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Proprietorship vs. OPC vs. Partnership vs. PVT LTD vs. LLP

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You have decided to start your own business, but are you aware of the legal formalities? Do you know you need to register a company, get a GST number and work around a lot of other legal information to start your business? If you are overwhelmed by the various types of business entities and unable to decide which one best suits your business, then this article will be of great help.

What is a Business Entity?

A business entity is a form of administration that consists certain laws of labour to run a business activity or any work that is generating revenue. Most often, a business entity is used to sell product or service and can be of different nature based on the laws of the country or state.

In India, any company or business is registered under different business entities. Here we are comparing the most popular four:

  • Sole Proprietorship
  • One Person Company
  • Private Limited Company
  • Limited Liability Company
  • Partnership

As many of the clients at AMZ Blast asks for guidance on which entity to choose to start their online business, we have created this article to help you know everything about the various entities for an informed decision.

Sole Proprietorship

One of the most common forms of business entities in India, Sole Proprietorship is owned and managed by a single person. This is a popular entity for the unorganized business sectors such as traders and merchants. It is very easy to start and require minimal compliance. However, this entity offers no benefits such as limited liability, corporate status, uninterrupted existence, transferability and more. So it is better for small businesses that choose to remain small.

Benefits of a Sole Proprietorship:

Easy to Start

There is no set mechanism for registering this entity, therefore it’s easy to start your business with few formalities. However, if you wish to go online, it will be a little difficult because you will need GST registration to complete the marketplace formalities.

Business Name of Your Choice

Since it’s not registered to MCA, you can choose any business name. However, we suggest obtaining a trademark for your business or brand to avoid conflicts in future.

Single Owner

You don’t need anyone except you as the company director to register the business entity.

Minimal Taxes

If you have an income of less than 3lakhs, you don’t have to pay any tax.

 

One Person Company (OPC)

Introduced through the Companies Act, 2013, One Person Company can be considered as the improved version of Proprietorship to support individual entrepreneurs who can start a venture on their own. This newly introduced entity is gaining popularity for multiple benefits such as sole ownership with limited liabilities. However, it has few limitations. In registering OPC, you need to appoint a nominee director who takes over the business in case the owner or director is disabled. Also, if the company hits an average turnover of three years over Rs. 2crore or paid a capital of over 50Lakhs, then it has to be turned into a private or public limited company.

Benefits of One Person Company:

Separate Legal Entity

Like PVT. LTD. and LLP, OPC is also a separate legal entity that offers limited liability protection to its sole owner or shareholder.

Easily Transferrable

As there is only one person, transferring the ownership is easy. You can do it by filing, signing and transferring the share transfer form and share certificates.

Funding is Possible

Most banks and financial institutes prefer funding registered companies over the partnership or proprietary firms. So, even though it’s a single owner company, OPC being a registered entity can raise funds more easily.

Registration Requirements and Process:

Documents Required

  • Scanned copy of PAN Card or Passport (Foreign Nationals and NRIs), Voter’s ID or Driving License
  • Scanned copy of Electricity Bill or Telephone Bill or Latest Bank Statement
  • Passport size photograph
  • Specimen signature (partners only)
  • Scanned copy of Attested Rental Agreement in English
  • Scanned copy of No-objection Certificate (NOC) from property owner
  • Scanned copy of Sale Deed or Property Deed in English

NOTE: The director has to self-attest all the documents mentioned in first three points.

Process of Registration

The process is similar to PVT. LTD. and LLP. You have to get a DSP that will be used for MoA and AoA. You will get the Certificate of Incorporation at the end of the registration process.

Watch video[Hindi] to understand more –

Private Limited Company (PVT. LTD.)

If you are looking for a scalable business where you can easily get outside funding, have limited shareholder liabilities and various stock options to attract top talent, then you should start your business as a Private Limited Company. This is one of the most popular legal structures for any businesses and considers highly credible. Private limited companies are smaller in size than public limited companies. Moreover, such companies cannot issue shares and should have at least one director and minimum two shareholders. This business entity is registered under the Companies Act, 2013 and the Companies Incorporation rules, 2014.

To register, you need minimum two shareholders and two directors. Most business owners like to register a private limited firm because it has the ability to raise funds, it has its separate legal entity status and perpetual existence.

Benefits of Private Limited Company:

Owe Property

As an artificial person, such companies can own, acquire and alienate any property in its name. It could be anything from machinery, land, residential property or any intangible assets. As its privately owned, shareholders cannot claim for any property or benefit.

Limited Risk to Personal Assets

In a case of a private limited label, your personal assets such as a house, personal bank account, car or other personal things are never at risk. It is because your business in covered under limited liability protection.

Funding is Easy

Funding is necessary to start, maintain or grow any business. Funds can be generated from anywhere – self-funding, funds from family and friends or funds from Venture capitalists. The last case is applied only to a private limited company because only it can make the VCs shareholders and offer a position on the board of directors. Such companies can issue equity shares, debentures, preference shares and more to raise funds.

Higher Credibility

Because private limited companies are registered with the Ministry of Corporate Affairs and can be found in the publicly searchable databases, they have a credible proof for existence. This makes it easy for business owners to have a credible bank account and other legal documents, and also increase the reputation in the market.

More Opportunities

As a private limited company, you can start and promote multiple businesses because they are then considered as separate legal entities and are not tied to its promoter. That means you don’t require to get into the legal formalities every time you plan a new business. You can easily use this saved time, energy and cost in building your business.

International Funding

If you have a private limited company, you can get the direct foreign investment of up to 100% and you don’t need any government approval for it.

Perpetual Succession

A private limited company is a separate legal person and always remain unaffected by the death, separation or any kind of departure of its members. Thus, its existence remains intact until it is legally dissolved.

Ownership Transfer

To transfer the ownership of business, all you need is to fill and sign the transfer share form and share certificate.

Regulatory Liberties

These companies have fewer regulatory requirements because they do not trade publicly. They have to conduct regular board meetings and file annual returns with Minister of Corporate Affairs (MCA). But they are not required to disclose account books in public or release shares.

Registration Requirements and Process:

Documents Needed

  • Scanned copy of PAN Card or Passport (Foreign Nationals and NRIs), Voter’s ID or Driving License
  • Scanned copy of Electricity Bill or Telephone Bill or Latest Bank Statement
  • Passport size photograph
  • Specimen signature (Director only)
  • Scanned copy of Attested Rental Agreement in English
  • Scanned copy of No-objection Certificate (NOC) from property owner
  • Scanned copy of Sale Deed or Property Deed in English

NOTE: All the directors and shareholders are required to submit the documents mentioned in first three points. Your registered company office could be a commercial or residential space.

Process of Registration

  • Initially, one of the directors has to apply for Digital Signature Certificate (DSC), which is a must to file the company registration documents.
  • Once, you get the DSC, you need a Director Identification Number (DIN). Your DSC and DIN are required to complete the Memorandum of Association (MoA) and Articles of Association (AoA).
  • In the third step, you have to select a company name that will be sent to Minister of Corporate Affairs for approval. You can send a maximum of six proposed names out of which one name based on availability, naming guidelines and MCA processing time will be approved.
  • As soon as you get the approval for the company name, you have to prepare MoA and AoA to apply for the Certificate of Incorporation.
  • Lastly, get a registered Permanent Account Number (PAN) and Tax Account Number (TAN) to start your online business.

 

Limited Liability Partnership (LLP)

Thanks to its unique features and attributes, Limited Liability Partnership (LLP) is a popular business entity amongst business owners despite its introduction in 2008. LLPs are maintained and processed under LLP act 2008. The main feature of LLP over general partnership entity is that it let the partners enjoy the benefits of limited liability such as protection of individual partner from negligence or incompetence of other partners. Moreover, it is easy and less costly to register an LLP than PVT. LTD company. The registration process is quicker, requires fewer compliances and has good tax benefits.

However, LLPs cannot raise funds or offer employee stock options. Therefore, this entity is more suitable for professional services where equity funding is not required.

Benefits of Registering Limited Liability Partnership:

Limited Liability of Each Partner

In LLP, each partner is responsible or liable for its misconduct or negligence. If you register an LLP, you have no obligation of what your partner does. Moreover, in the case of a lose in business, only the amount invested in business would be lost. Your personal assets will remain unaffected. Unlike PVT. LTD, LLP partners have the right to manage the business directly without any involvement of company shareholders.

No Auditing Needed

Any LLP with less than INR 25lakhs of capital investment and less than 40lakhs of turnover require no annual audit. Moreover, it needs fewer regulatory compliance formalities, that is very satisfying. This is one reason why more partnership startups are choosing LLPs over other forms of business entities.

Tax Benefits

If you register an LLP, you can enjoy many tax benefits such as dividend distribution tax and tax surcharge are not applicable, and loans to partners are not taxable as income.

Individual Legal Entity

An LLP is a ‘perpetual succession’ that can only be dissolved legally. As a legal entity, it is unaffected by the death or departure of any partner. Moreover, it has a more legal capacity, can own property and incur debts.

Swift Transferability of Ownership

One of the best reasons to register LLP is an easy transfer of ownership. In the case of all partners change, the ownership can be easily transferred to new partners.

Registration Requirements and Process:

Documents Required

  • Scanned copy of PAN Card or Passport (Foreign Nationals and NRIs), Voter’s ID or Driving License
  • Scanned copy of Electricity Bill or Telephone Bill or Latest Bank Statement
  • Passport size photograph
  • Specimen signature (partners only)
  • Scanned copy of Attested Rental Agreement in English
  • Scanned copy of No-objection Certificate (NOC) from property owner
  • Scanned copy of Sale Deed or Property Deed in English

NOTE: All the directors and shareholders are required to submit the documents mentioned in first three points. Your registered company office could be a commercial or residential space.

Process of Registration

  • Unlike PVT. LTD., in LLP all the partners need Digital Signature Certificate to get a Digital Partner Identification Number (DPIN).
  • After you get the DPIN, send the unique name of your choice for approval. And in the end file for incorporation with the MCA.
  • Get your registered PAN and TAN number to start selling online.

 

Partnership Firms

A Partnership Firm or General Partnership is a popular form of business structure where the business is owned, managed and controlled by an association of people for profit. This kind of structure has long been used by small and middle-sized business owners because of simple structuring and minimum compliance. In India, General Partnership Firms are registered and maintained under Indian Partnership Act 1932.

There are two types of partnership firms namely registered and unregistered. This means that registering a partnership firm is not compulsory. However, it is advisable to sign a deed to avoid any conflict in future. It’s been found that since the introduction of LLP, Partnership Firms have lost their prevalence as owners are getting more features in LLP with a similar freedom of Partnership Firms. However, low cost, minimum compliance

Benefits of Partnership Firm:

Less Formalities

Registering a firm is your personal choice. If you go for registration, you need few things as compared with other entities.

NO Annual Audit

You are not compelled to appoint any auditor, file Income Tax, service and sales tax.

Choose Any Name

Since Partnership Firms are not registered, you are not liable for any infringement of a registered trademark and can choose any name for your business or company.

Starts Easily

All you need is to sign a Partnership Deed to start the firm. The deed contains details of partners, the date of commencement of operation, any amount invested by partners and points mentioning the profit-sharing matrix created mutually by partners.

Inexpensive

With almost no compliance and legal formalities, it is anyways very cheap to start as a Partnership Firm.

Registration Requirement and Process:

Documents Required

  • Form No.1 which is an application to register under Partnership Act
  • Original copy of Partnership Deed undersigned by all partners
  • Affidavit declaring intention to become partner in profit and loss
  • Rental agreement

Process of Registration

Hire a Charted Accountant and a Lawyer who can understand your partnership requirements and frame a deed accordingly.

Conclusion:

In the end, different types of entities benefit different kinds of businesses. If you are a professional service firm who wants to enjoy the benefits of limited liability protection and tax advantages, then LLP is a good choice for you. For start-ups and growing companies, registering as a Private Limited Company is more beneficial. However, if you want don’t want to get too much into the legal formalities or wish to have an uninterrupted ownership, the Sole Proprietorship should be your choice. Moreover, you can enjoy the benefits of sole ownership with limited liability, low taxes, and perpetual existence in future by registering as One Person Company.

We understand that legal formalities are always cumbersome especially for new business owners. In such cases, a hands-on guide and good mentor like AMZ Blast can be of great help. If you have any trouble in deciding what entity to choose or which is best suited for you, then our consultants can help you. Just log in as a member and open your doors to a successful online business.

AMZ Blast is committed to facilitate all our members to provide every service which they need to embark and propel their business. In this series we are now established a dedicated GST desk for all our members which will help members to easily get GST number from us.We will take 1-2 week to provide your GST no or GSTIN.

Here are list of documents that we need while filling your new GST application.

Contact us on gstdesk@amzblast.com to know more about it.

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