What Business Entity is your Start up?

Before establishing your startup, it is essential to know the regulatory framework in which you will operate. You will find below the type of constitution to choose, the costs, and the requirements. There are different types of establishments which can be constituted depending upon the nature of business, initial financial plan and resources.

1. Proprietary Concern
2. Partnership Firm
3. Limited Liability Partnership
4. Private Limited Company

Proprietary Concern

When a business is owned by a single person we may call it a Proprietary concern. Full ownership & control of the business under this category remains with one individual. The business or firm’s name does not have any legal status or existence.

Sole Proprietorship

A sole proprietorship is the simplest and most common structure chosen to start a business in India. It is an unincorporated business owned and run by one individual with no distinction between the business and the owner. The proprietor may choose any trade name and get a registration with UDYAM under the Ministry of MSME. Technically no registration is required to constitute a proprietary concern but as most of the Banks require some accreditation for KYC norms, they insist on this registration for opening a bank account to do business under the trade name.

Partnership Firm

A partnership firm is one of the most important forms of a business organization. It is a popular form of business structure in India. A minimum of two persons are required to establish a partnership firm. A partnership firm is where two or more persons come together to establish a business and divide its profits amongst themselves in the agreed ratio. The partnership business includes any kind of trade, occupation, and profession. The Indian Partnership Act, 1932 governs and regulates partnership firms in India. The persons who come together to form the partnership firm are known as partners. The partnership firm is constituted under a contract between the partners. The contract between the partners is known as a partnership deed which regulates the relationship among the partners and also between the partners and the partnership firm.

The advantage in a Partnership firm is that it is easy to incorporate. It can be incorporated by drafting a partnership deed and entering into a partnership agreement. Apart from the partnership deed, no other documents are required. It need not even be registered with the Registrar of Firms.

The partnership firm has to adhere to very few compliances as compared to a company or LLP. The partners do not need a Digital Signature Certificate (DSC), Director Identification Number (DIN), which is required for the company directors or designated partners of an LLP. The partners can introduce any changes in the business easily. They do have legal restrictions on their activities. It is cost-effective, and the registration process is cheaper compared to a company or LLP. The dissolution of the partnership firm is easy and does not involve many legal formalities.

The biggest disadvantage of the partnership firm is having unlimited liability for the partners. The partners have to bear the loss of the firm out of their personal estate. Whereas in a company or LLP, the shareholders or partners have liability limited to the extent of their shares. The liability created by one partner of the partnership firm is to be borne by all the partners of the firm. If the firm’s assets are insufficient to pay the debt, then the partners will have to pay off the debt from their personal property to the creditors.

Limited Liability Partnership (LLP)

LLP registration in India is entirely online. To register an LLP, a minimum of two partners are required and the Designated Partners of the LLP have to sign documents digitally for which the contending partners have to obtain a digital signature certificate (DSC). Apart from Designated Partners, a practicing professional such as Company Secretary or Chartered Accountant has to mandatorily digitally sign and attest the documents to get your LLP Incorporated.

Once the DSCs are approved, an agreement has to be drafted with the main objects of the LLP and prepare the LLP Incorporation documents. The registration process has to be undergone through the Ministry of Corporate Affairs portal online. Once all the necessary documents are uploaded and the incorporation challan amount is paid to MCA, the Registrar of LLPs will go through the application and after due scrutiny, approves the same and issues you the Certificate of Incorporation online through the registered email address.

Unlike a partnership firm, a limited liability partnership has limited liability in which some or all partners will have the limited liability. It exhibits the elements of both partnership and company. In LLP, one partner is not responsible or liable for another partner’s negligence or misconduct.

Private Limited Company

In India, a private limited company is a type of company that is privately held and has limited liability. It is one of the country’s most popular types of business structures due to its various advantages, including limited liability protection, ease of formation and maintenance, and separate legal entity status. A private limited company is considered a separate legal entity from its owners and must have at least two members and two directors.

The following requirements must be fulfilled to start a private limited company in India:

• A minimum of two shareholders are required to start a private limited company. The maximum number of shareholders allowed is 200.
• A minimum of two directors are required to start a private limited company. At least one of the directors must be a resident of India.
• The Registrar must approve the proposed name of the company by the Companies (ROC). The name must be unique and not similar to any other company name registered with the ROC.
• A digital signature certificate is required for the directors to form the company.
• Private limited companies must comply with various legal and regulatory requirements, such as maintaining proper books of accounts, holding annual general meetings, and filing annual returns with the ROC.
• The annual returns are public documents where the documents can be verified by anyone on payment of certain fees to the Registrar of Companies.

Formation of a Private Limited Company

• Name of the Firm: The name of the PVT company must end with the words “Private Limited.”
• Share Capital: A private limited company must have a minimum paid-up capital of Rs.1 lakh or a higher amount as prescribed.
• Restrictions on Transfer of Shares: The right to transfer shares in a private limited company is restricted. Shares can only be transferred with the approval of the Board of Directors or following the Articles of Association of the company.
• Prohibition on Invitation to the Public: A private limited company is prohibited from inviting the public to subscribe to its shares or debentures.
• Compliance Requirements: Private limited companies must comply with various legal and regulatory requirements, such as maintaining proper books of accounts, holding annual general meetings, and filing annual returns with the Registrar of Companies.

P.R.Venkatesh

Sekaran & Venkatesh Chartered Accountants