Here we will discuss about different business entity types in India. There are two basic types of business entities, viz. a proprietorship of an individual and a partnership between two or more people.
For a Proprietory Firm, registration is not compulsory and the business liability is fully of the proprietor, meaning the owner is responsible for any liabilities of business. In case of a Partnership Firm, the liability, and the profit, is shared between partners. When two or more people agree to conduct a business as per a partnership deed, they are called partners in that firm. The firms, whether proprietory or partnership, do not have equity and are not limited by shares, meaning there are no transferable shares. Hence, these type of firms sometimes find difficult to raise capital and grow because of their inherent basic structure. However, firms are simple entities to operate with very few hassles.
If one wants to run an advanced structure of business, there are two types of entities viz. Private Limited and Public Limited companies. As the names signify, these are private or public, depending on shareholding and both have limited liability as regards business of company. Like partnerships, when people get associated together by a Memorandum of Association to run business, they form a company. When the capital share holding is held privately, it is private limited and when it is held by public example traded in stock exchanges, it is public company. Companies are registered with Registrar of Companies and Firms are registered with Registrar of Firms and Societies.
This is a simplistic explanation for purpose of understanding although in actual there are well defined differences.
Partnership firms are governed by Partnership Act while Companies are governed by Companies Act. Some of the other laws that are commonly involved are, Indian Contract Act, Income Tax Act and other tax acts, local Shops and Establishments Act, etc. There is also a special type of Company called section 25 Company, which is in practice not actually a business entity or rather, it is a not for profit company. It is mostly used for non profit activities like charity, etc.
As we move into twenty first century with global business and e-commerce, it is imperative that more types of business entities in India are available. Thus, a few years ago, new concept of Limited Liability Partnership or LLP was introduced. It is a significent improvement over the archaic and rigid Partnerships. The procedure and compliance for LLP is also available Online which makes easy for common person to understand and follow.
Similarly, in a major much awaited amendment in Companies Act, there is now provision for One Person Company or OPC which can act as an alternative to traditional Proprietorship.
These new options enable ease of doing business in India and forming necessary business relationships and creating business entities as per requirements. Thus there is a plethora of options available for various business entity types in India.