Shareholders. An exclusive Company has more compliance burden if compared to the a Partnership and LLP. For example, the Board of Directors must meet every quarter and looking after annual general meeting of Shareholders and Directors end up being called. Accounts of enterprise must prepare yourself in accordance with Income tax Act as well as Companies Federal act. Also Companies are taxed twice if earnings are to be distributed to Shareholders. Closing a Private Limited Company in India is a tedious process and requires many formalities to be completed.
One good side, Shareholders of this type of Company are able to turn without affecting the operational or legal standing of the company. Generally Venture Capital investors in order to invest in businesses in which Private Companies since permits great amount separation between ownership and processes.
Public Limited Company
Public Limited Company will be a Private Company utilizing difference being that quantity of shareholders of the Public Limited Company can be unlimited by using a minimum seven members. A Public Company can be either submitted to a wall street game or remain unlisted. A Listed Public Limited Company allows shareholders of the organization to trade its shares freely more than a stock alternate. Such a company requires more public disclosures and compliance from the government including appointment of independent directors in the board, public disclosure of books of accounts, cap of salaries of Directors and Head honcho. As in the case associated with a Private Company, a Public Limited Company is also a separate legal person, its existence is not affected the actual death, retirement or insolvency of some of its shareholders.