Types of Business Entities for Starting Business in India
Types of Business Entities for Starting Business in India


      Sole Proprietorship :
    This is the most common type of business entity. Sole proprietorship means that there is a sole owner who funds as well as operates the business. Being one of the simplest forms of business entities, it is relatively formality free with no rules regarding records required to be kept, no requirement of having your accounts audited and no requirement of filing financial information to the registrar of companies.

    In short, there is no legal distinction between you and your business.
    Pros:
        Very easy to setup and start your business.
        Relatively formality free. So, less time spent upfront in legal procedures.
        Public disclosure of your finances-not required.
        All the profits of your business are kept by you and no sharing of profits with others is required.

    Cons:
        Personal liability. If you go bankrupt, creditors get the right to your possessions-house, property, etc.
        Very difficult to get investment from VC’s, angels, etc.



      Partnerships :
    Partnership is a type of business entity, where you are partner with other individuals to own and run the business. On a higher level, they can be viewed as collection of sole proprietors. In case of partnership form of entity, you get access to a bigger pool of capital, skills and other resources to fund and run your business. All partners contribute capital equally, share profits and losses equally and have an equal say in business decisions, unless otherwise provided in the partnership deed.

    Pros:
        Access to larger pool of resources and capital.
        Beneficial when you do not have the confidence to start the business on your own and need someone to shoulder the responsibility.
        Access to complementary skills.

    Cons:
        In case of a mistake made by a business partner without your consent, you would be equally liable even though you had no role to play in the said mistake.
        In case your partner goes bankrupt, his share in the business can be seized by the creditors. Although you are not liable for his personal debts, your business may be put into jeopardy.


      Limited Liability Partnership :
    The LLP shall be a body corporate and a legal entity separate from its partners. Any two or more persons, associated for carrying on a lawful business with a view to profit may by subscribing their names to an incorporation document and filing the same with the Registrar, form a Limited Liability Partnership.

    Pros:
        There is no requirement to maintain statutory records except Books of Accounts.
       An LLP allows for an unlimited number of members and there is no upper limit on number of partners in an LLP unlike an ordinary partnership firm where the maximum number of partners cannot exceed 20 (10 in case of banking business).
        Being a separate legal entity, LLP is liable to the full extent of its assets; the liability of the partners would be limited to their agreed contribution in the LLP.
        There is flexibility without imposing detailed legal and procedural requirements.
        It has features similar to a corporate entity, i.e.; perpetual existence irrespective of changes in partners, capable of entering into contracts and holding property in its own name.

    Cons:
        LLP cannot raise funds from Public.
        Any act of the partner without the other may bind the LLP.



      Corporate Entity :
    This type of business entity is most common and preferred type while starting a business. A corporate entity is a separate legal entity from its founders, shareholders and managers. The liability of the shareholders is limited to the paid-unpaid capital that is issued as part of the company. Thus, in case of bankruptcy, the personal assets of the founders/managers are not affected. A corporate entity needs to keep record of accounts, audit their records and file an annual report and return with the registrar of companies.

    Pros:
        Founder’s financial liabilities are limited.
        There is proper structuring of the management-for example, who will be the managing director, etc.
        It is easy to get funding from VC’s and other sources by selling a stake (shares) of the company.
       Selling the company is relatively easy (legally) because the legal incorporation records, financial records, annual returns, etc. have already been filed.
       Additional members/directors (subject to limits as specified in the Companies act, 1956) can be added to the company structure.

    Cons:
        Considerable amount of time and effort required to complete the initial incorporation.
        Additional overhead of keeping records, having those records audited and filing annual reports.