Which are different types of entities?

Starting new business can be exiting and at times scary. It
is time to take big decisions that may have resonating impact on success of
your organization and even the course of your life. Arming yourself with the
information you get will help to ensure you make the correct decisions that
will set your business up for success.

Luckily for you we are basically the accounting equivalent
to Superman minus the pecs and the ability to fly! However, just like superman,
we are here to save your day! Assuming your day otherwise would have been
ruined without and explainer for what type of entity impacts what in your
business, here is an explanation below.

What is the entity type?

A business entity type is the structure of your organization.
The type of entity you choose when you found your business determines the
amount of taxes you pay, the cost of compliances and your personal legal
liability should your company come under legal litigation. The entity type also
impacts the share of your profit and the growth potential of your business.
Choosing right entity for your business will set your business up for success.

There are many types of business entities in India, but most
small businesses run five major types of entities: sole proprietorship,
partnership firm, limited liability partnership, one Person Company and private
limited company.

What is Sole Proprietorship?

Sole Proprietorship is the most common and simplest form of
business entity in India, where you are the only owner of your business. As a
sole proprietor of the business you alone take all financial liability and
legal responsibility. Starting a sole proprietor ship is very easy as compared
to the other business entities and does not require formal paperwork or
registration. Sole proprietorship formation happens automatically when you
start selling your goods or services. However if you require a Bank Account in
name of your Sole Proprietorship, you may have to do some paperwork. Profit and
Loss of the Sole Proprietorship are reported under your person Permanent
Account Number (PAN). There is no separate PAN for sole proprietorship.

What is Partnership Firm?

A Partnership Firm is a business entity where two or more
than two persons come together to start a business. Formation of partnership
involves little more paperwork than Sole Proprietorship but overall very easy
to start. A Partnership Firm can be formed by simply entering into a
Partnership Agreement by the partners and applying Income Tax Permanent Account
Number (PAN). As a partnership business all the financial liability and legal
responsibility is divided amongst the partners. Though it is not mandatory to
register a Partnership Firm with the Registrar of Firms, it is desirable to
register. Application for registration of partnership should be made within one
year of its formation. The biggest disadvantage of Partnership is that the
partners have unlimited liability and all the partners are jointly and
severally liable for the liabilities of partnership firm.

What is Limited Liability

Limited Liability Partnership is an alternative business
form that gives benefits of limited liability of a company and flexibility of
partnership firm at low compliance costs. The biggest advantage of Limited
Liability Partnership is that no partner is liable on account of independent or
un-authorised actions of other partners, thus individual partners are shielded
from joint liability created by other partner’s wrongful business decisions or
misconduct. Since LLP contains elements of both Partnership Firm and Company,
it is called hybrid between company and partnership.

What is Private Limited Company?

Private Limited Company is a company which is privately held
for small businesses. The liability of the members (shareholders) of a Private
Limited Company is limited to the amount of shares respectively held by them.
There can be minimum 2 and maximum 200 members in a Private Limited Company.
Besides members, the Private Limited Company must have minimum 2 directors. The
shareholders and directors can be the same persons. All the decisions of
Private Limited Company are taken by the Directors and Shareholders in meetings
of Directors and Shareholders respectively.

Picking the right type of entity

Choosing right type of entity for your business will set you
up for success by giving you the right amount of room to grow while mitigating
personal risk.  If you need help with the
financial side of your small business, Ofin is the perfect partner for you. We
can provide you guidance throughout each phase of the life of your business
from founding your business to your millionth sale. Contact us to know more
about the services we provide. 

1 Comment

  • by Bharat Jethani
    Posted November 24, 2020 6:45 am 0Likes

    Clear way of understanding for startups to form the companies.

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