Types of Business Entities for Starting Business in India

Partnership is a type of business entity, where you are partner with other individuals to own and run the business. On a higher level, they can be viewed as collection of sole proprietors. In case of partnership form of entity, you get access to a bigger pool of capital, skills and other resources to fund and run your business. All partners contribute capital equally, share profits and losses equally and have an equal say in business decisions, unless otherwise provided in the partnership deed.

Pros:

• Access to larger pool of resources and capital.
• Beneficial when you do not have the confidence to start the business on your own and need someone to shoulder the responsibility.
• Access to complementary skills.

Cons:

• In case of a mistake made by a business partner without your consent, you would be equally liable even though you had no role to play in the said mistake.
• In case your partner goes bankrupt, his share in the business can be seized by the creditors. Although you are not liable for his personal debts, your business may be put into jeopardy.

This type of business entity is most common and preferred type while starting a business. A corporate entity is a separate legal entity from its founders, shareholders and managers. The liability of the shareholders is limited to the paid-unpaid capital that is issued as part of the company. Thus, in case of bankruptcy, the personal assets of the founders/managers are not affected. A corporate entity needs to keep record of accounts, audit their records and file an annual report and return with the registrar of companies.

Pros:

• Founder’s financial liabilities are limited.
• There is proper structuring of the management-for example, who will be the managing director, etc.
• It is easy to get funding from VC’s and other sources by selling a stake (shares) of the company.
• Additional members/directors (subject to limits as specified in the Companies act, 1956) can be added to the company structure.
• Selling the company is relatively easy (legally) because the legal incorporation records, financial records, annual returns, etc. have already been filed.

Cons:

• Considerable amount of time and effort required to complete the initial incorporation.
• Additional overhead of keeping records, having those records audited and filing annual reports.

Corporate entities are of the following two types:

1) Private Limited Company

A private company is a company which has the following characteristics:

• Shareholder’s right to transfer shares is restricted;
• The no. of shareholders is limited to fifty; and
• Restriction on raising funds from the public.

2) Public Limited Company

A public company is defined as a company which is not a private company. The following conditions apply only to a public company:

• It must have at least seven shareholders.
• A public company is not authorized to start business upon the grant of certificate of incorporation. In order to be eligible to commence business as a corporation, it must obtain another document called “Certificate of Commencement of Business”.
• A public company is required to have a minimum of three directors.
• It must hold statutory meetings & obtain government approval for the appointment of the management.

There are several other provisions contained in the Companies Act, 1956 which are applicable only to public companies and should be consulted.