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TYPES OF ENTITIES THAT CAN BE FORMED BY STARTUPS

TYPES OF ENTITIES THAT CAN BE FORMED BY STARTUPS

The sheer number of requirements the government places on businesses can be confusing. To make the process of ‘choosing the right entity structure’ simpler, below are specified the main features of each structure:
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  • PRIVATE LIMITED COMPANY

Start-ups and growing companies pick this popular business structure because it allows outside funding to be raised easily, limits the liabilities of its shareholders and enables them to offer employee stock options to attract top talent. As these entities must hold board meetings and file annual returns with the Ministry of Corporate Affairs (MCA), they tend to be viewed with more credibility than an LLP or General Partnership.


  • LIMITED LIABILITY PARTNERSHIP

A relatively cheaper approach to incorporate as compared to a Private Limited Company and requires fewer compliances; its main improvement over General Partnership is that it limits the liabilities of its partners to their contributions to the business and offers each partner protection from negligence, misdeeds or incompetence of the other partners.


  • GENERAL PARTNERSHIP

A General Partnership is a business structure in which two or more individuals manage and operate a business in accordance with the terms and objectives set out in the Partnership Deed. This structure is thought to have lost its relevance since the introduction of the LLP because its partners have unlimited liability, which means they are personally liable for the debts of the business. However, low costs, ease of setting up and minimal compliance requirement make it a viable option for some, such as home businesses that are unlikely to take on any debt. Registration is optional in the case of General Partnerships.

  • SOLE PROPRIETORSHIP

A sole proprietorship is a business that is owned and managed by a single person. You could have one up and running within 10 days, which makes it very popular among the unorganised sector, particularly small traders and merchants. There is no such thing as registration; proprietorships are recognised by other registrations, such as a service or sales tax registration.


  • ONE PERSON COMPANY

The constitution of a One Person Company (OPC) was recently introduced as a strong improvement over sole proprietorship. It gives a single promoter full control over the company while limiting his/her liability to contributions to the business. This person will be the only director and shareholder (there is a nominee director, but with no power until the original director is incapable of entering into contract). Hence, there is no scope of raising equity funding or offering employee stock options.

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