(Note: This post contents are more relevant to statutory requirements for India. Check you country local legal statutory requirements for business types as this differs globally.)
Entrepreneurs in India have several options when setting up their startups. Businesses are categorised based on registration requirements, procedures, investment, and owner liability. The article overviews India's common business types, procedures, capital requirements, and liability. Famous structures like private limited, LLP, partnership, and proprietorship are compared, with a detailed chart of their features. This article helps readers understand the different business types, their procedures, and each structure's capital and liability requirements. This knowledge helps entrepreneurs make informed decisions while setting up their startups in India.
Content
Type of Business based on the Business Activity
Risk & Liability of a Business Structure
Control and Management in Specific Business Type
Formation Cost of Various Business Structures
Cost of Compliance of Several Business Structures
Taxation of Various Business Forms
Type of Business based on the Business Activity
The businesses must determine the set of activities they will engage in before deciding on the most appropriate business type. Different business types have different objectives depending on the activities they engage in. For example, businesses focusing on social welfare have different goals than those selling products or services for profit. Therefore, they must be registered as other business types.
| Private Limited Company | Public Limited Company | One Person Company
| Limited Liability Partnership | Partnership Firm | Proprietorship Firm
| Section 8 Company Society | Trust
Risk & Liability of a Business Structure
One can see that a small retail shop has negligible risk or liability in comparison to a business that is involved in foreign trade or dealing in hazardous chemicals. From the perspective of Risk and Liability, business structures may be divided into two categories. The first category is where the owner’s liability is limited to the capital that he has subscribed, and second category is where the liability of the owners is unlimited.
Concept of Limited Liability: For structures where the businesses and the owners are considered separate legal entities, the owners enjoy protection against the losses and liabilities of the business. Their liability of the owners in a limited liability business is restricted to the share capital that they have subscribed. The below table categorizes businesses based on the liability of their owners.
Unlimited Liability for Owners | Limited Liability for Owners |
Proprietorship | Company |
Partnership | OPC |
HUF | LLP |
Control and Management in Specific Business Type
Business structures like proprietorships and Partnership Firms have no separation between ownership and management. The sole owner of a proprietorship is responsible for its control and management, whereas each partner in a partnership firm or as decided in the Partnership Deed, is responsible for the management and control of the firm. However, structures like a company or an LLP have a separation between ownership and management. The table below categorises each type of business according to the separation between its ownership and management.
No | Business Type | Ownership | Management Control |
1. | Proprietorship | A single Individual known as the proprietor owns the proprietorship business. The proprietor alone invests all the capital and is entitled to the whole of the profits. | There is no separation between the ownership and the management in a proprietorship business. The proprietor controls and manages the business himself. |
2. | Partnership | In partnership, the partners collectively own the firm on the basis of their capital sharing ratio. | All the partners control and manage the firm, as mentioned in the terms of the partnership deed. |
3. | LLP | In an LLP, the partners collectively share the ownership on the basis of their capital sharing ratio | The responsibility of management and control of the LLP resides with its designated partners. |
4. | OPC | In OPC a single person, known as its shareholder, is the only owner of the OPC | The management and control of the OPC is the responsibility of its directors. |
5. | Private Limited | Shareholders own a private limited company in the ratio in the ratio of their subscribed capital | The board of directors of the company is responsible for its control and management. |
Formation Cost of Various Business Structures
The cost of starting a business can vary depending on several factors such as the professional fee, government fee, stamp duty, and taxes. The government fee is determined by the initial authorized capital, location of the registered office address, and the number of promoters involved.
To learn more about the overall cost of forming different types of businesses, you can visit https://www.creativevalues.in/.
Cost of Compliance of Several Business Structures
The cost of compliance varies from one business type to another based on their specific compliance requirements. The regular costs of compliance like accounting, GST, TDS, Advance Payment of Taxes, Payroll Processing, etc., are almost the same in every business type. However, there are differences in the overall costs mainly because of the annual filing of returns to the ROC. The table below mentions the applicability of annual filing for different business structures in India.
To get compliance support, you can visit https://www.creativevalues.in/.
No | Business Type | ITR | Annual Returns | Audit |
1. | Proprietorship | Yes | No | No |
2. | Partnership | Yes | No | No |
3. | LLP | Yes | Yes | Yes |
4. | OPC | Yes | Yes | Yes |
5. | Private Limited Company | Yes | Yes | Yes |
*Always check (https://www.gst.gov.in/) for sales & Service tax and (https://www.incometax.gov.in/iec/foportal/) for income tax compliance updated frequently.
Taxation of various business forms
The Income Tax is levied differently on different types of businesses, so we advise you to obtain a proper consultation and refer to the updated laws for the payment of taxes and filing of tax returns.
In terms of taxation we can classify as below,
A. Individual/HUF (Proprietorship)
B. Company (Pvt Limited, OPC)
C. Non-Company (Partnership/LLP)
Given below is a brief discussion on the taxability of the income of the common business structures in India.
A. Income Tax Rate for Individual (Proprietorship Firms)
A proprietorship is not considered a separate legal entity. The income earned by a proprietorship firm is added to the proprietor’s income tax return. This means that no separate tax return is filed for the proprietorship firm. The tax rate applicable to a proprietorship is based on the income it earns and ranges from 5% to 30%. The proprietor can claim deductions under section 80C to U on their income. The individual tax rate slabs for a proprietorship are listed below.
Income Tax Rates for Individuals/HUF (AY 2024-25)
B. Income Tax Rate for Non-company (Partnership & LLP)
Under the Income Tax Act, all the provisions applicable to the partnership firm apply to the LLP. The Income Tax Rate for the partnership firm and the LLP is 30% flat on the total income earned.
Income Tax Rates for Non-Company(Partnership/LLP) (AY 2024-25)
C. Income Tax Rate for Company (Pvt/Public Ltd & OPC)
Simplified table (115BA, 115BAA,115BAB)
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