There are many types of business entities or company types in India. When you start a business then you have to make an important decision about the type of business organization to register.
Type of a business entity is not just useful for legal aspects but also useful in many ways.
Different types of business entities are useful for different types of peoples. You can have many types of business ownerships.
If you choose the wrong type of business form then it will create many problems for your business like tax issues, legal issues, regulatory issues or operational issue.
There are many rules and laws for different types of business entities in India.
You should choose the perfect business entity or company type for your business.
Actually, there is no single perfect type of business, it depends on your requirements. For some peoples, one business type is good and for other peoples, some other types of businesses are useful.
In this post, you will get lots of information about each type of business entity in India. You will also get the advantages and disadvantages of each type of business entity in India.
So lets start –
1. Sole Proprietorship
Sole proprietorship is the business or enterprise which is owned by a single person.
Sole Proprietorship also known as individual Entrepreneurship.
In sole proprietorship, the business and the owner both are the same. When the business owner dies then the business also dies.
You cannot make a difference between the owner and business organization or business entity.
Sole Proprietorship is the most easy and popular type of business entity. You can easily start your own business as a sole proprietor.
Business owner can hire other employees to work for his business.
All assets of the business are owned by the business owner.
Business owner is responsible for all the debts & losses of the Business.
Sole proprietor can operate its business under his or her own name or he/she can use a business name other than its legal name.
If you are just starting a business on your own then it is the best type of business organization form for you.
To start a business as a sole proprietorship , there are no legal formalities required. There is no separate law for the sole proprietorship.
In India, there is no need to register your business if you are operating as a sole proprietor.
Depending upon your business you may need some licenses or permits in order to run your business.
Advantages of Sole Proprietorship
- Low Startup Cost
- It is very easy to start a Sole Proprietorship Business.
- You can start your business extremely fast.
- Owner has full control over its business.
- Easy to take Decisions.
- All Profit belongs to the business owner.
- You can easily change your business type in future.
- No Government Registration is Required to start business.
Disadvantages of Sole Proprietorship
- Unlimited Liability ( Business Owner is personally liable for all the debts and losses of the business. )
- Less scope for new Ideas and New Thought process
- The capacity for attracting funds is very less
- Limited Financial Resources, Limited business capital
- Business is totally dependent on the business owner.
- Difficult to scale
2. General Partnership
partnership is a type of business structure in which two or more individuals manage and operate business. In this business type there are always two or more owners of a business.
You can have Minimum 2 and Maximum 20 members in your partnership firm. Profit and losses in the business are shared among the partners as defined in the partnership agreement. For General Partnership, Registration is not compulsory in India.
This type of business is not preferred by people or businessmans because of its unlimited liability. All the business partners are personally responsible and liable for all the debts and losses in the business.
This type of business structure is lost after the introduction of limited liability partnership.
Advantages of General Partnership –
- Very easy to start.
- Low startup cost
- More Capital than Sole Proprietorship & One Person Company
- Work Gets Divided into the partners
- The audit is Not Necessary
- Registration is Not compulsory
- Risk, Losses & Debts gets shared.
Disadvantages of General Partnershp-
- Unlimited liability ( Partners are personally liable for all the debts & losses of the business.
- There is no separate existence of the business.
- You will not have full control over the business.
- Difficult to take decisions.
- Conflicts between partners.
3. Limited Liability Partnership ( LLP )
Limited liability partnership (LLP) is a type of business structure in which the liability of some partners or all partners is limited. No partner is liable for liability or debts created by another partner.
Limited Liability is one the major differences between general partnership and limited liability partnership.
This type of partnership is prefered by most of the people because of its advantages over general partnerships.
You can have a minimum of 2 members in your partnership firm. There is no upper limit for Maximum number of partners. You can have as many partners as you want in your partnership company.
ownership can be transferred in this type of business structure. In Limited Liability Partnership ( LLP ), the business or company is considered as a separate legal entity so the existence of the company does not affect by the changes in partners or death of partners.
This type of partnership or business structure is governed by the Limited Liability Partnership Act, 2008
Any rights or duties of partners are determined by the written agreement.
Foreign Ownership is also allowed with prior approval of RBI and FIPB but according to the Limited Liability Partnership Act, It is necessary that the minimum one partner in a Limited Liability partnership must be an Indian.
For Limited Liability Partnership, IT returns needed to be filed. The audit is not compulsory for LLP but if your turnover exceeds 40 lakhs or contribution to LLP exceeds 25 lakhs then an audit is required.
There is no need for minimum capital to start LLP.
Advantages of Limited Liability Partnership –
- Limited Liability
- It is easy to start this type of business
- Low Startup Cost
- No limit for maximum number of Partners
- Work Gets Divided between partners
- Tax Advantages ( There are many tax advantages for Limited Liability Partnership )
- Audit is not necessary
- Risk, Losses & Debts gets shared between partners
Disadvantages of Limited Liability Partnership –
- Clashes & Conflicts between partners
- Difficult to scale
- Decision Making is hard.
4. Private Limited Company
Private Limited Company is a popular business structure amongst growing businesses and companies. Private Limited Company is a separate legal entity registered under the company act, 2013.
You can have a minimum 2 members and maximum 200 members in your Private Limited Company. There should be minimum 2 and maximum 15 directors in the private limited company.
Foreign Investment is allowed in the most sectors.
There could be 2 to 200 shareholders in a Private Limited Company. Shares cannot be offered publicly. It needs to be held privately.
In this company type, The liability of the shareholders is limited.
Ownership of the company can be transferred through shares.
This business entity is governed by Company Act, 2013.
IT returns need to be filed for Private Limited Company. These types of business entities must hold board meetings.
Advantages of Private Limited Company-
- Limited Liability
- It is considered as more credible than Limited Liability partnership and General Partnership
- Separate Legal Entity
- Useful for Raising Funding
Disadvantages of Private Limited Company –
- Limited Members
- Less Tax Advantages
- Shares cannot be offered Publicly
- Shareholder right to transfer shares is restricted
5. Public Limited Company
In Public Limited Company, the shares are offered publicly to the general public. Public limited companies could be listed in the stock market or could be unlisted.
Shareholders can freely trade their share.
There are a minimum 7 members required to register a public limited company. There is no upper limit for maximum members in Public Limited Company.
There can be minimum 3 and maximum 15 directors in the Public Limited Company.
Liability of shareholders are limited so they are not personally liable for any debts and losses of the company.
Public Limited Company is a separate legal entity registered under the company act, 2013.
This entity is governed by the Company Act, 2013
Publishing a company prospectus is necessary for Public Limited Company.
According to Company Act, 2013, It is compulsory to add word ‘Limited’ after the name of company
Advantages of Public Limited Company –
- Useful for Raising Capital
- Limited Liability
- Useful for Bigger Companies
- Extra Growth & Expansion Opportunities
Disadvantages of Public Limited Company –
- Do not have full control over the company
- Many Rules & Regulations
6. One Person Company
‘One Person Company’ is a new concept introduced in the company act, 2013.
This company type is useful for sole entrepreneurs in which the business owner gets full control over his/her company. He/she also has limited liability .
To start other types of companies you will need multiple directors or members but this is not the case with ‘one person company’.
Only a Single-member / Single director needed to start the ‘One Person Company’.
In this type of company, Ownership can be transferred to the nominee after the death of the business owner.
In this type of company, foreign Directors and Nominees are not allowed & also there is no scope for raising equity funding in ‘One Person Company’.
If you have revenue over 2 crores and paid up capital over 50 lakhs then your company needs to be converted into a Private Limited Company.
Advantages of One Person Company –
- Easy to start
- Limited Liability
- Owner has full control over the company
- Easy to take decisions
Disadvantages of One Person Company –
- Higher Startup Cost than Sole Proprietorship
- Very Fewer Tax Advantages
- You will be required to conduct a statutory audit.
7. Hindu Undivided Family
This type of business organization is only found in India. This type of business entity is governed by Hindu Law. This is one of the oldest business types in India.
This business entity is owned and operated by the hindu family members.
Adopted individual or adopted child also becomes the part of Hindu Undivided Family. New childs are automatically added to this business by their birth.
This business is controlled by Karta or the head of a family.
All members have equal rights over the business properties.
This type of business forms is decreasing due to the nuclear families.
Advantages of Hindu Undivided Family –
- Profits remains in the family
- New Born Children naturally gets the business education
- Easy Decision Making
- Trust among the members
Disadvantages of Hindu Undivided Family–
- No Scope for new talents & Ideas
- No Entry for outside members
- Karta has all the burden of the business
- Karta has full dominance over the business
- Conflicts among the family members
8. Co-operative Society
In a co-operative society people work togethers and with others for common benefits & purposes. Registration of co-operative society is compulsory under co-operative society act, 1912.
In a co-operative society, members have a common motive of protecting their economic interests.
Creating a cooperative society is very easy and needs consent from 10 adult persons to form a Cooperative Society.
Capital for the society is raised from the members by issue of shares. Society gets legal identity after the registration.
There are many types of Cooperative Societies like consumer’s cooperative society, producers cooperative society, marketing cooperative society, farmers cooperative society, credit cooperative society, housing cooperative society
Advantage of Co-operative Society –
- Voting System
- Limited Liability
- Common Interest of all the members
- Membership Benefits ( anyone can join or leave the co-operative society )
- Stable Existence
- Government Support
Disadvantage of Co-operative Society –
- Lack of Effective Management
- Limited Resources
- Control of Government
Bottom Line –
You have to choose the best type of business organization for you. Everyone has different requirements.
So analyse your requirements and then choose the perfect business type for your business.
If you have any questions about business and marketing then comment your questions in the comment section.
Read this post in the Hindi Language :-
Frequently Asked Questions
1. How many types of companies are there ?
Ans – Actually, there are many types of companies in India but mainly there are 7 to 8 types of business entities or companies. Most people don’t require other types of company forms, they mainly need between 7 to 8 types of companies in India.
2. What are the different types of companies In India?
Ans – Like, I have given in the above post there are may types of companies in India like Sole Proprietorship, General Partnership, Limited Partnership, Private Limited Company, Public Limited Company, Co-operative Society, One Person Company
3. Which type of company is the best ?
Ans – There is no best type of company. It depends on your needs or requirements. For some peoples one type of company is better & for other peoples some other type of company is better. You can read above article then you will get clarity about your needs.
4. What is meant by limited liability ?
Ans – limited liability means liability of a business owner or person is limited. In some types of business entity, the liability of the business owners are unlimited means they are personally liable for any business debts or losses. But In Limited liability, business owners are not personally liable for any business debts & losses
5. What are two main types of companies ?
Ans – Actually people call ‘company’ to every type of business entity but there are mainly two types of companies, which is ‘Private Limited Company’ and ‘Public Limited Company’. These days a new form of company is introduced in India which is called ‘One Person Company’. These three are the most famous types of companies in India under the companies act, 2013.