Business entity structuring in India offers various options, each with its own legal, tax, and operational implications. Depending on the scale, ownership, and goals of the business, one can choose from the following structures
- Sole Proprietorship
- Ownership: Single owner.
- Liability: Unlimited personal liability.
- Taxation: Taxed as individual income (no separate business tax).
- Compliance: Minimal compliance requirements.
- Best For: Small businesses or individuals starting up.
- One Person Company (OPC)
- Ownership: Single individual owner.
- Liability: Limited liability to the owner.
- Taxation: Similar to a private limited company.
- Compliance: Moderate, easier than a private limited company.
- Best For: Entrepreneurs or small business owners wanting limited liability.
- Partnership Firm
- Ownership: Owned by two or more individuals.
- Liability: Partners have unlimited liability.
- Taxation: Firm’s income is taxed, and then partners are taxed on their share of profits.
- Compliance: Moderately simple, registered under the Indian Partnership Act, 1932.
- Best For: Small to medium-sized businesses.
- Limited Liability Partnership (LLP)
- Ownership: Owned by partners with limited liability.
- Liability: Partners are liable only up to their capital contribution.
- Taxation: LLP is taxed at 30% on its income; no dividend distribution tax.
- Compliance: Higher compliance than a partnership, regulated by the LLP Act, 2008.
- Best For: Professional services firms or businesses seeking lower compliance with liability protection.
- Private Limited Company (Pvt Ltd)
- Ownership: Shareholders (minimum of 2, maximum of 200).
- Liability: Limited liability to shareholders.
- Taxation: Corporate tax rate is between 15%-30% (depending on turnover and income), with dividend distribution tax (DDT) removed from 2020.
- Compliance: High, as regulated by the Companies Act, 2013.
- Best For: Growing businesses, startups seeking investors or loans.
- Public Limited Company
- Ownership: Owned by shareholders (minimum of 7; no maximum).
- Liability: Limited liability to shareholders.
- Taxation: Similar to private limited companies (corporate tax rates).
- Compliance: High, with stringent reporting and regulatory requirements.
- Best For: Large businesses or those looking to raise capital through public investment.
- Section 8 Company (Non-Profit)
- Ownership: Can be limited by Members as well as Guarantee
- Liability: Limited liability for members.
- Taxation: Eligible for tax exemptions under various conditions.
- Compliance: Stringent, as regulated by the Companies Act, 2013.
- Best For: Charitable organizations, NGOs.
- Branch Office, Liaison Office, and Project Office (For Foreign Companies)
- Ownership: Owned by a foreign parent company.
- Liability: Limited to the activities undertaken in India.
- Taxation: Foreign companies are taxed at a higher rate, around 40%.
- Compliance: Requires approval from the Reserve Bank of India (RBI) and the Ministry of Corporate Affairs.
- Best For: Foreign companies wanting to explore or establish a presence in India.
- Joint Venture
- Ownership: Partnership between an Indian company and a foreign or domestic entity.
- Liability: Defined by the joint venture agreement.
- Taxation: Taxed based on the business entity structure chosen (e.g., LLP, Pvt Ltd).
- Compliance: Varies with the chosen structure.
- Best For: Foreign companies entering the Indian market with local expertise.
Factors to Consider When Choosing an Entity:
- Liability Protection: LLPs, Private Limited Companies, and OPCs provide limited liability.
- Taxation: LLPs and companies are taxed differently, impacting profitability.
- Compliance: Public Limited Companies and Section 8 Companies have higher regulatory requirements.
- Capital Raising: Private and Public Limited Companies are better suited for raising capital.
Each structure comes with distinct advantages and limitations based on the business goals, investment size, and the need for liability protection or fundraising.