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Business Entities in India

There are several types of business entity defined in the legal systems of different countries. These include corporations, cooperatives, sole traders, partnerships, Limited Liability Company and other specialized types of organization. The choice of entity depends on circumstance of each case. Therefore, generally where there is no requirement of raising of finances through a public issue and the ownership is intended to be closely held by limited number of persons, Private Limited Company is the best choice.

Also the benefits of a private limited company includes access to sources of far greater finance, easy to borrow money, separate existence from its owner and continuity of existence irrespective of change of ownership.

Types of Business Entities in India

There are many business entities in India:
  • Private Limited Company
  • Public Limited Company
  • Unlimited Company
  • Limited Liability Partnership
  • Partnership
  • Sole Proprietorship
  • Liaison Office/Representative Office
  • Project Office
  • Branch Office
  • Joint Venture Company

Sole Proprietorship
This is the most common type of business entity.

Sole proprietorship means that there is a sole owner who funds and operates the business. It is the simplest form of business entities - relatively formality free, no rules about records you are required to keep, no requirement of having your accounts audited and no requirement of filing financial information to the registrar of companies. In short, there is no legal distinction between you and your business.

Partnership is a type of business entity, where you partner with other individuals to own and run the business. On a higher level, they can be viewed as collection of sole proprietors. By partnering with other individuals, you get access to a bigger pool of capital, skills and other resources to fund and run your business. All partners contribute capital equally, share profits and losses regularly and have an equal say in business decisions.

Pvt. / Public Ltd.
This is the costliest form of incorporation and involves a big amount of legal procedure. Most companies expecting a funding will form a Pvt. Ltd. company. Although the initial incorporation involves lot of time and effort, this kind of firms do have a very structured form. The company is very different entity from the shareholders in this form of business. Therefore, the liability of the shareholders is limited. So, if you hold a share of 10% in the company, you are responsible only to that part of loss/profit. It is very easy to add new people or remove old people in this form of organization.

Limited Liability Company:
This type of business entity is the most common and preferred type while starting a company. A limited liability company is a separate legal entity from its founders, shareholders and mangers. The liability of the shareholders is limited to the paid-unpaid capital that is issued as part of the company. Thus, in case of bankruptcy, personal assets of the founders/mangers are not affected. A limited liability company needs to keep record of accounts, audit their records and file an annual report on return with the registrar of companies.

Liaison Office
The basic role of liaison office is to promote the business of the foreign company in India and is allowed to carry on limited operations only. Setting up of a Liaison Office requires prior approval of the Reserve Bank of India. A Liaison Office is not allowed to carry out any business activity and therefore would not be expected to earn any taxable profits. Therefore, the activities of a foreign company through its liaison office in India does not become taxable in India, provided crucial board decisions are not made in India.

Project Office
A Foreign Company can set up temporary project/site offices in India to carry out specific projects and for carrying out activities relating to that project only. The Government of India has granted universal permission to foreign entities to establish project offices subject to specified conditions. On the completion of the Project, the Project office may send outside India the surplus of the project, after meeting the tax liabilities.

Branch Office
Branch office of a foreign company in India in comparison to a liaison office is allowed to carry out more activities and is subject to Transfer Pricing regulations with respect to transactions with the parent company and other associated enterprises outside India. Branch Offices established with the approval of RBI may remit outside India profit of the branch, net of applicable taxes and subject to the RBI guidelines.