Starting a new business can feel confusing, and it’s natural to have a lot of questions, especially with so many options available. You might be wondering whether to go for a Sole Proprietorship, a Partnership, a Limited Liability Partnership (LLP), or a Private Limited Company.
It’s important to remember that the type of organisation you choose will affect several key and long-term aspects of your business, such as tax benefits, legal responsibilities, and overall growth potential. So, making the right choice at the beginning is crucial.
We will be covering the following things in the article :
1. What are different types of Business entities available?
2. Identification of Name through Proprietorship, Partnership, LLP, & Private Limited Company
3.Governing Act of Proprietorship, Partnership, LLP, & Private Limited Company
4. Registration of Proprietorship, Partnership, LLP, & Private Limited
5. Ownership under Proprietorship, Partnership, LLP, & Private Limited
6. Income tax liability for Proprietorship, Partnership, LLP, & Private Limited
7. Minimum and Maximum members for Proprietorship, Partnership, LLP, & Private
Limited
8. Compliance for Proprietorship, Partnership, LLP, & Private Limited
9. Estimated yearly compliance cost of Proprietorship, Partnership, LLP, & Private Limited
10. Benefit for Proprietorship, Partnership, LLP, & Private Limited
What are the different types of business entities available?
Sole Proprietorship
A sole proprietorship is a business run by one person, where there is no difference between the owner and the business. The owner is fully responsible for everything and keeps all the profits, but also takes on any losses.
Partnership
A partnership is a business owned by two or more people. The profits and losses are shared between the partners based on a ratio they agree on, which is written down in a document called a partnership deed.
Limited Liability Partnership
An LLP (Limited Liability Partnership) is a mix of a sole proprietorship and a partnership. In this setup, some or all partners have limited liability, which means they’re not personally responsible for all the business’s debts. It is officially registered through the MCA website
Private Limited Company
A Private Limited Company is a type of business set up under the Companies Act and requires at least two members to start. The owners of the company are called shareholders. It is registered through the MCA website
Identification of name
- Sole Proprietorship and Partnership firms can use any name they like.Example: Ram & Shyam Associates, Ram & Co.
- Limited Liability Partnerships (LLPs) must have “LLP” at the end of their name. Example: Ram & Shyam Trading LLP
- Private Limited Companies must end with “Pvt Ltd.” Example: Ram & Shyam Trading Private Limited
Before finalizing a name, you need to make sure it’s not already taken.
You can:
1. Check if a company has already registered the name on the MCA portal
2. Check if a trademark is registered for the name on the Trademark Public Search tool
If no company or trademark exists with your chosen name, and the name follows the Trademark Act, 1999 and other Indian laws, you are free to use it.
Governing Act
- Sole Proprietorship is not governed by any specific law. This means anyone can start a sole proprietorship without going through any formal legal registration process or charges.
- Partnership firms are governed by the Indian Partnership Act, 1932. All partnerships must follow the rules and guidelines laid out in this Act.
- Limited Liability Partnerships (LLPs) are regulated by the LLP Act, 2008, which outlines the rights, responsibilities, and obligations of LLP partners.
- Private Limited Companies must be registered and operated according to the Companies Act, 2013, which covers everything from company formation to its daily functioning.
Before starting any business, it’s important to understand the legal rules that apply to your chosen structure and follow them as required.
Ownership
- Sole Proprietorship is owned and managed by a single person, known as the proprietor. It’s a one-person business, and the proprietor has complete control.
- Partnership is owned by two or more partners. Even though partners may have different roles, like active or sleeping partners, they are all considered owners of the business.
- LLP (Limited Liability Partnership) is owned by its designated partners, who are responsible for managing the business and ensuring legal compliance.
- Private Limited Company is owned by its shareholders. While the Board of Directors handles the day-to-day operations, the ownership of the company remains with the shareholders.
Liability
- Sole Proprietorship is taxed just like an individual. The income tax slab rates apply, based on the proprietor’s total income.
- Partnership Firms are taxed at a flat rate of 30%. They do not get the benefit of slab rates like individuals.
- LLPs (Limited Liability Partnerships) are also taxed at a flat 30% rate, just like partnership firms.
- Private Limited Companies are generally taxed at a flat rate of 25%.
However, If the company gives up certain deductions under Chapter VIA and Section 10AA, the tax rate is: 15% for newly incorporated companies and 22% for existing companies that opt for the new tax regime.
Minimum and Maximum Members
- Sole Proprietorship is a one-person business, so it always has only one owner.
- Partnership requires a minimum of 2 partners and can have up to 100 partners, depending on the type of business.
- LLP (Limited Liability Partnership) also needs at least 2 designated partners to start, but there is no limit on the maximum number of partners.
- Private Limited Company must have a minimum of 2 members and can have up to 200 members.
Compliance
- GST Compliances
Registration under the GST law is mandatory for businesses whose turnover exceeds ₹20 lakhs in services or ₹40 lakhs in goods. Once registered, the business must file GST returns either monthly or quarterly, depending on the chosen scheme. Additionally, filing an annual return is compulsory for all registered entities. However, a GST audit by a Chartered Accountant is only required if the annual turnover exceeds ₹5 crores.
- Income tax compliances
Filing an income tax return is compulsory for all businesses. A tax audit is also required if the annual turnover exceeds ₹50 lakhs in the case of professionals, and ₹5 crores for other types of businesses.
- PF and ESI
Every organization is required to register under labor laws once the number of employees exceeds 20. After registration, it becomes mandatory to file monthly returns as per the applicable regulations.
- Other Compliances
If you choose to start an LLP or a Private Limited Company, there are some extra rules you need to follow. These rules come under the LLP Act and the Companies Act. For a Private Limited Company, you must get your accounts audited by a Chartered Accountant, keep proper records of all your financial transactions, file an annual return using a form called AOC-4, maintain certain registers, hold at least four board meetings every year, and have a minimum authorised capital of ₹1 lakh. In the case of an LLP, an audit is only needed if your yearly turnover is more than ₹40 lakhs. You also need to maintain proper accounts and file your annual return on time.
Estimated Yearly Compliance
In the case of a Sole Proprietorship or Partnership, there are usually no yearly compliance costs because there is no mandatory registration or strict legal requirements. However, for an LLP, there are some yearly expenses like maintaining books of accounts, getting a statutory audit (if required), and filing annual returns. These compliance costs can be around ₹25,000 per year. For a Private Limited Company, the yearly compliance costs are higher. This includes maintaining proper accounts, filing returns, holding Board of Directors meetings, and getting the accounts audited by a Chartered Accountant. These can cost at least ₹50,000 per year.
Benefits
Benefits of Sole Proprietorship and Partnership:
For small-scale businesses where a separate legal identity and large funding aren’t essential, sole proprietorship or partnership are good options. These forms are simple to start and operate, with fewer rules and no requirement for compulsory registration. All decisions related to management and profit-sharing are directly taken by the owners, making it easy and flexible to run.
Benefits of LLP and Private Limited Company:
On the other hand, LLPs and Private Limited Companies offer the benefit of a separate legal identity from their owners. This means the business is treated as a separate entity, and the liability of the owners is limited to the amount they have invested. These business structures also enjoy perpetual succession, meaning the company continues to exist even if its members leave or change.
In fact, many big companies like Coca-Cola, Flipkart, and Amazon began as sole proprietorships. So, for those starting on a small scale, it’s perfectly fine to begin with a sole proprietorship or partnership. As the business grows, it can later be converted into a Private Limited or even a Public Limited Company to suit larger operations and compliance needs.
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