Ashok Zawar & Co

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Types of Business Entities for Starting Business in India:

01. Sole Proprietorship:


This is the most common type of business entity. Sole proprietorship means that there is a sole owner who funds as well as
operates the business. Being one of the simplest forms of business entities, it is relatively formality free with no rules regarding
records required to be kept, no requirement of having your accounts audited and no requirement of filing financial information
to the registrar of companies. In short, there is no legal distinction between you and your business.

Pros:

  • Very easy to setup and start your business.
  • Relatively formality free. So, less time spent upfront in legal procedures.
  • Public disclosure of your finances-not required.
  • All the profits of your business are kept by you and no sharing of profits with others is required.

Cons:

  • Personal liability. If you go bankrupt, creditors get the right to your possessions-house, property, etc.
  • Very difficult to get investment from VC’s, angels, etc.

02. Partnerships
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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.
03. Limited Liability Partnership
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The LLP shall be a body corporate and a legal entity separate from its partners. Any two or more persons, associated for carrying on a lawful business with a view to
profit may by subscribing their names to an incorporation document and filing the same with the Registrar, form a Limited Liability Partnership.

Pros:

  • An LLP allows for an unlimited number of members and there is no upper limit on number of partners in an LLP unlike an ordinary partnership firm where the maximum number of partners cannot exceed 20 (10 in case of banking business).
  • Being a separate legal entity, LLP is liable to the full extent of its assets; the liability of the partners would be limited to their agreed contribution in the LLP.
  • There is flexibility without imposing detailed legal and procedural requirements.
  • It has features similar to a corporate entity, i.e.; perpetual existence irrespective of changes in partners, capable of entering into contracts and holding property in its own name.
  • There is no requirement to maintain statutory records except Books of Accounts.

Cons:

  • LLP cannot raise funds from Public.
  • Any act of the partner without the other may bind the LLP.
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04. Corporate Entity

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.

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05. Branch Office

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up branch offices in India for the purpose of export/import of goods,
rendering professional or consultancy services, R&D, promoting technical or financial collaborations, representing the parent company, acting as buying/selling
agents, rendering services in IT and development of software, rendering technical support to the products supplied by the parent/group companies. Branch offices
could be established with the approval of the government of India and may remit outside India profit of the branch, subject to RBI guidelines after payment of applicable Indian taxes.

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06. Liaison Office/Representative Office

A Liaison Office could be established with the approval of the government of India. The roles of the Liaison Office are limited to collection of information, promotion of
exports/imports and facilitate technical/financial collaborations. Liaison office cannot undertake any commercial activity directly or indirectly.
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07. Project Office

Foreign companies planning to execute specific projects in India can set up a temporary project/site office in India for carrying out activities only relating to that project.
The Government of India has now granted general permission to foreign entities to establish project offices subject to specified conditions.
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08. Registration of Companies

Businesses wanting to operate in India through a corporate entity would require to setup and register the company with the Registrar of Companies (RoC).

The following services are provided by us in this regard:

  • Advising on implications of operating through a corporate entity, the level of capitalization, etc.
  • Assistance in obtaining name approval from the Registrar of Companies (RoC).
  • Assistance in drawing up the Memorandum of Association & Articles of Association of a Company (MoA & AoA).
  • Registration of the Company with the Registrar of Companies (RoC).
  • Assistance in statutory local registrations under other laws.