How to choose the right legal entity For startups
In India when you starting any business you are always confused on one thing - legal registration or documentation. Several entrepreneurs want to register their company as they start up, but have limited knowledge on the same and are unaware of the different kinds of business registrations or legal entities present in India.
There are 5 types of legal entity or you can say forms of the business registrations in India
1. Sole Proprietorship Firm -
In short, this is a simple one person firm where you can use your brand name, apply for payment gateways and be able to issue invoice on your brand name to customers. It's a best for the testing our ideas in the starting whether it's an e-commerce or tech startup as single founder then on later stage you can easily set up another proper private limited company.
Advantages in the Sole Proprietorship Firm -
-Required just only one person which can be your family member,if you are doing the job.
-Require basic Documentation for the Registration as VAT/CST or Service Tax or MSME.
-Less Taxation as compared to another legal entity like you has to pay the taxes on the slab basis or individual basis.
Disadvantages in the Sole Proprietorship Firm -
-You're all the liabilities are your personal
-You can't add the investors or partners
-You can't protect your firm name.
2. Partnership Firm -
In short it’s similar to the sole proprietorship firm but required the two people for the registration so similarly you can doing all the things as open the bank account in the firm name, sign the contracts or agreements & many more things. It’s a best when you have co-founders and want to test your ideas in the starting.
Advantages of the Partnership Firm -
-Required the 2 people for the Registration for the Deed and Pan Card.
-Less Documentation as compared to other legal entity.
-Easy to Start and easy to close.
Disadvantages of the Partnership Firm -
-Personal liabilities of the partner.
-VC or Angel investors are not preferred.
-Increase the costing in registration with the Registrar of Firms.
3. Private Limited Company -
In short Private Limited Company Registration one of the most popular legal entity in India which is preferred by the startups. Its gives you all the features. Even mostly VC or investors preferred the private limited company for the investment so you can issue share to investors easily for the funding. Private Limited Company is the best when you are growing the startup and ready to raise the funds from investors.
Advantages in Private Limited Company
-Gives limited liability in the business to partners or investors
-Investment ready as VC or another source of Funding.
-ESOP Option available to provide the shares to employees.
Disadvantage in Private Limited Company
-High Cost of the Formation
-More yearly compliance as compared to other legal entity
-Not easy to close the Company.
4. Limited Liability Partnership Firm (LLP) -
In short, LLP is the mixture of the partnership firm and private limited company because its give you both feature in one legal entity. It's required just only 2 people for the registration. It’s a best when you have co-founder and have no vision for the fundraising but need limited liability in the business.
Advantage in the LLP -
-Limited liability in the business
-Less cost of formation as compared to company
-Less Compliance as compared to Private Limited Company
Disadvantage in the LLP -
-Investors are not preferred
-ESOP not available in the LLP.
-ROC Compliance increases as compared to Partnership Firm.
5. One Person Company (OPC)-
In short one person company(OPC) is similar to a private limited company but its required only the one person for the registration. It’s a best legal entity when you need control on your business with 100% equity.
Advantage in the OPC -
-100% Control in the Company
-Limited liability in the business
-Not required any partner for the Registration
Disadvantage in the OPC -
-Nearby similar cost of formation as compared to the pvt Ltd company.
-Can't add partners in the future anytime.
-Annual maintenance is equal to private limited company.
Hope this article helpful for you to choose the right legal entity for your startups. Even you can start with very small Sole Proprietorship Firm & on the later stage you can convert into the proper private limited company from any other legal entity.