Different Types of Companies in India and How to Pick One

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.

What is a business entity or legal structure for startups?

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.

Why choosing a business structure in India is important for startups?

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.  

Types of companies and legal structures in India

1. Sole Proprietorship

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.

Sole Proprietorship process:

•  Decide the trade name.
•  Do registrations like Shop and Establishment Act, GST, Small and Medium Enterprise (SME).
•  Open a bank account
•  Documents required are Proof of address, Aadhaar card, PAN card.

Advantages and disadvantages of Sole Proprietorship:

Advantages	Disadvantages
Less legal paperwork	Unlimited liability
Easy taxation	Difficult to fundraise
Easy to setup	No financial control

2. Partnership Firm

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.

Partnership firm process:

• Draft a partnership deed
• Print on stamp paper to execute by partners
• Apply for PAN
• Open a bank account in the name of a Partnership firm.
• Documents required are Proof of address, Aadhaar card, PAN card.

Advantages and disadvantages of Partnership Firm:

Advantages	Disadvantages
Less legal paperwork	Unlimited liability
Easy taxation	Shared decision making
Share capital investment	May rise to conflicts between partners

3. Limited Liability Partnership (LLP)

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.

Limited Liability Partnership (LLP) process:

• Reserve the name of LLP with the Ministry of Affairs (i.e.) the name of the company should not be registered by others with MCA.
• Apply for Digital Signature Certificate (DSC) of partners.
• Draft a partnership deed.
• Print on stamp paper to execute by partners.
• File documents with MCA and wait for the Registration Certificate.
• Apply for PAN.
• Open a bank account in the name of a partnership firm.

Advantages and disadvantages of Limited Liability Partnership:

Advantages	Disadvantages
Separate legal entity	Difficult to fundraise
Less legal paperwork	Cannot take loan outside India
Fewer compliances	Public disclosure of the company

4. Private Limited 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.

Private Limited Company process:

• Check trademark at the IP India portal. 
• Reserve the name of the company with the Ministry of Affairs (MCA). 
• Apply for Digital Signature of all shareholders. 
• File the application with MCA including MOA, AO, ID, Address Proof, etc.
• MCA will issue the Certification of Incorporation.
• PAN and TAN will be allotted along with Certification of Incorporation.
• Open a bank account.
• Transfer Initial Capital as per commitment in Memorandum of Association(MOA)
• File business Commencement Certificate with MCA.
• Apply for Udyam Registration (MSME registration). 
• Register the entity with start-up India for Anel Tax Exemption.
• Labour law Registration, as and when applicable.

Advantages and disadvantages of Private Limited Company:

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

5. Public Limited Company

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.

Public Limited Company process

• Digital Signature Certificate (DSC) of directors and shareholders are required for filing form on the MCA portal.
• Director Identification Number (DIN) has to be procured by all the directors.
• The director of the company has to register the name of the company.
• Certificate of Incorporation of the Public Company is issued after the documents are verified by the Registrar of Companies (ROC).
• The documents required are Proof of Identity, Proof of Address, PAN, NOC, DIN, DSC, MOA, AOA, etc.

Advantages and disadvantages of Public Limited Company:

Advantages	Disadvantages
Easy to fundraise	Shared ownership
Limited liability of shareholders	Expensive to operate and manage
Easy transferability of shares	Difficult to manage

6. One Person Company (OPC)

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.

One Person Company (OPC) process:

• Digital Signature Certificate (DSC) is required for filing on the MCA portal.
• Apply for Director Identification Number (DIN).
• The director of the company has to register the name of the company like (name) Private Limited.
• The documents required are Proof of Identity, Proof of Address, PAN, DIN, DSC, MOA, AOA, etc.
• Certificate of Incorporation of the Public Company is issued after the documents are verified by the Registrar of Companies (ROC).

Advantages and disadvantages of One Person Company:

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

Factors you should consider while choosing from the different types of companies in India

  The Deciding factors for any type of business entity in India depend on

• Tax benefits
• Team structure
• Future plan
• Potential liabilities
• Nature of the business
• Number of founders
• Investment capital
• Residential status

Points to consider after choosing a business structure in India

• Before starting a business identify Brand name and legal entity name. This may be the same or different. Also, a single entity may have multiple brands as well. Example:  – One97 Communications Limited is a single entity name that have different brand names like Patym Money, Patym Insider, Patym Payments Bank, Paytm Insurance, etc.
• Check trademark for Brand name and Legal name.
• Document roles and responsibilities of partners in a company if needed.
• Know all the compliances applicable for your legal structure.

Documents required for registering government portals in India

Get all the documents required for registering like

• Proof of Identity
• Proof of Address
• PAN
• TAN
• DIN (Director Identification Number)
• DSC (Digital Signature Certificate)
• MOA (Memorandum of Association)
• AOA (Article of Association) etc.

Compliances applicable to different types of businesses in India

Different taxes and licenses are applicable based on the type of businesses in India. 

• GST registration is mandatory for all goods purchased and services related whose annual turnover is more than 40 lakhs rupees.
• DGFT license is mandatory for all export and import related businesses.
• FSSAI license is mandatory for food related businesses.
• Shop and Establishment license is mandatory for commercial shops and is issued by the labor department.
• BIS registration is mandatory for electronic manufacturing businesses.

Important links for Registration

• GST registration – GST.gov  
• MSME registration – Udyam Registration 
• Digital Signature Certificate & MCA registration – MCA.gov 
• Trademark registration – IP India 
• DIN registration – MCA portal  
• FSSAI registration – FSSAI.gov 
• DGFT registration – DGFT.gov 
• BIS registration – BIS.gov 

Conclusion

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.