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Three thoughts that come to our mind immediately when we decide to start a business are how to generate the Capital for the business, the nature of the Company to Register, and what business to choose. These are the top three questions that come to our minds when we decide to start our business.
Once we generate the Capital for the business, the next action would be Company Registration. Here comes the confusion as to what is the type of entity that suits our business and to know the answer. First we need to know the types of entities. In this article, we are going to see the six basic types of entities.
Six Types of Companies
- Proprietorship
- Partnership
- Limited Liability Partnership (LLP)
- Private Limited Company (Pvt Ltd)
- One Person Company (OPC)
- Public Limited Company (PLC)
Apart from these types, there are many other types of entities available, but only these are the common types of entities that suit most businesses. We will see each one in detail.
1. Proprietorship Firm
- Proprietorship is a famous and ancient type of entity. This type of business entity is managed and owned by a single owner. He is the deciding authority and the sole investor. This type of entity is easy to form and simple to operate. There is no significant legal complication to start the proprietorship firm, which is more suitable for small-scale businesses.
- The proprietor’s liability is unlimited, so such firms are suitable for businesses with few clients. No regulation governs a proprietorship firm, so MSME/Udyam registration is more than enough to show the existence of a Proprietorship firm.
2. Partnership Firm
- A partnership firm is when two or more people join together to do a small type of business. The Law that governs the Partnership firm is the Indian Partnership Act, 1932. This type of entity is formed by way of signing a partnership deed. The partnership deed is the charter of the partnership firm, which speaks about the object of the partnership firm, rights, and duties of the partners.
- This is most suitable for two or more people who want to start a small-scale business entity. As per Indian Partnership Act, a partnership firm can either be registered or unregistered. So, there is no big legal complication to forming a partnership firm. Just signing the partnership agreement informant of two witnesses, the firm comes into existence. The liability of the partners in a partnership firm is unlimited.
3. Private Limited Company (Pvt Ltd)
- This is the most popular form of business entity. A private limited company is an entity privately held and suitable for small businesses. This type of Company limits the liability of the Company’s shareholder liability to their share. To form a Private Limited Company, the following requirements should be observed: a minimum of two shareholders, one lakh paid-up share capital and office space in India.
- Even an NRI or a foreign national can be a private limited company shareholder. The act that governs a Private Limited Company in the Indian Companies Act, 2013. Nowadays, it is easy to raise funds using the Private Limited Company by having new angel investors into one’s business.
4. Limited Liability Partnership (LLP)
- This is a hybrid child. LLP is a more suitable form of a startup as such incorporates the benefits of both Partnership firm and Private Limited Company. The governing act is the Limited Liability Partnership Act, 2008, which was enacted to minimize compliance and after registration formalities.
- Forming a Limited Liability partnership requires a minimum of two partners who shall be individuals or entities, and out of that, one partner should be an Indian resident. Like Private Limited, there is no requirement of minimum capital contribution. Registrar of Companies (ROC) is the appropriate authority for registering the LLP.
5. One Person Company (OPC)
- This is a newly born child in the Company’s family. In the year 2013, the Companies Act was amended so that even a single shareholder can form a Private Limited Company, and it is called One Person Company Private Limited. In simple words, a One Person Company can be formed with only one shareholder further, and there is no minimum requirement of paid-up share capital.
- Before 2013, a single person would not incorporate as a Company. But the only barrier is such as the turnover of the Company cannot exceed twenty crores, and if so, the Company has to be changed into a Private Limited company.
6. Public Limited Company (PLC)
- This type of entity is most suitable for Large Scale Businesses where the shares can be circulated to the general public through the stock exchange. The Indian Companies Act, 2013 also govern this type of entity.
- It requires a minimum of three directors, seven shareholders with a minimum paid-up capital of five lakhs, and office space in India. As public money is involved, the rules and the regulations of a PLC are more rigid and strict as compared to the Private Limited Company.
Learn more about the requirements and required conditions for company registration in Bangalore.
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