One of the most critical decisions in starting a business in India is choosing the right legal structure for the business. This choice has lasting implications for taxation, liability, ownership, and compliance requirements. This article outlines the most common types of business structures in India, their legal references and a brief overview of the incorporation process.
Sole Proprietorship
What is a sole proprietorship?
A sole proprietorship is the simplest form of business entity in India and is not governed by any specific legislation. It involves a single individual owning and managing the business. There is no legal distinction between the owner and the business, and as such, the owner is personally liable for all business-related obligations. In other words, all the obligations of the business are deemed to be the obligations of the individual who owns the sole proprietorship.
No need to incorporate a sole proprietorship
While there is no need to incorporate a sole proprietorship under any legislation, the business is nonetheless required to obtain registrations under various other legislations which are mandatory to legally carry out any business in India. For instance, a Permanent Account Number (PAN) in the name of the proprietor is required under the Income Tax Act, 1961, registration under the Central Goods and Services Tax Act, 2017 is required if the annual turnover exceeds the prescribed threshold under the said enactment, and depending upon the total number of employees/workers, securing local licenses under the state specific Shops and Establishments Act may also be required. Bank account setup in the proprietor’s name is also necessary for accounting purposes. Since it lacks recognition as a separate legal entity, raising equity capital through this structure is not feasible.
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Partnership Firm
Partnership Firm explained
A partnership firm is governed by the Indian Partnership Act, 1932. It is formed when two or more individuals come together to carry on a business and share its profits and losses. Although registration is optional, it is highly advisable to register a partnership firm with the Registrar given that an unregistered firm cannot enforce its contractual rights in a court of law as per Section 69 of the said enactment.
Registration of a partnership firm
To register a partnership firm, partners must fill the online registration form and draft and execute a Partnership Deed outlining the terms of the partnership. The deed should be notarized and be registered with the Registrar of Firms. Additionally, the firm must obtain a PAN and, if applicable, GST registration. This structure provides simplicity and flexibility but does not shield partners from unlimited personal liability.
Other benefits of registering a partnership firm
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- A registered partnership firm can file suits against the third party in its own name.
- As opposed to other legal structures, a registered partnership firm is not required to do mandatory periodic auditing unless a turnover threshold is met.
- A registered partnership firm is not required to convene board meetings and is neither required to make periodic filing with any authority.
- Registration of partnership may get completed as soon as within a week if all the required documentation as stated above is correctly in place.
- Banks and other financial institutions are more inclined to deal with registered firms because of their genuineness and authenticity.
- A registered partnership firm can be easily converted into any other legal form such as LLP or a private limited company depending on the needs of the business.
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Limited Liability Partnership (LLP)
Limited Liability Partnership explained
Introduced through the Limited Liability Partnership Act, 2008, a Limited Liability Partnership (“LLP”) is a hybrid entity combining the features of a partnership and a company. It provides limited liability to its partners and has a separate legal identity, making it an attractive option for professionals and small businesses. The partners of an LLP are termed as designated partners and are liable only to the extent of capital contribution made by them. An LLP can be formed by a minimum of two designated partners.
Incorporation process of an LLP is fully digital. An application to incorporate an LLP can be made on the website of Ministry of Corporate Affairs, Government of India. The incorporation process can be completed in not more than fifteen days provided all the necessary documents as mentioned below are submitted.
List of documents/information required
Following documents are required for incorporation of LLP:
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- Passport size photographs of all the designated partners;
- Copy of passport and PAN Card;
- If the partners do not already have digital signatures, a copy of DSC Form duly signed with passport sized photograph affixed; and
- Latest bank statements or any utility bill.
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Process of incorporation of LLP
The incorporation process begins with name reservation through the RUN-LLP (Reserve Unique Name) service on the Ministry of Corporate Affairs (MCA) portal. Thereafter, the Form FiLLiP must be filed with details of designated partners, along with Digital Signature Certificates (DSC) and Director Identification Numbers (DIN). Once incorporated, the LLP Agreement, defining rights and duties of partners, must be executed and filed with the Registrar using Form 3. The LLP is then required to obtain PAN, TAN, and GST registration as needed.
Private Limited Company (Pvt Ltd)
Private Limited Company explained
A private limited company is one of the most popular legal structures among startups and growing businesses. Governed by the Companies Act, 2013, this structure allows for limited liability, separate legal identity, and ease in raising equity capital and restriction with regard to transfer of shares of the company to a third party. No minimum capital is required for incorporating a private limited company.
List of documents required
Following document from all the subscribers/directors are required for incorporation of a private limited company:
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- Self-attested copy of PAN Card as ID proof;
- Self attested copy of Aadhar Card;
- Digital Signature; and
- Passport Size Photograph
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Process of incorporation of a private limited company
The incorporation process is centralized through the SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) form available on the MCA portal. The procedure includes name reservation (Part A of SPICe+), followed by submission of incorporation documents (Part B), including the Memorandum of Association (e-MOA) and Articles of Association (e-AOA), identity and address proofs of directors, and declaration forms (DIR-2 and INC-9). The AGILE-PRO form also facilitates registrations for shops and establishments registration, GST, EPFO, and ESIC. Upon successful verification, a Certificate of Incorporation (COI) along with PAN and TAN is issued.
One Person Company (OPC)
The Companies Act, 2013 introduced the concept of One Person Company (OPC) under Section 2(62), enabling a single entrepreneur to benefit from a corporate structure while retaining complete control. The OPC is a separate legal entity and offers limited liability to the sole shareholder. Under OPC, the founder can act as the sole shareholder and director of the Company.
The incorporation process mirrors that of a private limited company through the SPICe+ form. The key difference is that only one person acts as both the shareholder and director, while also appointing a nominee in case of death or incapacity. Conversion to a private limited company is mandatory if the OPC’s paid-up capital exceeds INR 50 lakhs or its turnover surpasses INR 2 crores, as per Rule 6 of the Companies (Incorporation) Rules, 2014.
Public Limited Company
A public limited company, governed by Section 2(71) of the Companies Act, 2013, is suitable for large businesses intending to raise funds from the public through equity shares. It offers limited liability, a separate legal entity, and the ability to list on stock exchanges. However, it comes with increased regulatory and compliance obligations, especially if listed, in accordance with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Incorporation follows the same SPICe+ route as for private companies, with the added requirement of having at least seven shareholders and three directors. If the company wishes to go public, it must comply with SEBI guidelines and submit an offer document to the Securities and Exchange Board of India and relevant stock exchanges.
Conclusion
Selecting the appropriate business structure is a foundational legal decision that influences every aspect of business operations. From tax efficiency to ease of compliance, the right entity can enable entrepreneurs to optimize growth while minimizing risk. With the Ministry of Corporate Affairs simplifying many aspects of registration through integrated portals like SPICe+, it has never been easier to incorporate a business in India. However, each structure brings its own set of legal obligations, and professional guidance is essential to navigate the incorporation and compliance landscape effectively.
For tailored legal support on incorporating your business in India, including drafting key corporate agreements and ensuring regulatory compliance, get in touch with our experienced corporate law team.
