Starting a New Business in India

Starting a New Business in India? Consider Which Legal Entity Might Be Suitable for You

Being an entrepreneur who wants to start his or her own business is a very exciting venture but also involves many risks. Maybe you are studying at college and want to drop out to become the next Elon Musk, or perhaps you have grown tired of corporate life and now want to start your venture. However, as soon as you decide to start a new business, the dilemma of legal considerations begins. Do you need to register this business? If yes, when? Should you register a private limited company, an LLP, or something else?

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Selecting the correct legal entity type is among the most important strategic decisions you will make. The structure you adopt to conduct your business can greatly influence its taxation, legal exposure, operational efficiency, and ability to raise funds. From sole proprietorships to public limited companies, the options might seem overwhelming. Each entity type comes with its own set of advantages and disadvantages. For instance, did you know that while sole proprietorships offer simplicity and full control, they also expose the owner to unlimited personal liability? The purpose of this blog is to offer an insight into the various forms of business available to be established. We will also discuss the experiences potentialities and drawbacks of each one and, therefore, assist you in choosing the most appropriate solution depending on your company’s requirements. A sole proprietor, Partnership or Ltd Company might be a first option due to simplicity or limited liability or seeking for investment these options should act as a strong platform for your new business. Let's delve into the specifics to find the most suitable legal structure for your entrepreneurial journey.

Types of Legal Entities in India

Sole Proprietorship

Have you ever noticed the local pan store or Chai Tapri where you prefer to have your favourite chai, or perhaps that famous snack corner or sweets shop, and wondered how they manage their legal compliance? These small, often family-run businesses typically operate as sole proprietorships.

A sole proprietorship is a business owned and operated by one person, known as the sole proprietor. This simple and easy-to-set-up structure gives the owner full control over decisions and operations but also makes them personally liable for all business debts. While popular for small businesses, the lack of separation between personal and business assets poses significant risks. If considering this structure, be prepared for both its rewards and responsibilities.

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Registration Requirements

Setting up a sole proprietorship in India requires:

1. Business Name Registration (if necessary).
2. GST Registration if turnover exceeds ₹20 lakhs.
3. Shops and Establishment Act License.
4. PAN Card for the proprietorship.
5. Business bank account.
6. Additional licenses as per business type (e.g., trade license, FSSAI for food businesses).

Pros:

1. Ease of Setup: It is easy to form with little requirement to engage in a formal legal proceeding and it was inexpensive to set up.
2. Full Control: The owner is solely responsible for making all the decisions about the business and its functioning.
3. Tax Benefits: Income is taxed only once as it is earned by the owner and considered his/her income.

Cons:

1. Unlimited Liability: This form of business structure entails the owner’s legal and financial responsibility for all the business’s debts and other legal responsibilities to third parties, making the owner’s personal properties vulnerable.
2. Capital Limitations: One of the main disadvantages is the difficulty in raising capital, which has no source of income except the owner’s profit.
3. Lack of Continuity: This business does not have the characteristic of perpetual succession and it may lose its existence when the owner is dead or has decided to retire.

Partnership Firm

A partnership firm is a business organization where two or more individuals come together to run a business and share its profits and losses. It is governed by the Indian Partnership Act, of 1932. Each partner contributes to the business, whether through capital, skill, or effort and shares the responsibilities and risks involved in running the business.

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Registration Requirements

To register a partnership firm in India:

1. Draft a partnership deed detailing rights, duties, and profit-sharing.
2. Notarize the partnership deed.
3. Obtain a PAN card for the partnership firm.
4. Register with the Registrar of Firms by submitting Form A, partnership deed, and fees.
5. Obtain Certificate of Registration from Registrar.
6. Register for GST if turnover exceeds the limit.
7. Obtain any other necessary licenses (e.g., trade license, FSSAI license).

Pros:

1. Shared Responsibility: This involvement can lead to cost savings, improved decision-making, and convenience as partners bring to the table their skills, knowledge, and equipment.
2. Simple Setup: To be specific, the establishment of a partnership is highly uncomplicated and cheap when using a partnership deed.
3. Flexibility: Some contractual aspects regard flexibility concerning profit sharing and allocation between partners.

Cons:

1. Unlimited Liability: Each of the partners is held legally responsible as well as accountable for the debts and or obligations of the business.
2. Potential for Disputes: They hold disputes within the partnership that may be detrimental to the management and running of the business.
3. Limited Life: It also shows that the partnership may be weakened in the event of the death or withdrawal of a partner unless otherwise agreed.

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Limited Liability Partnership (LLP)

Imagine a tech startup where two friends come together to combine their skills and resources, sharing both the rewards and the responsibilities. Or think about a consultancy firm where professionals from different fields pool their expertise. These scenarios often operate as Limited Liability Partnerships (LLPs), a modern business structure designed to provide the benefits of both partnership and corporate forms of business.

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A Limited Liability Partnership (LLP) is a hybrid business structure that combines the advantages of a partnership with those of a company. Introduced in India by the Limited Liability Partnership Act, of 2008, LLPs offer flexibility in management and limited liability protection to their partners.

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Registration Requirements

To set up an LLP in India:

1. Obtain Digital Signature Certificates (DSCs) for all designated partners.
2. Apply for Director Identification Numbers (DINs) for designated partners.
3. Reserve LLP name through LLP-RUN form.
4. File Form FiLLiP for incorporation with the partnership deed and required documents.
5. Draft and file LLP agreement within 30 days of incorporation.
6. Apply for PAN and TAN for the LLP.
7. Register for GST if turnover exceeds the limit.
8. Obtain necessary licenses like trade licenses or professional tax registrations based on business activities.

Pros:

1. Limited Liability: According to this type, the partners’ liability extends only up to their agreed contribution, hence personal assets are protected.
2. Separate Legal Entity: LLP has a separate legal entity and the partners are different from those of a partnership firm or partnership company.
3. Less Compliance: Essentially, the legal obligations that LLPs have are less as compared to what companies are legally mandated to follow.

Cons:

1. Limited Capital Raising: LLPs cannot issue shares, making it challenging to raise capital compared to companies.
2. Annual Compliance: LLPs do not file annual returns, but they are required to submit annual financial statements.
3. Resident Partner Requirement: One of the partners must reside in India or one of the partners must be an Indian citizen.

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Private Limited Company

Imagine you have a great idea for a business. You've done your research and decided that a Private Limited Company (PLC) might be the best structure for your venture. A PLC is a type of business entity that offers limited liability to its owners and shareholders, meaning their assets are protected in case of business debts or legal issues.

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A Private Limited Company is a popular business structure among entrepreneurs looking for limited liability protection and the ability to raise external funding. It offers a corporate structure with shareholders, directors, and stringent compliance requirements, yet retains flexibility in operations.

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Incorporation Requirements

To set up a Private Limited Company in India:

1. Obtain Digital Signature Certificates (DSCs) for proposed directors.
2. Apply for Director Identification Numbers (DINs) for directors.
3. Reserve company name by filing INC-1 form with RoC.
4. Draft and file Memorandum of Association (MoA) and Articles of Association (AoA).
5. Submit Form SPICe for company incorporation with the required documents.
6. Provide proof of registered office address.
7. Optionally, prepare a shareholder agreement.
8. Apply for PAN and TAN for the company.
9. Register for GST if turnover exceeds the prescribed limit.
10. Obtain necessary licenses and permits based on business activities.

Pros:

1. Limited Liability: These mean that shareholders are protected in a way that they can only lose their investment and no other property of the shareholders is at risk in the event.
2. Capital Raising: Increased financing flexibility through equity investment is an important change observed in the course of mega-regional economic development.
3. Perpetual Succession: It emerges its existence operant in the course of its business regardless of change of ownership.

Cons:

1. Complex Setup: It has more strict legal requirements for incorporation of such a company and many expenses are there in it.
2. Regulatory Compliance: This entails that the enhanced business practices are subject to stringent regulating and compliance standards, such as annual reviews.
3. Limited Number of Shareholders: It is mandatory that the voting rights and share ownership of the members be disproportionate and the number of shareholders cannot exceed 200.

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Public Limited Company

You may be wondering what to do if you have a viable company idea and are thinking about setting it up as a Public Limited Company (PLC). A PLC is a sort of company whose shares are sold openly on a stock exchange, providing a means of raising large sums of money from the general public.

A Public Limited Company is a corporate entity that offers shares to the public and operates under stringent regulatory frameworks. It allows for raising capital from public investors through the issuance of shares traded on stock exchanges.

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Incorporation Requirements

To set up a Public Limited Company in India:

1. Obtain Digital Signature Certificates (DSCs) for proposed directors.
2. Apply for Director Identification Numbers (DINs) for directors.
3. Reserve company name by filing INC-1 form with RoC.
4. Draft and file Memorandum of Association (MoA) and Articles of Association (AoA).
5. Prepare and file a prospectus or statement instead of a prospectus with RoC.
6. Submit Form SPICe for company incorporation with the required documents.
7. Provide proof of registered office address.
8. Optionally, prepare a shareholder agreement.
9. Apply for PAN and TAN for the company.
10. If applicable, comply with stock exchange listing requirements and SEBI regulations.
11. Register for GST if turnover exceeds the prescribed limit.
12. Obtain necessary licenses and permits based on business activities.

Pros:

1. Large Capital: The advantages of the public issue of shares include; Financing through the public issue of shares enables companies to raise a fairly huge capital.
2. Limited Liability: The principle of limited shareholders’ liability means that shareholders of a corporation can only lose their stakes in the company but not their other assets.
3. Enhanced Credibility: In reality, public companies are usually considered to have higher credibility and observability.

Cons:

1. Extensive Regulation: Regulated players who are required to adhere to various regulatory measures and standards including disclosures made at least quarterly.
2. Costly to Maintain: Risks such as the high cost of Public Listing and continuous non–compliance with stock exchange regulations.
3. Loss of Control: Another issue is that founders can be ousted from the management due to public shareholding.

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One Person Company (OPC)
An OPC, or One Person Company, is a legal entity that enables single entrepreneurs to establish and operate a business with limited liability protection. This structure was introduced to support individual entrepreneurs by allowing them to enjoy the benefits of a corporate entity while being solely responsible for its management. Unlike sole proprietorships, which do not have a separate legal identity from their owners, an OPC is distinct in that it offers limited liability, meaning the owner's assets are shielded from business liabilities.

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Incorporation Requirements

To set up a One Person Company (OPC) in India:

1. Obtain a Digital Signature Certificate (DSC) for the sole director and shareholder.
2. Apply for a Director Identification Number (DIN) for the sole director.
3. Reserve company name by filing INC-1 form with RoC.
4. Draft and file Memorandum of Association (MoA) and Articles of Association (AoA).
5. Submit Form SPICe for company incorporation with the required documents.
6. Provide proof of registered office address.
7. Apply for PAN and TAN for the OPC.
8. Register for GST if turnover exceeds the prescribed limit.
9. Open a bank account in the name of the OPC.
10. Meet annual compliance requirements (AOC-4 and MGT-7).
11. Convert to a Private Limited Company if thresholds are exceeded.

Pros:

1. Limited Liability: The legal entity owner can be held liable for the obligations only to the extent of the company’s capital.
2. Sole Control: The major part of ownership empowers the single shareholder to control all aspects of the company’s functioning.
3. Simplified Compliance: Compared with other kinds of private consumers, it has relatively lower requirements and can better match the requirements of the Chinese market.

Cons:

1. Single Ownership: Many people can be restricted to one person and this greatly limits the ability to draw; and accumulate people, financial and other means.
2. Conversion Requirement: As a private limit company, it can convert to a Private or Public Company, if its annual turnover is more than ₹2 crores or its paid-up capital is more than ₹ 50 lakhs.

Higher Compliance than Sole Proprietorship: However, compliance is somewhat more formal compared to other business structures but not as complicated as that of a corporation.

How Agrim Advisors Can Help

At Agrim Advisors, we are committed to providing end-to-end professional consulting solutions for founders and investors. Our services span from company incorporation and fundraising to compliance management, acquisitions, and beyond. If you believe we can assist you, feel free to reach out, and we will connect with you shortly.

Disclaimer

This content is for general informational purposes only and does not constitute professional advice. For specific legal, tax, or financial needs, seek professional guidance. Agrim Advisors assumes no liability for reliance on this information. Note that the content is based on current laws, which may be subject to change.

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