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Frequently Asked Questions
How do I start a business in India?
Once the entity is registered, the applicable tax and other registrations need to be done in the name of the entity.
What are the different types of business entities?
i. Public Limited Company
ii. Private Limited Company
iii. Limited Liability Partnership (LLP)
v. One Person Company (OPC)
While the first four types (Public Limited, Private Limited, LLP and Partnership) require more than one promoter, OPC and Proprietorship are the types of entity applicable when there is only one promoter.
What are the differences between the types of entities - Private Limited, Limited Liability Partnership (LLP), Partnership, One Person Company and Proprietorship?
|Sole Proprietorship||Partnership Firm||One Person Company||Limited Liability Partnership||Private Limited Company|
|Ease of Incorporation||Very Easy. No separate Registration||Indian Partnership Act - 1932||Difficult. Registered under Indian Companies Act – 2013||LLP Act-2008||Difficult. Registered under Indian Companies Act – 1956/2013|
|Compliance||Very Less Compliance||Very Less Compliance||Moderately Complex Compliance||Moderately Simple Compliance||Complex Compliance|
|Ease of allotting shares||Not Possible||Not Possible||Not Possible||Very Difficult. Almost impossible||Very Easy|
Which entity is best suited for me?
|Type of Company||Best suited for|
|One Person Company||
|Limited Liability Partnership||
|Private Limited Company||
What are the advantages and disadvantages of a Private Limited Company?
- Very easy to issue fresh shares and raise equity funding
- Easy to offer and manage equity to the new promoters or ESOP to the employees
- Easy for investors or shareholders to exit the company by selling their shares
- More Credibility in the market
- Limited liability of the promoters or shareholders
- Compliances are relatively higher than the other entity types
- Low Tax Benefits
- In case the business needs to be closed down, a cumbersome process has to be completed
What are the advantages and disadvantages of a Limited Liability Partnership (LLP)?
- Lesser compliances since the working is governed by the Partnership deed
- Tax benefits like, no dividend distribution tax and no tax on loans to partners
- Limited liability for the partners
- Very difficult to raise funding on fresh equity
- Extremely difficult to offer Shares/ ESOPs to employees or other stakeholders
- Selling of the shares of one of the Partners is very difficult
What are the advantages and disadvantages of a Partnership?
- Easy to incorporate
- Legal way for group of individuals to conduct business
- Unlimited Liability among partners
- Extremely unlikely to raise equity capital or offer equity to any other stakeholder
What are the advantages and disadvantages of a One Person Company (OPC)?
- Limited Liability
- Allows to have only one promoter
- Impossible to issue fresh equity and get funding in lieu of Equity
- Once the Paid up capital crosses INR 50 Lac or ransaction crosses INR 2 Crores for any 3 consecutive financial years, then it is compulsory to convert the company to Pvt Ltd Company or Public Company
- Compliance similar to that of a Private Limited Company
What are the advantages and disadvantages of a Proprietorship?
- Easiest way to start a business
- No separate registration of the company is required. Only the applicable tax and other registrations, as applicable will be needed to operate the business.
- No Legal difference between the Proprietor and the company
- Unlimited personal liability
- Impossible to accept equity investment
I want to start a venture with my friends. Which type of business entity is best suited for me?
I am looking at starting my business. I do not have any cofounders. Which is the best suited entity for me?
Three of us are looking at starting a business. We will be funding it ourselves and not raising any external funding. Which is the best suited entity for us?
- Exposure to liabilities the shareholders want to take
- Whether you want to offer ESOP to employees or not
- Extent of regulatory compliance you want to expose your entity to
- Whether you want to make the business a going concern or have the existence of entity dependent on the partners. A Private Limited Company is a going concern
Can I register as one entity and change it to another later?
- A Partnership firm registered according to Indian Partnership Act - 1932, can be converted to an LLP
- A Private Limited Company can be converted to an LLP(Please note that the name will now start ending with LLP instead of Pvt Ltd. For e.g., your present ABC Pvt Ltd., should be renamed ABC LLP)
- OPC has to be compulsorily converted to a Pvt Ltd Company, either if Paid up Capital is increased beyond Rs.50 Lac or if Annual Turnover of immediately preceding three consecutive financial years exceeds two crore rupees
I am testing waters with an idea right now and am not sure if this is something that will work. What kind of entity suits me the best?
- Though this will depend on the nature of your business and the tax and other license registrations that need to be done, you can explore starting with a Partnership or Proprietorship (depending on the number of promoters). Once you have made up your mind and want to raise capital to invest further in the business, you can either convert it or register a new entity.
- Please note that in case you decide to start a new entity, you will have to get all the registrations done again and the financial track record cannot be carried from the earlier entity, unless a conversion or acquisition happens