Planning to start a business? One of the first questions in your mind would be about the type of business entity that needs to be established. Someone may recommend that you set up a private limited company if you wish to work within corporate frameworks. However, a sole proprietorship might turn out to be easier to manage, especially from the compliance point of view.
Presently, there are 5 major options available, which are –
- Sole proprietor
- Partnership Firm
- Limited Liability Partnership
- One Person Company, and
- Private Limited Company.
Different individuals might recommend different options, but it is important for you to have clarity about each option when it comes to choosing a startup registration service. Each has its advantages and disadvantages and it boils down to the personal choice of the entrepreneur/s as to what suits them.
We have explained the different facets of all these options in a simple-to-understand tabular format:
| Sr No | Particulars | Proprietorship | Partnership Firm | Limited Liability Partnership | One person company | Private Limited Company |
| 1 | How to Register the entity | No legal requirement of Registration. | * Can be registered or not. | Registered with the Ministry of Corporate Affairs and the provisions of the Limited Liability Partnership Act. 2008, will be applicable. | Registered with the M.C.A and governed by the provisions of the Companies Act, 2013. | Registered with the M.C.A and governed by the provisions of the Companies Act, 2013. |
| * If registered, then the provisions of the Partnership Act, 1932 will be applicable. | ||||||
| 2 | The naming of the entity | No restrictions on names. Pro-tip – It’s recommended to avoid Trademarked names to be on the safer side. | No restrictions on names. Pro-tip – It’s recommended to avoid Trademarked names to be on the safer side. | The name has to be approved by the Registrar of Company & would have “LLP” written at the end of its name | The name has to be approved by Registrar of Company & would have “OPC” written at the end of its name | The name has to be approved by Registrar of Company & would have “Private Limited Company” written at the end of its name |
| 3 | Legal Standing of the Entity | The proprietor is NOT a separate legal entity and hence WILL be held personally liable for all the liabilities. | As per the provisions of the Partnership Act, 1932, the partners will personally be held liable. | An LLP is a SEPARATE legal entity registered under LLP Act, 2008, hence the partners WON’T be held personally accountable for any losses the firm suffers. | An OPC is a SEPARATE legal entity registered under The Companies Act, 2013, hence neither the Director nor the Nominee Director will be held personally accountable for any losses the OPC suffers. | A Pvt Ltd Co is a SEPARATE legal entity registered under The Companies Act, 2013, hence neither the Director nor the Shareholders will be held personally accountable for any losses the Pvt Ltd Co. suffers. |
| 4 | Liability of parties in the entity | Unlimited liability | Unlimited liability for all liabilities of the partnership firm | Partners have limited liability and are liable ONLY up to their contribution to L.L.P | Limited Liability; Director and Nominee Director are liable only to the extent of their share capital | Shareholders have limited liability & are liable only to the extent of their share capital |
| 5 | Minimum and Maximum Number of members | Minimum – 1; Maximum – 1 | Minimum – 2;Maximum – 20 | Minimum-2; Maximum-No limit | Minimum 2; Maximum-2 | Minimum-2; Maximum-200 shareholders or members |
| 6 | What is the transferability allowed under law? | Not Transferable | Not Transferable | Yes can be transferred | Yes can be transferred | Transferable by Share transfer |
| 7 | Existence or Survivability of the entity | Dependent on Proprietor | Dependent on Partners. It can go for dissolution if any partner dies | Not dependent on partners; can be dissolved either voluntarily or by the Company Law Board | Can be dissolved either voluntarily or by Regulatory Authorities | Can be dissolved either voluntarily or by Regulatory Authorities |
| 8 | Taxation of the entity under the law | Proprietorship and Proprietor are considered as one and taxed as one as well. | Profits are taxed at 30% plus surcharge and cess, as applicable | Profits are taxed at 30% plus surcharge and cess, as applicable | Up to 1Cr – 25% ; >1Cr<10 Cr – 25,00,000+25%+7% surcharge ; >10 Cr – 2,50,00,000+25%+12% surcharge | Profits are taxed at 30% plus surcharge and cess, as applicable |
| 9 | Requirement of Annual Filings for the entity | No such requirements except the filing of IT return of the Proprietorship | No such requirements except the filing of IT return of the Partnership Firm | The Annual Statement of Accounts & Solvency and Annual Return must be filed with the Registrar every year; IT return to be filed for LLP as well | Annual Accounts and Annual Return must be filed with the Registrar; IT return to be filed for OPC. | Annual Accounts and Annual Return must be filed with the Registrar; IT return to be filed for Pvt Ltd Co |
Now that you have understood the different facets of all the multiple options of registering a firm, how do you go about choosing it? Here are a few ways in which you can take a call:
A proprietorship or a partnership
If you are starting a venture without the need to raise funds from external investors, then you could consider starting a proprietorship or a partnership. The compliance requirements for running a proprietorship or a partnership are very low.
However, it is important to remember that when you are running a proprietorship or partnership, you and your partners would be susceptible to unlimited liability. In simple words, this means if your business is unable to settle its dues, then your creditors can make a claim on your personal assets.
Examples include A small agency or a stationery store or a boutique consulting firm.
An LLP or a One person company or a Private Limited Company
If you are starting a firm that may work within a corporate framework by raising capital, then it makes sense to start an LLP or a One Person Company, or a Private Limited Company. You would also be protecting your personal assets from creditors if your business is unable to settle its dues.
However, running an LLP or a Person Company or a Private Limited Company would require you to fulfil multiple compliances.
Examples include: Building a fintech startup or a Manufacturing Set up
One thumb rule to decide would be to determine whether your business is capital-intensive. If it is, then you might want to set up an entity that protects you against unlimited liability. If it is not, then you may initially want to set up a sole proprietorship or partnership and then consider transforming into an LLP or a Person Company or a Private Limited firm.
If you still need clarity or are looking for a company registration service, then feel free to get in touch with us.
