Business Incorporation Primer

Incorporation primer
Image credits: Stuart Miles at FreeDigitalPhotos.net

Getting a startup or business incorporated is a critical decision for any entrepreneur. Starting from the very first question of whether you need or you need not to incorporate (Read: Do You Need To Incorporate Your Startup?) to what legal entity should be chosen for incorporating your startup, everything requires diligent planning. Here's a primer of the various type of legal entities possible and comparison of their basic attributes to help an entrepreneur choose the right legal entity for your startup.

Point of Distinction Sole Proprietor Partnership Limited Liability Partnership Private Limited Company One Person Company
Definition A business enterprise exclusively owned, managed & controlled by single person with all responsibility, authority and risk. A relationship between two or more persons who join to carry on a trade or business with the intention of profit sharing Alternative corporate business vehicle that combines the flexible structure of a partnership with the benefits of limited liability An association of two or more people, whose liability is limited and the transfer of whose shares is limited to its members. Mostly same as private limited, but main exception is that only one person can start it
Governed by No governing law Partnership Act, 1932 The LLP Act, 2003 The Companies Act, 2003 The Companies Act, 2003
Ownership requirements One person Minimum one working partner Minimum two designated partners Minimum two directors Minimum one director
Legal entity status No Separate  Legal Entity No Separate  Legal Entity from its partner(s) Separate Legal Entity from the partners Separate legal entity from its  members and directors Separate legal entity from its  members and director(s)
Documents for incorporation No documentation Partnership Deed Limited liability partnership agreement is the main document Memorandum of Association (MOA) & Articles of Association (AOA) are the main documents Same as private limited company
Liability Proprietor has unlimited liability and is responsible for all the liabilities of the Proprietorship Partners have unlimited liability and is responsible for all the liabilities of the Partnership Partners have limited liability and is liable only to the extent of their contribution to the LLP Shareholders have limited liability and is liable only to the extent of their share capital Director and Nominee Director have limited liability and is liable only to the extent of his/her share capital
Property Ownership Rights Can own property in proprietor’s name Cannot own property in firm’s name Can own property in LLP's Name Can own property in company’s name Can own property in opc’s name
Statutory Compliances Quick and easy to set up Quick and easy to set up in comparison to companies Quick and easy to set up than companies but complex than partnerships Relatively higher formalities & statutory  procedures to comply with Almost same as private limited company
Profits taxed at Personal income tax rates slab of the proprietor Taxed as a firm Taxed as a partnership firm Corporate Tax Rates Corporate Tax Rates
Continuity in Law Exists as long as the owner is alive and desires to continue the business Exists subjected to the partnership agreement A LLP has a Perpetual succession just like a company. A company has perpetual succession until wound up or struck-off An OPC too has perpetual succession until wound up or struck-off
Ease of Setup Easy Easy Medium High High
Time taken for incorporation (appx.) 2-3 Days 1 Week 20 Days 1 Month 1 Month
Fund raising and selling opportunities Negligible Opportunity Limited Opportunity Limited Opportunity Easy to raise and transfer funds Easy to raise and transfer funds
Minimum Alternate Tax Not applicable Not applicable Not applicable Applicable Applicable

 

Gaurav Mittal is an accomplished chartered accountant and brings critical experience in project financing and executing turnkey projects. He has consulted several startups providing valuable financial know-how to entrepreneurs. He writes at his blog at www.taxlaine.in.

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