Business Structures in India
Choosing an ideal legal structure is paramount for a seamless business journey. Depending on industry, scalability, taxes and management, you must pick a structure that fits your needs and ensures a hassle-free operation. Whereas an ideal structure helps your business shine in various aspects, a wrongfully chosen structure can lead to various problems, hindering your ability to operate and grow. Thus, it is vital to thoroughly analyze each structure and pick the one that goes the extra mile without hindering your goals. However, doing so can be overwhelming if you are new to the corporate world. Having said that, let’s scout all business structures in India and underscore their regulatory requirements, pros, and cons.
Types Of Business Structures In India
Setting up a legally viable business isn’t a piece of cake. You need to be deadly accurate from the very first stride, which typically means choosing the right structure. Below is the list of business structures in India that adhere to distinct legalities, pros, and pitfalls. Let’s scout and analyze them individually.
1. Sole Proprietorship
A sole proprietorship is a compliance-friendly structure ideal for a single owner. It is easy to set up as it attract minimal paperwork and registration formalities. However, ease of formation and seamless handling does not necessarily make it an ideal choice for everyone. One of the most serious pitfalls of this structure is that it invites unlimited liabilities for the owner. Also, it blurs the line that differentiates the owner from the business from the legal viewpoint, putting owner’s assets at stake.
Reasons to choose:
- Easy to setup
- Minimal compliances
- Render utmost control to the owner
- No profit bifurcation whatsoever
Reasons to avoid:
- Reinforce instability from a liability standpoint
- No separate legal identity for the business
- Taxes are levied on the owner’s income
- Growth prospects aren’t that bright
2. One-Person Company (OPC)
OPC is one the most preferred business structures in India among entities run by a single owner. It falls under the Companies Act 2013 and is deemed a combination of a private entity and a sole proprietorship. This structure can accommodate a director unlike a sole proprietorship, which can be the owner. It offers benefits like limited liabilities, minimal compliances, single ownership, easy conversion, etc.
If you are someone who wishes to run a business without a sizeable staff while having complete control over the operation and profit, this structure can be your best bet.
Reasons to choose
- Ideal for small businesses
- Reinforce transparency in management
- Easily convertible into a Privately limited company, fostering growth and expansion
- No risk of being argued on key business decisions
- Ensure utmost control and limited liability for the owner
Reasons to avoid
- Cannot accommodate a large management comprising more than one director
- A lack of board members can lead to costly decision-making
- Invites audit requirements wherein the company’s finances undergo inspection
- Attracts event-based compliances; the owner has to take care of all of them.
Check out our web stories: Top 7 Easiest Countries To Start A Business
3. Partnership
A partnership business model works fine for individuals gearing up to serve a common business objective as partners. Regulated by the Partnership Act 1932, this model allows partners to have equal access to profits and losses. The founding document namely the partnership deed is used to legitimize this structure. It boasts terms concerning decision-making, profit dissemination, dispute resolutions etc.
Reasons to choose:
- Works best for a group of people dedicated to a common business goal
- Garner integration, coordination, and mutual empowerment among partners
- Easy to set and attract low registration cost
- No event-based compliances
Reasons to avoid:
- Attract unlimited liability for partners; can put personal assets at stake
- No legal distinction between partners and a firm
- Fraud of any partner can transfer the liability to other partners
- Disputes can lead to the closure of the firm
4. Limited Liability Partnership
A Limited Liability Partnership (LLP) is a flexible version of a partnership firm, overcoming quirks like unlimited liabilities and the likelihood of disputes. Also, it adheres to moderate compliance, allowing entities to focus on business growth. LLPs fall under the LLP Act 2008 and are governed by the Ministry of Corporate Affairs.
Reasons to choose:
- Limited liability for partners
- Robust structure that can withstand worst events including payment defaults and debt repayment.
- Adheres to a distinct legal identity
Reason to ignore:
- Stringent compliances relating to accounting and taxes
- Expansion prospects aren’t that bright
- Profit bifurcation is for sure since it is a partnership-based model
- Stringent registration process
5. Private Limited Company
A Private Limited Company falls under the ambit of the legislation namely the Companies Act, 2013. It is arguably one of the best business structures in India, praised for its robust structure, definite management, moderate compliances, and ability to scale. It is popular among entities with a moderate operational footprint and capabilities. These entities adhere to a separate legal identity, allowing shareholders to enjoy limited liability.
Reasons to choose
- Remarkably robust and highly operational transparency
- Foster trust among lenders, peers, and stakeholders
- Uphold the concept of perpetual existence
- Ensure limited liabilities for shareholders
Reason to ignore:
- Not easy to form since it attracts ample paperwork
- Attracts operational and event-based compliances
- Adhering to tax compliance is mandatory
- Shares are not accessible to the general public
6. Public Limited Company
A Public Limited Company is a popular structure among bigger entities and companies seeking significant scaling of their operation. The structure is robust enough to support sizeable management and business events like joint ventures and acquisitions. Eligible to trade on the stock market, these entities have an increased potential for growth and scalability. It requires at least seven members and a minimum paid-up capital amounting to Rs 5 lacs for establishment.
Reasons to choose
- Share trading allowed on the stock exchange
- Ensure continual operation even in testing events, including shareholder’s demise
- Great potential to attract funding for expansion
- Unmatched ability to raise funds from the public via Initial public offering
Reason to ignore
- It is a compliance-intensive structure
- Managing operational affairs can be taxing since it attracts sheer regulations
- Needs to reveal financial details publically as a part of compliance
7. Joint Venture
A Joint Venture (JV) is a structure that entails two or more entities intending to achieve a common business goal. JV can be formed by either incorporating a separate entity or reinforcing a partnership or consortium agreement. The former model will let it embrace the traits of PLC, whereas the latter will make it an unincorporated joint venture.
JV can be understood as a joint endeavour of two separate entities coming forward to join forces and achieve pre-defined business goals. Through JV, entities can agree to share resources, such as capital and manpower to an extent based on mutually-agreed terms. JV is one of the ideal business structures in India for entities seeking collaborative endeavours and unprecedented growth.
Reasons to choose
- Ideal for entities seeking collaborative endeavours to achieve something that requires the sharing of resources
- Can lead to unmatched results in terms of profit and growth
- Adhere to an independent legal identity
Reasons to ignore
- Sharing of resources may be a concern for those keeping trade secrets intact
- Cannot guarantee success, leading to significant capital loss
- Require in-depth managerial expertise
- Attract stringent compliances
8. Section 8 Company Or Non-Profit Company
Section 8 Company falls u/s 8 of the Companies Act 2013 and its founding object adheres to serving philanthropic purposes without any scope for profit generation. Also known as non-profit entities, Section 8 companies are an ideal structure for those seeking to serve charitable objectives in an organized way while having corporate status and limited liability protection.
Reasons to choose
- Ideal structure for unregistered NGOs and charitable societies
- Promotes transparency and fair management activities
- Attracts funding from potential donors
Reasons to ignore
- Profit generation is out of the equation
- Decision-making can be taxing since it is at the discretion of the board members
- Attract stringent regulatory compliance concerning taxes, accounting, and operation.
Conclusion
So that’s our take on the Business Structures in India. We hope this write-up has rendered a clear idea about each structure, its pros and limitations, enabling you to make informed decisions. However, if you still have doubts, let us know by leveraging our comment section.
Read Our Article: Guide To Set Up A Business In Hong Kong
