Understanding Types of Business Entities to Set Up in India
India, without any doubt, is emerging as a significant market in the world economy. While the older and bigger companies have already established themselves in the global market, the smaller businesses and startups are operating at best in bringing the World to India. It becomes essential for all young entrepreneurs to be comprehensive in terms of the kind of business model they wish to set up, and to analyse the different methods to take their firm to the topmost positions. It is to stay put and form robust associations. This article provides information on various types of business entities that can be set up in India.
Before discussing anything else, it is essential for all of us first to understand what a business is. A business, also known as a firm or company, is an entity that produces goods and/or services for consumers.
The Concept of Business Entities in India
When starting a business in India, one must consider the type of business model that best suits the company’s purpose, as well as securing payment of necessary taxes, verifying the owner’s liability, investment, savings, and compliance burden. Around the world, there are three primary types of business structures: single proprietorship, partnership, and corporation.
India is a country of diversity, constituting a mixed economy. Different types of business entities, such as private and public limited companies, sole proprietorships, limited liability partnerships, wholly owned subsidiaries of foreign companies, joint venture companies, and others, are available in India. For the sake of clarity, and to reduce the complexities of the various types of business entities in India, we primarily have the following four kinds of legal business structures, which both Indian and foreign companies can form.
Any company in India must file with the relevant government authorities to comply with the nation’s laws. Before learning how to register a company in India, it is helpful to have a basic understanding of the different types of business structures in India, as well as the requirements for compliance with each structure. These are the types of business entities to set up in India:
- Sole Proprietorship
- Limited Liability Partnership
- Private Limited Company
- Public Limited Company
Before we learn how to register a company, let’s try to understand the types of business entities that can be set up in India.
| Company type | Ideal for | Tax advantages | Legal compliances |
| Limited Liability Partnership | Service-oriented companies or businesses that have low investment needs | Advantages of depreciation | Company tax returns to be filed, ROC returns to be filed |
| Single Proprietorship | Single owners want to limit their liability | Tax holiday for the initial 3 years under Startup India, Higher benefits on depreciation, No tax on dividend distribution | Companies’ returns to be filed, Limited ROC compliance |
| Private Limited Company | Entities that have a high turnover | Tax holiday for the initial 3 years under Startup India, and Higher benefits on depreciation | Entities’ tax returns to be filed, ROC returns to be filed. An audit is mandatory |
| Public Limited Company | Businesses with a high turnover | Tax exemptions | Business tax returns to be filed. Mandatory Audits |
Why does Choosing the Right Business Structure in India Matter?
Choosing the best business layout in India is a significant part of operating a profitable organisation in India. A proper business framework will enable your company to run efficiently and position it to meet its specified goals. Knowing which business structure to register in India is crucial for different reasons:
- The business structure you choose will have a direct impact on how your business will be taxed.
- The business structure you select will determine what steps you must take to remain compliant with the government in India.
- The type of business structure you select can significantly impact the perception of your company from the outside and whether an investor chooses to do business with you.
Determining the right company structure for your business is as essential as any other business-related activity. The right business framework will allow your company to run efficiently and achieve the business objectives you need. In India, every company is required to register as part of its legal compliance.
Considerations When Registering a Company in India
There are many valuable factors to consider when registering a company in India, including the following:
- The number of owners – The number of owners affects whether certain business entities are available. A one-person company may be best when there is a single owner. However, if the business has several owners, a Limited Liability Partnership or Private Limited Company may be more suited.
- Level of legal compliance – The business owner must carefully consider the steps necessary to remain compliant at all times. Some business types require additional steps and obstacles to achieve compliance.
- Liability – A key consideration when registering a company in India is the extent to which the owner wishes to be personally liable for the company’s actions. Single proprietors and partners have unlimited liability, so creditors can personally pursue them for not paying company debts. Companies have limited liability, typically in the form of the number of contributions they have made to the business or the value of their shares.
- Value of initial investment – If the owner desires to create a minimum initial investment, a Single Proprietorship, Hindu Undivided Family, or a Partnership may be the best choice. However, if the company owner is particular that they will be able to recoup the setup and compliance costs, a Private Limited Company is also a suitable option.
- Tax structure – Sole proprietors are taxed at the individual rate, and the business income is added to the individual’s other income. A higher tax rate may be imposed on companies.
- Investor contributions – It is challenging for unregistered businesses to secure funding from outside investors. LLPs and Private Limited Companies are trusted more and may be more likely to receive investments than other types of companies.
