Overview – Types of legal entities for doing business in India
There are many ways in which you can start your business in India. The popular forms in which people in India do business are following:
- Sole Proprietorship
- Limited Liability Partnership
- Private Limited Company
- One Person Company
While all the above forms are perfectly legal, each one of them have a set of pros and cons for doing business. Of all these legal forms, Private Limited Company is the most popular one. The figure below shows the composition of nature of companies incorporated in India as on 31 December 2020. As of 31 December 2020, there are a total of 14,96,733 registered legal entities. Out of that, 80% is private limited companies.
What are the major differences between Private Limited Company, One Person Company and LLP?
Before jumping on to the differences, one common thing about all is that they are governed by the Ministry of Corporate Affairs (MCA), Government of India. Since these entities are governed, people have greater confidence in doing business as compared to an unregulated structure such as Sole Proprietorship or Partnership.
The figure below highlights the key differences between these three legal forms. To summarize, both private limited company and LLP require at least 2 persons to start the business. One person company, as the name suggests, consists of one single person. This does not mean you need to find a co-founder to start your business. To comply with the requirement of 2 persons, people usually make their close relatives (parents, spouses) or friends as the other member.
Why should I opt for Private Limited Company, One Person Company or an LLP?
Some of the other advantages of a regulated corporate form are as follows:
- Perpetual existence – which means the business will continue to exist even if you don’t. As you know creating great business takes time and at times more than one lifetime. Groups such Tata, Reliance Industries etc are run by second generation entrepreneurs. Having a legal structure helps you create a perpetual existence of your business.
- Fund raising – having a regulated corporate structure gives more confidence to lenders (banks and financial institutions) and investors. Hence, they would always prefer a legal entity over an unregulated entity for providing funds.
- Limited liability – a legal entity functions separate from the owners. This means company or LLP can own properties on its name, enter into contracts etc. Any liability occurring from the activities of the legal entity is restricted to the legal entity and does not pass on to the owners. This can help Founders to ring-fence themselves from any potential liability of their business.
- Tax benefits – unlike individuals, corporate entities are subject to tax at different rates. Tax rates vary for a company and a LLP. But the effective tax rate can be lower as compared to a high net-worth individual doing business as sole proprietorship. In some cases, the tax rate can be as low as 15%.
What is the process to incorporate a company?
Simply put, company incorporation is a 5 step process. The process is summarized below:
- Get Director Identification Number and Digital Signature
This is a prerequisite for applying for company incorporation. Director identification number is a unique ID provided by the Government for individuals acting as directors. Digital signature can be obtained from any external agency.
- Obtain name approval from Government
Unlike human names, company names cannot be same. Therefore, before company is registered, the name of the company must be unique. Hence, under this step, the preliminary approval of the name is taken.
- Prepare your charter documents i.e. Memorandum of Association and Articles of Association
These documents define the governance of the company and describes the key aspects of the entity such as object of set-up, key businesses to be undertaken, capital structure, first shareholders etc.
- Company Incorporation
Once all the above steps are completed, the application for company incorporation can be filed with the MCA. The MCA then issues the incorporation certificate of the company (similar to a birth certificate) after verification of the documents submitted by the applicant.
- Obtain PAN and GST number for your company
PAN is mandatory for income tax purposes and GST registration is mandatory for providing any services or trading in goods. Both are essential for starting your business.
What are the documents required for starting the company incorporation process?
You should keep the following documents ready:
- Passport size photos of directors
- Address proof of directors
- Photo ID proof of directors
- Specimen signature
- Self-declaration about your directorship in other companies
- Rent agreement of your registered office and No objection certificate from the owner
How can Procket help in company incorporation process?
Procket can offer a one stop solution for company incorporation by helping you throughout the process. Our assistance includes the following:
- Filing of E-forms with the Registrar of Companies (ROC) – these are forms which are required to be filed for the purpose of company incorporation. We will collect relevant information from you and fill the forms on your behalf.
- Director Identification Numbers – as mentioned above, director identification numbers are issued by the Government. We will collect relevant information from you and fill the forms with the Government to get the Director Identification Numbers.
- Digital Signature Certificates – Procket will fill applications forms for obtaining the right digital signature certificate for you. Please note that these certificates come with a validity (typically 2 years) and can be used for income tax purposes as well.
- Name approval – Procket will discuss your preferences of the name you want to give to your business and help you to get a unique name.
- Drafting of Memorandum of Association (MOA) & Articles of Association (AOA) – Procket can help you draft the detailed charter documents with industry standard clauses.
- Issue of Certificate of Incorporation – Procket can fill the forms with the ROC and help in resolving queries, if any, and get you the incorporation certificate.
- PAN Application & GST Registration – Procket can apply for PAN and GST Registration of your newly incorporated company.
Start company registration with Procket
Now that you have learnt about legal entities in India, start company incorporation process now with Procket.
Still in doubt?
Let’s chat before you start. Speak to our advisor and resolve your queries. Please provide your contact details for us to reach you.
If you liked out post, please feel free to share it with your network. Let us know your comments and feedback below.