The organizational structure you choose will determine the taxes you have to pay, the compliance measures you need to follow and the eligibility criteria you need to meet. Hence, one of the most vital decisions an entrepreneur can make is deciding what type of business registration to do in India. Moreover, the Indian legal system allows various types of companies to exist under different Types of company registration. In this blog, we will take a look at the different types of business entities and types of company registration.
Different Types of Companies
As per the Companies Act, 2013 here’s a look at the different classifications and types of business entities found in India;
|Criteria||Types of Companies|
|Basis of size||Small company & Other company|
|Basis of No. of members||One person/ Private/ Public Companies|
|Basis of control||Holding/ Subsidiary/ Associate companies|
|Basis of liability||Limited by Share/ Guarantee, Unlimited|
|Basis of access to capital||Listed/ Un-listed companies|
Types of Company Registration
Company registration is the primary process by which business owners establish or incorporate their company. Since there are several types of companies in India, entrepreneurs have to ensure they choose a business type that suits their operations. In India, the Companies Act, 2013 lays down guidelines for different types of company registration. Hence, here’s a quick look at the Business type list for India.
- Private Limited Company
- Public Limited Company
- Limited Liability Partnership
- One Person Company
- Sole Proprietorship
- Section 8 Company
Now we will take a look at the different types of companies and their registration process in detail.
Private Limited Company
Private Limited Companies are suitable for small businesses that require registration as a private entity. In this type of company, a group of shareholders distributes the liability amongst themselves to help protect their personal assets. The total capital of such business types is the total of all the shares held by each member of the company. Also, the personal and business assets of the members are considered separate, allowing for better protection and security. The shares of such a company cannot be publicly traded or transferred. As per the Companies Act, 2013 to be eligible for this type of business registration, the private limited company must meet the following criteria;
- Minimum of two and maximum of fifteen directors
- At least one of the directors must be an Indian resident
- Minimum of two and maximum of 200 shareholders or members
- Additionally, an authorized capital fee amounting to at least INR 1 Lakh
- Must have a registered office address within India
Types of Private Companies
- Limited by Shares: In such private limited companies, the liability of the members is determined by the memorandum to amount unpaid on shares allotted to them.
- Limited By Guarantee: In this case, the liability of members is limited by the memorandum of the amount of members will contribute or guarantees to pay if the company goes bankrupt.
- Unlimited: Moreover, such types of business entities do not have any limit on the liability of its members. As a result, if the company assets fail to pay off creditors, members will have to use their private assets to clear debts, increasing the risk factor involved.
Public Limited Company
A Public Limited Company is one whose shares may be purchased by members of the general public. In such business entities, there is no limit on the number of shares that can be sold or traded. Since the shares of the company are listed on the Stock Exchange, they can be traded freely, making the shareholders part-owners of the company. Such companies need to obtain a Certificate of Registration from the RoC before commencing business operations. Further, as per the Companies Act, 2013 to be eligible for this type of business registration, the public limited company must meet the following criteria;
- Minimum of three directors
- At least one of the Directors must be an Indian resident
- Minimum of seven shareholders with no cap on the maximum limit
- Moreover, an authorised capital fee amounting to at least INR 5 Lakhs
- Further, must have a registered office address within India
In such business entities, the handling of the operations is handled by partners, who have agreed to their role and share in profits. Hence, the functions, duties, powers, and number of shares held are all clearly defined in a verbal contract known as the Partnership Deed. Additionally, these businesses fall under the purview of the Indian Partnership Act, 1932. Partnership firms can function with or without a license as long as they have a valid and registered Partnership Deed. However, most partnerships do register themselves as that gives them additional rights. Moreover, to be eligible for this type of firm registration, the partnership must meet the following criteria;
- Minimum of two and maximum of fewer than ten partners
- Moreover, must have a registered office address within India
- Additionally, must have a registered Partnership Deed signed by all partners
Limited Liability Partnership
Popularly called an LLP, Limited Liability Partnerships are also a new type of company in India. Moreover, it enjoys a separate legal status, helping distinguish between personal and business assets, and granting the entrepreneurs limited liability protection. In such firm types, the liability of each partner depends on the number of share capital, helping provide more protection than a Sole Proprietorship. Moreover, to be eligible for this type of business registration, the LLP must meet the following criteria;
- Minimum authorized capital amounting to INR 1 Lakh
- At least one of the Designated Partners must be an Indian resident
- Minimum of two partners and no cap on the maximum number
- At least one individual partner, if the rest are corporate bodies
- No required for shared capital since each partner must have an agreed contribution
One Person Company
The newest entry into the different types of company registration allowed in India, OPCs are great for small businesses. Additionally, it became a part of the Companies Act 2013, to help entrepreneurs who wish to run a business single-handedly. Since such a firm type has separate legal status, entrepreneurs get the benefit of liability protection without having to partner with anyone else. Furthermore, since they involve only one individual, this type of firm registration is easy to incorporate and regulate. Moreover, this essentially serves as a combination of the Sole-Proprietorship and Company model of business entities. Additionally, to be eligible for this type of firm registration, the One Person Company must meet the following criteria;
- Minimum authorized capital amounting to at least INR 1 Lakh.
- Further, an individual must be a natural Indian Citizen and resident
- The promoter must appoint a nominee during the incorporation
- Additionally, Financial businesses cannot incorporate as an OPC.
- Further, should convert to a Private Limited Company if paid-up capital exceeds INR 50 lakhs or turnover exceeds INR 2 crores.
This is another type of business entity wherein a single individual handles the running of the business. However, in this firm type, the company and the owner are considered as a single entity, making them solely responsible for profits and losses. Moreover, since the registration bears the name of the owners, tax filings and accounting reports will also bear the name of the owner, leading to unlimited business liability. As a result, this type of company does not have a separate business registration process.
Section 8 Company
Commonly called a Non-Profit Organization, such companies mainly work for charitable purposes. Moreover, it involves in promoting arts, science, literature, education, caring for the needy, and protecting the environment. Also, all the profits generated by such types of companies are used to achieve these objectives, and the members do not take dividends for themselves. To be eligible for this type of firm registration, the Section-8 Company must meet the following criteria;
- Minimum of two shareholders
- Minimum of two Directors and they can be shareholders as well
- At least one of the Directors must be an Indian resident
- No minimum capital requirement
- Moreover, must have a registered office address in India
What are the benefits of company incorporation?
1. Corporate Veil
Incorporation effectively creates a protective sphere of limited liability known as Corporate Veil, which protects the interest of the company’s shareholders and directors. Thus, incorporated businesses can digest many risks that help in the growth of the company and business without exposing owners, directors, and shareholders to many financial liabilities outside of their original investments in the company.
2. Corporate personality
The Incorporation of the company helps in setting up a legal entity of the firm irrespective and different from the legal entity of the stockholder, owners of the firm, which is different from the partnership firms.
3. Limited Liabilities
According to the Company Act Section 34(2), if a company is shut down, members are solely responsible for the liabilities but if the company is incorporated the members are legally bound to contribute with some nominal share held by the members and few other liabilities. It is one of the most important reasons why companies get incorporated.
4. Perpetual Succession
It is the continuation of the business, organization despite the death of any owner, bankruptcy, insanity, transfer of shares to a new entity, etc. Thus, it provides immunity to the company. The company will work until the company gets shut down.
5. Transferable Shares
According to Companies Act Section 82, the shares and other interest of the members are transferable and is movable property. However, this provides liquidity to the investors and generates investment of funds in shares. Members can sell shares anytime either in the stock market or in an open market.
6. Separate Property
An incorporated company is denoted as a Legal entity, and it can hold its assets and funds. The property of the company is treated as separate property rather than the shareholder’s property. The company is treated as a real person who manages, controls and disposes of the property. Under the law, if the shareholders use the company’s property for their personal use, they are liable to be held for criminal misappropriation of the company’s fund.
7. Capacity to sue
An incorporated company is a legal entity and has the right to sue other people, and other people and companies can also sue it. However, some of the shareholders, such as Managing directors, some board members are not liable to be sued in the name of the company.
8. Flexibility and Autonomy
An incorporated company has autonomy and independence to form their own rules and policies and how they can implement these policies. However, these are subjected to Equity rules, General principles of law and good conscience.
9. Enhances Business’ Credibility
Businesses which are incorporated goes beyond finances. Incorporated businesses are perceived as more stable than unincorporated businesses. In short, having “Inc.” or “ltd” after the company name brings stability permanence, credibility.
10. Other considerations
Tax benefits are one of the significant reasons to get businesses incorporated. A corporation is taxed on its profit which is reduced by qualifying business expenses. An incorporated company may also deduct salaries, health benefits, etc. to meet their financial goals. Taxation of the corporation is a bit complex and has their advantages and disadvantages.