27.09.2024
9 Types of Business Structures in India
Discover the pros and cons, tax implications, and legal responsibilities of the business structures in India. Get practical tips and insightful examples to help you choose the right business structure for your startup.
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Don’t let the business jargon intimidate you as you build your startup. Terms like “Section 8,” “Sole Proprietorship,” or “PLC” might sound complex, but they’re easier to grasp than you think.
Making the right decision about your business structure is essential for getting your business off to a strong start. It affects key areas such as your legal responsibilities, taxes, and the level of personal risk you're willing to take on. Each structure offers different levels of flexibility and protection, so it’s important to understand them and find the one that aligns with your goals.
In this guide, we’ll walk you through the 9 most common business structures in India with definitions, pros and cons, practical tips, and examples—so you’re not bogged down by all the confusing terms. Let’s get started!
Sole Proprietorship
A sole proprietorship is the simplest and most widely used form of business structure. It is owned and operated by one individual, and there’s no legal distinction between the owner and the business. This means that all the business assets and liabilities are essentially the owner's responsibility.
Since there's no need for complex legal filings, it’s a popular choice for many first-time entrepreneurs who are looking for an easy and affordable way to get started. Plus, as the sole owner, you get to call all the shots, enabling quick decisions without having to consult partners or shareholders. When it comes to taxes, things are pretty straightforward, too. The business income is usually reported on your personal tax return, so you can keep the financial process simple. If you're planning to start your business solo and want to keep things as uncomplicated as possible, a sole proprietorship could be ideal.
But it’s important to be aware of the significant risks involved. The biggest concern is unlimited personal liability, which means you’re personally responsible for all debts and obligations. If your business runs into legal trouble or financial issues, your personal assets could be on the line. Raising capital can also be a challenge, as you often rely on personal savings or loans rather than attracting outside investment, which can limit your growth potential.
A popular example of a sole proprietorship that evolved into a big corporation is Walmart. In the 1950s, Sam Walton started Walmart as a sole proprietorship, operating a small chain of stores in Arkansas. Over time, the business grew and eventually incorporated, transforming into the global retail giant we know today. Walton’s story shows how a simple sole proprietorship can evolve into something much larger with the right strategy and growth.
Many local cafés, freelancers, consultants, and small retail businesses also start as sole proprietorships. This business structure is a fantastic way to test the waters before diving into more complex business structures. You can operate the business at a relatively low cost, maintain full control over operations, and have a simple tax process. However, you’ll need to carefully weigh the risks. Unlimited personal liability means that if your business faces any legal or financial trouble, your personal assets could be at risk.
Additionally, while a sole proprietorship might work perfectly in the beginning, if your business starts to grow, you may want to consider moving to a more formal structure, such as a limited company, to protect yourself and your assets.
Pro Tip: If you’re working solo and want to keep things simple, starting with a sole proprietorship can be a smart move. Just bear in mind that as your business expands, so do the risks, indicating the need for a stronger business structure.
General Partnership (GP)
A general partnership is a business structure where two or more individuals come together to share the profits, losses, and management of a business. It's a great choice when you want to combine resources, skills, and expertise with someone else. Unlike a sole proprietorship, where a single person is responsible for everything, a general partnership splits the workload and responsibilities between partners.
In a general partnership, each partner typically shares equal responsibilities and liabilities unless stated otherwise in the partnership agreement. This means that both profits and losses are usually divided equally, and every partner has a say in the decision-making process. However, if the agreement specifies otherwise, the roles, contributions, and share of profits or losses can be adjusted accordingly.
Each partner will also have a partnership account in the business’s books, tracking their financial contributions, withdrawals, and share of the profits.
Tax-wise, general partnerships are considered pass-through entities. This means that the partnership itself does not pay income tax. Instead, profits and losses are reported on each partner's personal tax return, based on their share of the partnership. This structure can simplify tax filing, but partners need to ensure that they maintain accurate records of income and expenses for proper reporting.
It’s important to note that general partnerships are less common at the large corporate level. This is due to the increased personal risk faced by partners. However, general partnerships remain popular in certain professions, particularly in law firms, medical practices, and architectural firms, where partners benefit from shared expertise, costs, and management while maintaining joint control. These types of businesses are well-suited to the partnership model, as they rely heavily on collaboration between highly skilled professionals.
Pro Tip: If you’ve got a trusted partner and you’re looking to share the workload, a general partnership could be the perfect option. Just make sure you have a solid partnership agreement in place to define roles, responsibilities, and profit-sharing arrangements. This will help avoid any disputes or misunderstandings down the road, protecting both you and your partner as the business grows.
Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) is a business structure that blends the flexibility of a traditional partnership with the limited liability benefits typically found in corporations. Each partner in an LLP has protection from personal liability for the debts or claims against the partnership, meaning their personal assets are generally not at risk if the business faces financial trouble.
Like a general partnership, LLP also has pass-through taxation. This means that the profits and losses of the LLP pass directly to the partners, who then report this income on their personal tax returns. As a result, partners must be aware of the potential for higher personal tax liabilities, especially if the LLP generates substantial profits.
On the other hand, there is a higher formation and maintenance cost in this company structure, and partners may still face unlimited liability for specific actions. Additionally, access to capital can be limited, making it less suitable for all business types. The structure can also be complex, requiring careful management, and LLPs typically have a limited lifespan, dissolving upon the departure of a partner unless otherwise stipulated.
LLPs are especially useful for professional services firms where multiple partners contribute to the management of the business. One key difference between an LLP and a general partnership is that in an LLP, partners are not personally liable for the actions of other partners. This makes it a popular choice for businesses that need to protect individual partners from personal liability, while still enabling them to be fully involved in managing the business.
A typical example of an LLP is a law firm. For instance, Dentons LLP, one of the largest law firms in the world, operates under this structure, allowing its partners to share profits and management responsibilities without personal risk from liabilities arising from the firm’s legal cases or financial obligations.
Pro Tip: When forming an LLP, be sure to draft a comprehensive partnership agreement that clearly outlines each partner’s roles, responsibilities, and how profits are distributed. This will help prevent conflicts and ensure smooth operations as your business grows.
Private Limited Company
A Private Limited Company is a distinct legal entity separate from its owners, where the liability of shareholders is limited to their contributions in share capital. It requires a minimum of two directors and two shareholders and must be registered with the Registrar of Companies.
In terms of tax implications, a private limited company has the potential for double taxation. The company itself is taxed on its profits at the corporate tax rate, and when dividends are distributed to shareholders, they are taxed again as personal income. However, private limited companies benefit from various tax advantages, such as the ability to deduct business expenses and lower corporate tax rates compared to personal income tax rates. This structure also allows for reinvestment of profits back into the business at a lower tax rate.
A private limited company has restrictions on share transfers, requiring approval from other shareholders, which limits flexibility. Setup costs are higher due to registration and legal fees, and financial disclosures are mandatory, adding to administrative work. Also, regulatory oversight is stringent, with companies needing to meet various compliance standards, increasing the administrative burden.
However, private limited companies are still the preferred choice for many startups and businesses in India aiming for growth. The limited liability feature provides essential protection for shareholders, while the ability to raise funds through various means, such as bank loans and debentures, enhances their borrowing capacity. Additionally, the dual role of individuals as shareholders and directors adds flexibility in management. Notable examples of private limited companies in India include Anand Automotive Pvt. Ltd. and Parle Products Pvt. Ltd.
Pro Tip: Before setting up a private limited company, consult with a business advisor to understand the regulatory requirements and compliance obligations.
Public Limited Company
A Public Limited Company or PLC is similar to a private limited company but has the ability to issue shares to the public and can accommodate an unlimited number of shareholders. To establish a PLC, a minimum of three directors and seven shareholders is required, and it must be registered with the Registrar of Companies.
One of the key tax implications for PLCs is that they are subject to corporate taxation on their profits at the applicable corporate tax rate. Additionally, when dividends are paid to shareholders, these are taxed as personal income, which can lead to double taxation similar to that of private limited companies. However, PLCs can also benefit from certain tax advantages, such as the ability to deduct business expenses and reinvest profits, which can enhance their overall financial position.
PLCs are suitable for large-scale businesses that need significant funding for expansion and development. By listing on a stock exchange, they can trade shares openly, providing liquidity for investors. However, this comes with the responsibility of adhering to more legal regulations and maintaining transparency in operations. Popular examples of public limited companies in India include Reliance Industries and Bharti Airtel.
One-Person Company
A One-Person Company (OPC) is a relatively new type of business in India that allows a single individual to own and manage a company while benefiting from limited liability. It requires a minimum of one director and one nominee, ensuring that the company has continuity in the event of the owner’s absence.
From a tax perspective, an OPC is treated as a separate legal entity, meaning it is subject to corporate tax rates on its profits. This structure provides certain tax benefits, such as the ability to deduct business expenses before calculating taxable income. Since profits can be reinvested back into the business, this can further reduce the taxable income in the short term.
The introduction of the OPC structure aims to foster economic growth and create employment opportunities. By allowing individuals to take on higher business risks without jeopardising personal assets, it encourages entrepreneurship and innovation. In India, well-known instances of one-person businesses are Akhan Diary and Truffle House. These businesses exemplify how individuals can effectively manage and grow their enterprises under this flexible structure.
Pro Tip: When setting up an OPC, choose a trustworthy nominee who understands the business and can step in if needed. This ensures smooth continuity and helps safeguard your interests in unforeseen circumstances.
Non-Profit Company
A Non-Profit Company, also known as Section 8 company, is established under the Companies Act, 2013, for promoting objectives such as commerce, art, science, sports, education, research, social welfare, religion, or charity. All profits or income generated by the company are reinvested in furthering its objectives, and dividends cannot be distributed to members.
The primary aim of a Section 8 company is to provide aid and support to specific groups or the public at large. They operate under a framework that prioritises social development rather than personal profit, often functioning as tax-exempt charities or public service organisations. While they do not engage in credit transactions typical of profit-making businesses, they maintain financial records to ensure transparency regarding income and expenditure.
TATA Foundation, Reliance Foundation, Infosys Foundation, and Reliance Research Institute are perfect examples of non-profit companies in India.
Pro Tip: When considering forming a non-profit company, ensure your objectives are clearly defined and aligned with the regulations set by the Central Government. Additionally, maintaining transparent financial records is essential for building trust with donors and stakeholders.
Joint Venture Company
A Joint Venture Company (JV) is a strategic partnership where two or more parties contribute resources—whether goods, services, or capital—towards a shared commercial objective. This arrangement can take various forms, such as equity-based or contractual joint ventures, and can be structured for long-term collaboration or for the completion of a specific project. The flexibility of JVs allows for tailored arrangements that suit the unique needs and goals of the participating parties.
In India, joint ventures are particularly prevalent in sectors requiring significant capital investment or advanced technical skills, including insurance, asset management, oil and gas, and infrastructure. With the recent liberalisation of the defence sector, there has also been a noticeable increase in defence-related joint ventures.
In India, when a Joint Venture (JV) is classified as an Association of Persons (AOP), it faces significant tax implications, including a higher tax rate of 41% on its net income. This classification means the JV is treated as a separate taxable entity, requiring it to file its own tax returns and adhere to all tax reporting obligations. If the JV is deemed a resident in India, it will also be taxed on its worldwide income. Moreover, all members of the JV are jointly and severally liable for the taxes, which can add to their financial burdens.
A joint venture is a popular corporate structure, particularly for foreign investors looking to enter the Indian market. Through joint ventures, these investors gain access to established distribution channels, financial resources, and valuable contacts from their Indian partners.
- Examples of successful joint ventures in India include:
- Mahindra-Renault Ltd.: This venture involves Mahindra & Mahindra teaming up with the renowned vehicle maker Renault SA from France.
- Tata SIA Airlines Ltd. (branded as Vistara): A joint venture between Tata Sons and Singapore Airlines.
- Tata Starbucks Pvt. Ltd.: A collaboration between Tata Global Beverages and Starbucks Corporation from the USA.
Non-Government Organisation
Non-Governmental Organisations (NGOs) are independent entities established to improve social conditions, particularly for underprivileged communities. They aim to manage various activities that benefit society at large, addressing issues like poverty, education, and environmental conservation. In India, they can take several forms, including Trusts under the Trust Act of 1882, Societies under the Societies Registration Act of 1860, or Section 8 Companies under the Companies Act of 2013.
NGOs also reinvest their profits back into their missions, much like non-profit companies. While NGOs and non-profit companies share this common goal of serving societal causes, they differ in scope and operations. NGOs typically operate on a broader, international scale with a strong focus on advocacy and policy influence. In contrast, non-profit companies are often more community-focused, providing direct services within specific regions or causes. Non-profits may collaborate closely with government bodies to fulfil their objectives, whereas NGOs maintain independence from government control. Both entities are essential in driving social change, but the choice between them depends on the mission's scale and focus.
One of the significant advantages of forming an NGO in India is the tax-exempt status it can receive under Section 12A and 80G of the Income Tax Act. This allows the NGO to be exempt from paying income tax on the funds used for charitable purposes, and donors can claim tax deductions on their contributions. However, to maintain this tax-exempt status, NGOs must comply with strict regulatory requirements, including transparent accounting practices and mandatory filings with tax authorities.
NGOs often focus on eradicating poverty, promoting education, providing healthcare and nutrition, and advocating for human rights. Their members operate purely on a charitable motive, emphasising the need to serve others rather than pursuing self-interest. Despite their significant contributions, NGOs must comply with regulations set by the Government of India to ensure transparency and accountability.
Establishing an NGO comes with several benefits, including tax exemptions and access to government and private funding. There's no minimum capital requirement, and ownership can be easily transferred, allowing for smooth transitions. Furthermore, NGOs can collaborate nationally and internationally, enhancing their impact and reach. Some well-known examples in India include CRY (Child Rights and You), Smile Foundation, and HelpAge India, which demonstrate the vital role NGOs play in fostering social welfare and community development.
Factors to Consider When Choosing a Business Structure
Liability
Start by considering personal liability. If you opt for a sole proprietorship or a general partnership, you’ll assume full personal liability, meaning your personal assets could be at risk if the business encounters debts or legal issues. On the other hand, structures like corporations and limited liability companies (LLCs) provide limited liability protection, safeguarding your personal assets from business liabilities.
Taxation
Next, think about the tax implications. Different structures come with different tax responsibilities. Sole proprietorships and partnerships typically benefit from pass-through taxation, where profits are taxed only at the personal level. Conversely, corporations may face double taxation, which means the company pays corporate taxes, and shareholders also pay taxes on dividends received. If you're considering a non-profit company or a non-governmental organisation (NGO), you could benefit from tax exemptions, allowing you to reinvest funds back into your charitable mission without incurring standard tax liabilities.
Control
Your desire for control over the business is another key factor. As a sole proprietor or a one-person company, you have complete control over decision-making. However, if you choose to form a corporation or partnership, you may need to share control, which requires collaboration and consensus among multiple stakeholders.
Capital Needs
Consider how you plan to raise capital for your business. If you intend to secure funds through public share offerings, a public limited company may be the way to go. In contrast, private limited companies and partnerships often rely on private investments or loans to meet their financial needs.
Regulatory Requirements
Don’t overlook regulatory obligations. Corporations and public limited companies usually face more stringent compliance and reporting requirements, which can add to the cost and complexity of running your business.
Continuity
Consider the continuity of your business. Perpetual succession is an extremely important factor, which means the business can continue operating even if an owner leaves or passes away.
Cost
Evaluate the costs associated with forming and maintaining your chosen structure. Sole proprietorships and partnerships are generally cheaper to establish and run, while bigger business structures can incur higher formation and ongoing maintenance costs.
Legal and Regulatory Environment
Take into account the legal landscape in your area. Different jurisdictions may favour certain business structures over others, impacting your decision based on the regulatory climate and incentives available.
Future Goals
Align your structure with your long-term ambitions. If you plan on expanding your business or going public in the future, selecting a structure that supports these growth plans is necessary.
Industry Norms
Look at what’s common in your industry. Certain sectors may have preferred business structures due to regulatory requirements or operational practices, which can influence your choice.
Scale Your Business with Borzo
When choosing a business structure, it’s crucial to remember that your decision not only defines your legal responsibilities but also influences key aspects such as how you raise capital, manage liability, and plan for future growth. A scalable business structure impacts everything from attracting investors to the extent of your personal liability in case of debts or legal issues.
Don’t hesitate to seek guidance from professionals like lawyers, business experts, or accountants. Their expertise can help ensure that you choose a structure designed for long-term success.
As you establish the right structure and lay a solid foundation for your business, it’s equally important to consider how you’ll manage day-to-day operations, particularly logistics. To complement your business operations and reach a wider audience, consider Borzo, a courier provider in India. Whether your business is just starting or scaling, Borzo ensures fast and reliable deliveries for your customers. Use the promo code ‘BORZOSAVE20’ for a discount on your next order above ₹500. Start using Borzo to connect with more customers today!
Business Structures FAQ
Can I change my business structure later?
Yes, you can change your business structure later, but it involves navigating various legal and financial implications. The process typically requires re-registering your business, updating your articles of association, and notifying the relevant authorities. It's crucial to understand how this change will affect your tax obligations and benefits, as well as the level of personal liability you might incur. For instance, switching from a Sole Proprietorship to a Private Limited Company can help limit your personal liability.
Additionally, operational adjustments may be necessary, including updating contracts and licences, which can impact your relationships with suppliers and customers. Costs can also arise from legal and registration fees, alongside potential tax liabilities. Some structures, like Private Limited Companies, may offer better opportunities for investment and scalability. Consulting with legal and financial professionals is advisable to navigate these changes effectively and ensure a seamless transition.
Which business type has the most liability?
The business type with the most liability is typically the Sole Proprietorship. In this structure, the owner has unlimited personal liability, meaning they are personally responsible for all business debts and obligations. If the business faces financial difficulties or legal issues, the owner's personal assets, such as their home or car, can be at risk to cover those debts.
In contrast, structures like Limited Liability Partnerships (LLPs) and Private Limited Companies offer limited liability protection. This means the personal assets of the owners are generally safeguarded from business debts and legal claims. If you're worried about liability, it might be worth exploring these alternative structures for better protection.
What is the most scalable business structure?
When it comes to scalability, a Private Limited Company is typically considered one of the most scalable business structures. One key advantage is their ability to raise capital by issuing shares, making it easier to attract investors and secure funding for expansion. This potential for investment is complemented by limited liability, which protects shareholders' personal assets, encouraging more individuals to invest without the fear of personal financial loss.
Additionally, a private limited company operates as a separate legal entity from its owners, providing stability and continuity that can support growth, even during ownership changes. With a formal management structure in place, private limited companies can scale operations more efficiently. While they do have more regulatory requirements, this enhances governance and transparency, which can boost credibility and trust, helping to establish valuable partnerships and attract customers.
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