It is possible that you start your business as a side hustle. You can perform early ideation and customer validation without the hassle of company formation.
But when you are fully committed, you have to incorporate a company. This allows you to develop trust with bigger clients, follow appropriate law, raise investments, and in general to avail commercial services.
Six types of business structures in India
Sole proprietorship
Sole proprietorships have one owner who makes all of the business decisions, and is personally liable for all the liabilities. Some typical examples of sole proprietorships include a local grocery store, a local clothes store, an artist, freelance writer, IT consultant, freelance graphic designer, etc. who operate on a solo basis.
One Person Company
It is a company incorporated by a single person. Just like a sole proprietorship, a One Person Company (OPC) also has just one shareholder. But unlike a sole proprietorship, in a One Person Company, the owner has “limited liability” and the burden of outstanding debts does not fall on the owner personally (this means that business debts do not require the owner to sell their own private assets in case of unfortunate circumstances). A One Person Company is treated as a separate entity, while in sole proprietorship, the person and the company are the same entity.
Partnership Firm
It is formed when two or more people agree to share profits of a business. Partnership Firm allows both partners to invest in a business with 100% responsibility for any business debts. They don’t require a separate legal identity separate from its members. It requires minimal paperwork and legal documents to establish. The partners of a business typically divide the profits among themselves. CA Firms and Law firms are examples of Partnership firms.
Limited Liability Partnership
Limited liability Partnership (LLP), is defined as a separate legal entity and may have an unlimited amount of shareholders and is most common form of business structure for small businesses. Here, partners share liabilities to the amount of money they invest. Examples of limited liability companies include start-ups, Law Firms, Accounting Firms, Ad agencies, etc.
Note that LLP does not have any “company shares” so they cannot raise money by selling “equity”. LLPs can raise money either by bringing in a new partner who brings their own money, or via debt raised via banks or other institutions.
Private Limited Company
A private limited company is a company which is privately held for small businesses. The liability of the members is limited to the amount of shares respectively held by them. Shares of Private Limited Company cannot be publicly traded. This is the most typical form of startup business. Minimum two directors are needed to incorporate a private limited company.
An important distinction between a private limited company and and LLP is that Pvt. Ltd. companies are governed by the Companies Act of India, whereas LLPs are governed by specific partnership agreements between the partners. That is why, private limited companies have an onus to file annual compliances with the MCA or the Registrar of Companies (RoC).
Public Limited Company
It is a separate legal entity which offers shares to be traded, resulting in raising of capital from public. It designates a company that has offered shares of stock to the general public. The buyers of those shares have limited liability. Example: Bharat Petroleum Corporation Ltd, Coal India Ltd, etc.
Summary
If you have read carefully, there are actually only 3 types of company structures with minor variations: (i) Proprietorship, (ii) Partnership, and (iii) Private/Public Limited
Proprietorship companies have a single owner. They cannot bring in new partners or raise money by selling “equity”.
Partnership firms do not have any shares. They cannot raise capital via selling equity. They are governed internally by a partnership agreement, thus having lower compliance burden.
Private/Public Limited companies can raise capital by selling equity. They have a higher compliance burden, but that also lends them more credibility.
Steps for Incorporation of Company in India
Incorporating a company in India has become super easy. I remember I registered Turnip Innovations as a Private Limited company in July 2018. The process was completely online and took about 2-4 weeks.
I took the services of an online e-filing company. But you can also take help from your local chartered accountants or company secretaries.
In theory it is possible to register on your own via the Ministry of Corporate Affairs (MCA) website. But I will strongly advice against it. There are several forms and formalities that is best done by experts. You will not only save your time but also reduce the likelihood of errors and rejection of application.
You should carefully consider the name of your company before submitting your application. The first company name I selected was rejected as it was sounding similar to a global corporation. You should ideally do a company name search on the MCA website and a trademark search.
All the more reasons to avail specialist services for company incorporation!
Here are the approximate steps that you will follow:
- Step 1: Obtaining a Digital Signature Certificate (DSC), which you can use to verify your identity when signing documents electronically during business operations.
- Step 2: Submitting an eForm SPICe application for a Director Identification Number (DIN).
- Step 3: Complete Form SPICE INC-32 and RUN (Reserve Unique Name) to request a new name for the business.
- Step 4: Drafting the Memorandum of Association (MoA) and the Articles of Association (AoA)
- Step 5: Printing, Sealing, and Checking the Memo and the Articles
- Step 6: You can apply for a PAN and TAN using the same SPICe form by using fields 49A and 49B, respectively.
Annual compliances
Once your company is incorporated, you will likely also have to hire a CA firm to take care of your finances, GST and other Tax formalities, and mandatory annual company compliances.
All these are extra effort that startup founders need to pay attention to in addition to developing product and driving sales!
Even if you avail services for incorporating the company and doing annual compliances, you should study the documents carefully yourself. It is possible there are some mistakes done by your service providers. Eventually, you are responsible for your business!
DPIIT Certificate of Startup Recognition
In order to enjoy tax incentives, simpler compliance, IPR-related activities, and other benefits under the Startup India initiative, qualifying businesses can apply to have the Department for Promotion of Industry and Internal Trade (DPIIT) recognise them as startups. To apply for ‘Recognition by DPIIT, you can process your application through the Start-up India Recognition portal.
Benefits for DPIIT Recognised Startups
The advantages of registering as a startup with the Department for Promotion of Internal Trade and Industrial Policy may be obvious to all of us (DPIIT). The benefits stated below present a good perspective of the government’s support for the entrepreneurial ecosystem, which fosters job creation and innovation.
The startups can avail the following benefits after obtaining the DPIIT Certificate of Recognition for Startups:
- Self Certification
- Start-Up Patent Application
- Easy Public Procurement Norms
- Tax Exemptions
- Easy winding up of Company