The First step in Starting a new business is to decide on the right legal structure. Whether you’re just starting or your business is growing, it’s crucial to understand the options. The legal structure of a business determines your tax rates, management, and paperwork requirements, fundraising abilities, and more. Sole proprietorships and partnerships are relatively easy to start, but they lack liability protection. Corporations may take more work to start, but they offer liability protection and, in some cases more favorable tax rates. This article is for business owners looking to learn more about the different small business legal structures. But, the clarity about the vision and scale of the business makes this choice easier. You must know the level of control you want, the level of compliance you will be able to follow, the amount of investment you will require, and more.
Particulars | Sole Proprietorship | One Person company | Partnership Firm | Limited Liability partnership | Private limited company |
Meaning
| A Sole proprietorship is a business that is owned and controlled by a single individual. There is no difference between the owner and the entity. |
OPC is a company incorporated by a single person. |
A Partnership Firm is an entity where two of more partners form business and divide the profits in agreed ratio. |
An LLP is an entity that has the features of both a company as well as a partnership firm. |
A private Limited Company is an entity privately owned shareholders of members of the company. |
Law Applicable & Registration Under | Not mandatory | Mandatory as per Companies Act,2013 | Optional under Partnership Act,1932 | Mandatory as per LLP Act,2008 | Mandatory as per Companies Act,2013 |
Legal Status of Entity | Not recognized as a separate legal entity | It is a separate legal entity | Not recognized as a separate legal entity | Separate legal entity | Separate legal entity
|
Liability of members | Unlimited-Proprietor can be held personally liable for the liabilities of the firm | Limited-Director not personally liable for the liabilities of the company |
Unlimited |
Limited |
Limited |
Number of Members |
1 member | 1 director & 1 nominee director | Minimum-2 partners Maximum-20 partners | Minimum-2 partners Maximum –Unlimited | Minium-2 directors & shareholders Maximum-200 shareholders |
Compliance | Very Low | Moderate | Low | Moderate | High |
Existence | Dependent on the proprietor | Not dependent on director | Dependent on partners -partnership can be dissolved on death of a partner | Not dependent on partners-can be dissolved voluntarily or by order of law |
Not dependent on shareholders |
Transfer of Ownership | Not transferable | Ownership can be transferred | Not transferable | Can be transferred | Can be transferred |
Annual Costs | Low | Moderate | Low | Moderate | High |