Legal Entities for Startups

Everything about Start-up seems exciting except the paperwork. However, one of the most important decisions you have to make while starting a business is choosing a legal structure. Each business activity comes up with its own set, or legal regulations and companies should pay proper attention before incorporating the company. In India to start a business, you need to select a particular business entity. To select a specific object of business you need to know plenty of factors such as taxation, owner liability, compliance burden, investment and funding strategies. No one enjoys the documentation process involved in starting their own business.  Your choice will be based partly on the tax consequences and how much risk you’re willing to shoulder. As all entrepreneurs know, these are important things – there is no business without compliances. There is a wide availability of information on the internet, but entrepreneurs have become sharp. They know the risk of missing steps in the Start-up compliance process and documents.

There are five types of business registrations/legal entities for the Start-ups or Entrepreneurs which are as follows –

  • Private Limited Company-

The Ministry of Corporate Affairs governs private Limited Company Registration, Companies Act, 2013 and the Companies Incorporation Rules, 2014. Registration of Private Limited Company is one of the most popular and prevalent legal entity in India which is preferred by the Start-ups. It is best when you are thinking, to grow your Start-ups and ready to raise funds from the investors.

To establish a company as a pvt ltd company registration, minimum of two directors and two shareholders are required. A person can be both a director and a shareholder, while a corporate legal entity can be a shareholder. Private Limited Company has a unique feature like a limited liability in the business to partners or investors, ability to raise equity funds, separate legal entity status. It is the most recommended type of business entity for millions of small and medium-sized business that are owned by the family or professionally managed.

  • Sole Proprietorship-

It’s a real one-person firm where a single person owns, controls and manages the business. It’s a real one-person organization, where you can use your brand name, apply for the payment gateways and you can also be able to issue an invoice to the customers. It’s a best for testing your ideas in the Start-up. As a single founder then on later stage you can easily set up another proper private limited company.

The proprietor has ownership stake, control and they don’t required minimum capital investment. Sole Proprietorship can prevent double taxation of the firm. You have to file the returns and pay taxes only in your name.

  • One Person Company (OPC)-

One Person Company (OPC) in India was introduced through the Companies Act, 2013 to support Start-ups and Entrepreneurs who on their own are capable of starting a venture. One Person company is similar to a private limited company, but with a single shareholder.

Only one person required for the registration of the business. It is a best legal entity when you need to have a control on your business with all equity. It has limited liability in the company. But there are specific restrictions on the OPC, and it is not a good option for the sole entrepreneurs who are looking to create a large entity than a proprietorship.

  • Limited Liability Partnership (LLP)-

A Limited Liability Partnership (LLP) is a partnership in which some or all the partners depending on the jurisdiction have limited liabilities.  In short, Limited Liability Partnership is the mixture of the private limited company and the partnership firm. It gives you both features in one legal entity. It would be best if you had limited liability in business. It cost less for the formation of the company. It also has fewer compliances compared to the Private Limited Company.

  • Partnership Firm-

It’s almost similar to the sole, but it required at least two business partners. You can sign the agreement or a contractor you can open the bank account in the firm name & many more things. Here the compliance requirements are low, and while a firm is a distinct entity from partners, each partner has unlimited liability.  This is the best option available to any Start-up that wanted a low compliances burden.

Conclusion:

You can incorporate a company as according to your fit and suitability. Providing a legal structure to your company goes a long way. It helps to build a sense of trust and reliability in the market. Giving a legal structure paves the way for other legal formalities which are necessary for your company.

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Emily Brantly

About the Author: Emily Brantly

Emily Brantly is a freelance writer and blogger who is passionate about music, movies and books. She enjoys writing reviews and covering stories related to the entertainment industry. Email: [email protected]