Simplest business structures with limited documentation.
Sole proprietorships are the simplest popular legal structure of start ups in India. The sole owner is the founder and the entrepreneur of the business. This kind of business structure requires minimum fuss (no accounts audition, no submission of financial information to the ROC and no compulsory record rules.
There are no provisions for profit sharing; all that you earn belongs to you.
The biggest disadvantage of this type of business is that there is no legal distinction between you and your start up, In case of bankruptcy, creditors can seize all your worldly possessions. Investors are also generally unwilling to invest in this kind of venture.
In a partnership firm, there are two or more owners with equal or varying degrees of responsibility involved. You will have a lot more resources and capital at your disposal if you opt for this mode. Responsibility is also shared so there is no extra liability burdened on an individual.
However, if one business partner goes bankrupt, the creditors can seize the shares of the other partners. Mutual trust and understanding between partners is essential in this case. There are two kinds of partnerships in India; Partnership and Limited Liability Partnership.
A partnership firm can have as many as 10 partners but it does not have a separate legal identity. In the event of a bankruptcy, creditors can obtain money by selling of personal assets of the partners.
The LLP (Limited Liability Partnership Act) came in force in 2008 and it gave partnership firms a separate legal identity. The liability of a particular partner will vary according to his/her statement in the LLP Agreement. This form of partnership enjoys international recognition, low set up costs and minimum documentation requirements.
Public and Private Limited Companies
A Private Limited Company (PLC) should be duly incorporated with ROC (Registrar of Companies). All PLC’S require a minimum startup capital of INR 100,000. A PLC can be structured by more than 2 and less than 50 members/shareholders. The liability of a shareholder is proportional to his subscribed shares. A private Limited Company has a separate legal identity so its directors enjoy a certain degree of insulation to bankruptcy damages.
However, PLCs are required to maintain perfect paperwork.
The Company Act, 1956 contains the rules and regulations governing a Public Limited Company. There is no restriction on the number of shareholders but the minimum amount of paid up capital required is INR 500,000. Shares of a Public Limited Company can be traded freely and the shareholders enjoy restricted liability. However, the management has unlimited liability in most cases.