Different Types of Companies in India and How to Pick One
- Last Updated December 21, 2023
Suraj Shrivastava
Chief Link Building Strategist
![services-img](https://forgefusion.io/wp-content/uploads/2023/06/how-to-choose-the-right-business-structure-in-india.webp)
Chief Link Building Strategist
In this blog, you will get a clear understanding of how to choose the right business structure in India, what each type of company entails, the pros and cons, and how to navigate registration processes. It’s your essential guide to setting up a business entity in India, designed to help you make informed decisions for your business success.
Struggling to choose the right type of company in India that best suits your business? Well, we are going to give you an ultimate guide to help you choose the right legal structure to make your business successful. But how to find the best type of company in India for all the legal aspects? It depends mainly on ownership, investment, liabilities, and taxation. To have a better understanding of the above, let’s dive more into detail.
A business entity or legal structure is a term used to describe the company’s responsibility to raise capital, the amount of tax it should pay the government, future plans, and liabilities. Choosing a business structure in India can have long-term implications, so it’s crucial to make well-informed decisions.
Choosing from the types of companies in India for your startup will help you to make important decisions on tax filings, your liabilities to the creditors, legal agreements between the government and your startup and also to fundraise for the development of the company. Different tax rates are applicable for different types of companies in India. Liability vary depending on the types of business entities ranging from unlimited liability to limited liability of personal assets. The legal paperwork filing is unique and requires you to file depending on the type of business in India.
A sole proprietorship is one of the simplest legal business entities in India. If you’re the only person who wants to start a business, then choosing this type of company will be appropriate. It requires minimum investment with unlimited liabilities. Establishing and operating sole proprietorship is very simple compared to other types of business entities in India.
Confused with what is an unlimited liability? Well, if the business cannot satisfy its obligations to creditors, the proprietor’s personal assets are pursued to repay the credits.
Some examples of sole proprietorship businesses are local grocery stores, local clothes stores, freelancer jobs, etc.
Advantages | Disadvantages |
Less legal paperwork | Unlimited liability |
Easy taxation | Difficult to fundraise |
Easy to setup | No financial control |
A Partnership firm is a type of company in India where there are two or more people who can own the business. All the partners fund the business and share the credits and debts of their business. But one person can be liable for the action of the other person.
Benefit of slab rate taxation is not applicable. That is a flat rate of 30% tax is levied on partnership firms by income tax. This legal entity is ideal for you if you want to go into business with a family member or a friend.
So some of the examples of choosing this business legal structure in India are Apple, Microsoft, Warner Bro, Levis, Maruti Suzuki, Hindustan Petroleum, etc.
Advantages | Disadvantages |
Less legal paperwork | Unlimited liability |
Easy taxation | Shared decision making |
Share capital investment | May rise to conflicts between partners |
LLP has two or more partners who share the cost and responsibilities of the business. LLP’s legal structure protects the partner’s personal assets from losses and debts. Even if the business fails, owners cannot lose beyond the amount invested in this type of business in India. The terms of partnership are recorded in partnership agreement.
The benefit of slab rate taxation is not applicable. That is a flat rate of 30% tax is levied on partnership firms by income tax. More legal compliances are required than a simple partnership firm. Some examples of choosing this type of company in India are Pepsi-Cola, Sony, Nike, IBM, etc.
Advantages | Disadvantages |
Separate legal entity | Difficult to fundraise |
Less legal paperwork | Cannot take loan outside India |
Fewer compliances | Public disclosure of the company |
A Private Company Limited is a separate type of business entity in India that allows other people to subscribe to the shares of the company. They are called shareholders and the company can have only 30 shareholders. This type of company in India requires at least two directors and two shareholders.
If you own such a company, then you can hire directors to manage your business. The directors may or may not be the shareholders. The liabilities of the shareholders are limited to their shareholding capital. As the company grows and more investors step in, then the board of directors will be opted for the company.
Since this is most popular among entrepreneurs, let’s understand in detail with an example. There are different types of companies in India but let’s assume that the private limited company has formed with 1000 shares. This means the company has been divided into many small parts (shares).
The initial value of these shares known as the FACE VALUE was listed as Rs.10. The 1000 shares known as the Authorized Shares is multiplied by Rs.10 to get the Company value. So the company value will be Rs.10,000. This company value known as the Authorized Capital is distributed as shares to the shareholders.
A few types of companies in India are Flipkart, Snapdeal, Carat Lane, Ikea, Dell, Facebook, etc.
Advantages | Disadvantages |
Limited liability | Growth of company limited because of the limited 50 shareholders |
Continuity of existence of the company | Shares cannot be sold without the agreement of the other |
More capital investment can be raised | Strict legal compliance |
A Public Limited Company has a minimum of three directors and seven shareholders. This type of business in India offers shares to the general public and has limited liability. The shares can be acquired by the public through IPO (initial public offering) or through stock market trades. The shareholders are only liable for the amount invested by them and are not responsible for loss or debts of the company.
A Public Limited Company is required to invest a minimum capital of Rs.1 lakhs or more as per the act. Usually, this legal structure is least preferred by startups but consult a professional before taking any decision.
Some examples of this type of company in india are Indian Oil Corporation Limited, Bharat Heavy Electronics Limited (BHEL), Bharat Petroleum Corporation Limited (BPCL), Rolls-Royce Holding PLC, etc.
Advantages | Disadvantages |
Easy to fundraise | Shared ownership |
Limited liability of shareholders | Expensive to operate and manage |
Easy transferability of shares | Difficult to manage |
The Companies Act, 2013 introduced the new concept of One Person Company (OPC). OPC is a business legal structure in India that allows a single individual to form a company. That one member is solely responsible for the ownership and decisions of the company. The owner is liable only for the shares he/she invested and is not personally liable for the debts and loss of the company.
Since OPC is a private company, it is easy for fundraising and banks prefer to grant loans than a proprietorship/partnership firm. Less compliance requirements compared to private limited companies. OPC must convert into a Private Limited Company if their share capital or annual capital exceeds certain limits. A minimum of Rs. 1 Lakh is required as a paid capital and a minimum of two directors and two shareholders are required to convert into Private Limited Company.
So choosing this type of business legal structure in India is suitable for small businesses and single entrepreneurs who want to enjoy the benefits of a Private Limited Company while retaining ownership and control.
Some examples of this type of company in India are Truffle House (OPC) Private Limited, Akhan Dairy (OPC) Private Limited, Henkako Technologies Private Limited etc.
Advantages | Disadvantages |
Easy to get loans from bank | Suitable for small business |
Easy to operate and maintain | Difficult to fundraise |
Limited liability | Higher taxation compared to sole proprietorship |
The Deciding factors for any type of business entity in India depend on
Get all the documents required for registering like
Different taxes and licenses are applicable based on the type of businesses in India.
The different types of companies in India have their own advantages and disadvantages. Choosing the right type of company in India that suits you will have long-term implications for your business. So, you should consult with legal and financial professionals to understand the specific legal and regulatory requirements associated with different types of companies in India and make a decision that suits you best.
Suraj Shrivastava at ForgeFusion shares simple, effective ways to grow your business using SEO, content marketing, and AI, learned from helping over 50 companies. When he's not working, he loves teaching others or watching documentaries.