The differences between sole proprietorship, partnership, limited liability partnership (LLP), private limited company, and public limited company:
Sole Proprietorship:
A sole proprietorship is a type of business entity where a single person owns and operates the business. It is the simplest form of business organization and requires no formal registration or legal documentation. The owner of the business has unlimited liability for the business debts and obligations. The income earned by the business is taxed as the personal income of the owner. The proprietor is personally liable for all the debts and obligations of the business.
Partnership:
A partnership is a type of business entity where two or more persons come together to carry on a business with the aim of making a profit. The partners share the profits and losses of the business as per the agreed terms. The partners are jointly and severally liable for the debts and obligations of the business. There are two types of partnership- General Partnership and Limited Partnership.
Compliance: Partnership registration is not mandatory, but it is advisable to have a partnership agreement in place. Partnerships have relatively more compliance obligations than sole proprietorships, and partners are jointly and severally liable for the debts and obligations of the business
Limited Liability Partnership (LLP):
A Limited Liability Partnership (LLP) is a type of business entity where the liability of the partners is limited to their contribution in the business. It is a hybrid form of partnership and a private limited company. An LLP offers the benefits of limited liability to the partners while allowing them to manage the business as per their wishes. The income earned by the business is taxed as per the income tax slab of the partners.
Compliance: LLP registration is mandatory, and compliance requirements are relatively higher than sole proprietorships and partnerships. LLPs are required to file annual returns and financial statements with the Registrar of Companies (ROC), and partners have limited liability for the debts and obligations of the business.
Private Limited Company:
A Private Limited Company is a type of business entity that is registered under the Companies Act, 2013. It is a separate legal entity and the liability of the shareholders is limited to their share capital contribution in the company. A private limited company can have a minimum of two and a maximum of 200 shareholders. The shares of a private limited company are not freely transferable. The income earned by the company is taxed at a flat rate of 25% (as of 2022).
Compliance: Compliance requirements for private limited companies are more stringent compared to sole proprietorships, partnerships, and LLPs. Private limited companies are required to file annual returns and financial statements, hold annual general meetings, and comply with other regulations under the Companies Act.
Public Limited Company:
A Public Limited Company is a type of business entity that is also registered under the Companies Act, 2013. It is a separate legal entity and the liability of the shareholders is limited to their share capital contribution in the company. A public limited company can have a minimum of seven shareholders and there is no limit on the maximum number of shareholders. The shares of a public limited company are freely transferable. The income earned by the company is taxed at a flat rate of 25% (as of 2022).
Compliance: A public limited company is required to comply with more stringent regulations under the Companies Act and other applicable laws.
In summary, the key differences between these business entities are in their legal structure, liability, management, and taxation. The choice of the business entity depends on various factors like the size of the business, the nature of the business, the number of owners, the liability, the tax implications, and the compliance requirements. It is advisable to seek professional advice before choosing the right business entity for your business.
The compliance requirements increase as the complexity and size of the business structure increase, with public limited companies being the most complex and requiring the highest level of compliance.
Frequently Asked Questions?
Sole Proprietorship
What are the advantages and disadvantages of running a sole proprietorship?
Advantages of running a sole proprietorship include:
Ease of formation: It is easy and inexpensive to form a sole proprietorship. There are no legal formalities required to start a sole proprietorship.
Complete control: As the sole owner, you have complete control over the business and can make decisions without consulting anyone else.
Tax benefits: Sole proprietorships are not taxed as a separate entity. The owner is only required to pay personal income tax on the profits earned by the business.
Flexibility: Sole proprietorships are flexible, making it easy to adapt to changing market conditions and customer needs.
Disadvantages of running a sole proprietorship include:
Unlimited personal liability: The owner is personally liable for all the debts and obligations of the business. This means that personal assets may be used to pay off business debts.
Limited access to capital: Sole proprietors may have difficulty obtaining funding from banks and other financial institutions as they are perceived to be high-risk borrowers.
Limited growth potential: Sole proprietorships may find it difficult to attract and retain talented employees or expand into new markets due to limited resources.
Lack of continuity: A sole proprietorship is dependent on the owner. If the owner dies or becomes incapacitated, the business may cease to exist.
Can a sole proprietorship be converted into another type of business entity?
Yes, a sole proprietorship can be converted into another type of business entity, such as a partnership, LLP, private limited company, or public limited company. However, the process and requirements for conversion may vary depending on the laws and regulations of the country or state where the business is registered.
In most cases, the conversion process involves registering a new business entity and transferring the assets, liabilities, and business operations from the sole proprietorship to the new entity. The sole proprietor may need to obtain new licenses, permits, and tax registrations for the new entity, and may also need to dissolve the sole proprietorship and settle any outstanding debts or obligations.
It is important for a sole proprietor to consult with legal advisors before deciding to convert their business entity, as there may be legal, tax, and financial implications involved.
Is it necessary to obtain any licenses or registrations to start a sole proprietorship?
The licenses and registrations required to start a sole proprietorship depend on the nature of the business and the location where it is operating. Here are some general licenses and registrations that may be required:
Business Registration: In most states, a sole proprietorship needs to register the business with the Registrar of Companies. The registration process involves providing details such as the business name, address, and nature of the business.
GST Registration: If the annual turnover of the sole proprietorship exceeds a certain threshold limit (currently INR 20 lakhs), it is required to register for GST.
Professional License: If the sole proprietorship is in a field that requires a professional license, such as law, medicine, or engineering, the proprietor must obtain the necessary license.
Shop and Establishment Registration: If the sole proprietorship operates from a commercial establishment, it needs to obtain a shop and establishment registration.
FSSAI Registration: If the sole proprietorship is involved in the food business, it needs to obtain a Food Safety and Standards Authority of India (FSSAI) registration.
Other Licenses: Depending on the nature of the business, other licenses such as a trade license, import/export license, or pollution control license may be required.
It is important for a sole proprietorship to obtain all the necessary licenses and registrations to avoid legal issues and penalties.
Partnership
How many partners can there be in a partnership?
A partnership can have a minimum of two partners and a maximum of 20 partners in the case of a regular partnership, as per the Indian Partnership Act, 1932. However, in the case of a banking business, the maximum number of partners is limited to 10. It is important to note that the number of partners may vary based on the laws and regulations of different countries.
What is the difference between a general partnership and a limited partnership?
The main difference between a general partnership and a limited partnership is the level of liability each partner assumes.
In a general partnership, all partners share equal rights and responsibilities for the management of the business. Each partner is personally liable for the partnership’s debts and obligations. This means that if the business cannot pay its debts, the partners’ personal assets may be used to cover the debt.
In a limited partnership, there are two types of partners: general partners and limited partners. General partners have the same rights and responsibilities as partners in a general partnership, and they are personally liable for the partnership’s debts and obligations. However, limited partners are only liable for the amount of money they have invested in the business. Limited partners are also not involved in the day-to-day management of the business and have limited control over the partnership’s operations.
Overall, a limited partnership provides more protection to limited partners from the risks and liabilities of the business, while general partners have more control over the business but also face greater personal liability.
How are profits and losses divided among partners in a partnership?
In a partnership, profits and losses are divided among partners based on the terms of the partnership agreement. Typically, the agreement will specify a certain percentage or ratio for the distribution of profits and losses among the partners.
In a general partnership, all partners share equally in the profits and losses unless the partnership agreement specifies otherwise.
In a limited partnership, the partners are divided into two types: general partners and limited partners. General partners have unlimited liability for the debts of the partnership and are responsible for managing the partnership. They also share in the profits and losses according to the terms of the partnership agreement. Limited partners, on the other hand, have limited liability and are not involved in the management of the partnership. They only share in the profits and losses to the extent of their investment in the partnership.
It is important for partners to clearly define the terms of profit and loss distribution in the partnership agreement to avoid any disputes or misunderstandings in the future.
Limited Liability Partnership (LLP)
What is the liability of partners in an LLP?
In a Limited Liability Partnership (LLP), the liability of partners is limited to the extent of their agreed contribution in the LLP. This means that the personal assets of the partners are protected in case the LLP incurs any debts or liabilities.
Unlike a traditional partnership where the liability of the partners is unlimited, the liability of partners in an LLP is limited. However, if the partner has acted fraudulently or illegally, they can still be held personally liable for their actions.
It is important to note that the liability of the LLP as a whole is not limited and the LLP can be held liable for any debts or liabilities incurred by the business
How is an LLP different from a partnership or a private limited company?
An LLP (Limited Liability Partnership) is a type of business entity that combines the benefits of a partnership and a private limited company. Here are some differences between LLPs, partnerships, and private limited companies:
Liability: In a partnership, all partners have unlimited liability for the debts and obligations of the business. In an LLP, the liability of each partner is limited to their agreed contribution to the LLP. In a private limited company, the liability of the shareholders is limited to the amount of share capital they have invested.
Legal status: A partnership is not a separate legal entity from the partners, while an LLP and a private limited company are separate legal entities.
Management: Partnerships and LLPs are typically managed by the partners themselves, while a private limited company is managed by a board of directors.
Ownership: Partnerships and LLPs are owned by the partners, while a private limited company is owned by the shareholders.
Transferability of ownership: Ownership in a partnership or LLP can be transferred only with the agreement of all partners, while ownership in a private limited company can be easily transferred through the buying and selling of shares.
Compliance: LLPs and private limited companies are subject to more compliance requirements than partnerships, including annual filings with the Registrar of Companies.
Overall, an LLP is a good choice for businesses that want the flexibility of a partnership but also want to limit their personal liability.
What are the compliance requirements for an LLP?
The compliance requirements for an LLP in India are as follows:
Annual filing of LLP Form 8: Every LLP must file its Annual Return in Form 8 within 60 days of the close of the financial year.
Annual filing of LLP Form 11: Every LLP must file its Statement of Account & Solvency in Form 11 within 30 days from the end of six months of the financial year.
Maintenance of Statutory Registers: LLPs are required to maintain various statutory registers such as Register of Partners, Register of Charges, Register of Investments, etc.
Income Tax Returns: LLPs are required to file their income tax returns on or before the due date specified by the Income Tax Department.
GST Returns: If the LLP is registered under GST, it is required to file its GST returns on a monthly or quarterly basis.
Other Compliances: LLPs are required to comply with other laws such as the Companies Act, 2013, Foreign Exchange Management Act (FEMA), Shops and Establishments Act, etc.
It is important for LLPs to comply with all these requirements to avoid penalties and legal action.
Private Limited Company
What is the minimum and maximum number of shareholders in a private limited company?
The minimum number of shareholders required to form a private limited company is two, and the maximum number of shareholders allowed is 200.
What are the advantages of setting up a private limited company?
Some of the advantages of setting up a private limited company are:
Limited liability: The liability of the shareholders is limited to the extent of their shareholding in the company. The personal assets of the shareholders are not at risk in case the company faces financial difficulties.
Perpetual succession: The company continues to exist even if the shareholders or directors change. The ownership can be easily transferred by selling or transferring the shares.
Separate legal entity: A private limited company is considered a separate legal entity, which means it can own assets, enter into contracts, and sue or be sued in its own name.
Credibility and trust: A private limited company is considered more credible and trustworthy compared to a sole proprietorship or partnership. It is easier to raise funds and attract investors or customers.
Tax benefits: Private limited companies enjoy certain tax benefits such as lower corporate tax rates and more deductions compared to other types of business structures.
Professional management: Private limited companies are managed by a board of directors, which brings professionalism and accountability to the business.
Limited compliance: Private limited companies have limited compliance requirements compared to public limited companies, which reduces the administrative burden.
Note that the advantages may vary depending on the specific business and industry. It is important to consult a professional before making a decision on the business structure.
What is the procedure for incorporation of a private limited company?
The procedure for incorporation of a private limited company in India is as follows:
1. Obtain Digital Signature Certificate (DSC) and Director Identification Number (DIN) for the proposed directors of the company.
2. Apply for the name availability of the company using the RUN (Reserve Unique Name) web service provided by the Ministry of Corporate Affairs (MCA).
3. Once the name is approved, prepare the Memorandum of Association (MOA) and Articles of Association (AOA) of the company.
4. File the incorporation documents along with the necessary fees to the Registrar of Companies (ROC) within 20 days of name approval.
5. The ROC will verify and scrutinize the documents and if everything is found to be in order, will issue a Certificate of Incorporation (COI) with a Corporate Identity Number (CIN) and Permanent Account Number (PAN) for the company.
The entire process can take between 10-15 days, provided all the documents are in order and there are no objections or queries from the ROC.
Public Limited Company
What is the minimum and maximum number of shareholders in a public limited company?
A public limited company must have at least seven shareholders to start with, but there is no maximum limit on the number of shareholders.
How is a public limited company different from a private limited company?
A public limited company and a private limited company are both different types of business structures that are recognized by law. Some of the key differences between the two are:
Ownership: In a public limited company, the shares are publicly traded and can be bought and sold by anyone. In contrast, a private limited company’s shares are owned by a group of individuals or entities, and cannot be traded on the stock exchange.
Minimum Shareholders: A public limited company must have a minimum of seven shareholders, while a private limited company can be formed with a minimum of two shareholders.
Disclosure Requirements: A public limited company has more stringent disclosure requirements than a private limited company. It must file more detailed financial reports with the regulatory authorities, including the Securities and Exchange Board of India (SEBI).
Legal Compliance: A public limited company is subject to more stringent legal compliance requirements than a private limited company. This is because it has a larger number of shareholders, which makes it more important to protect their interests.
Public Offer: A public limited company can make a public offer of its shares, while a private limited company cannot.
Board Composition: A public limited company must have at least three directors, while a private limited company can have a minimum of two directors.
Transfer of Shares: In a public limited company, the transfer of shares is easier, as they are publicly traded. In contrast, the transfer of shares in a private limited company is more complicated, as it requires the approval of the other shareholders.
These are some of the key differences between a public limited company and a private limited company. The choice between the two depends on various factors, including the business’s size, growth prospects, funding requirements, and ownership structure.
What are the compliance requirements for a public limited company?
The compliance requirements for a public limited company in India are as follows:
Board Meetings: The board of directors of a public limited company must meet at least four times a year, with a maximum gap of 120 days between two consecutive meetings.
Annual General Meeting: The company must hold an annual general meeting (AGM) within six months of the end of the financial year. The purpose of the AGM is to present the company’s financial statements to its shareholders.
Financial Statements: The company must prepare and file its financial statements with the Registrar of Companies (ROC) within 30 days of the AGM.
Audit: The company must appoint an auditor to audit its financial statements every year.
Annual Return: The company must file an annual return with the ROC within 60 days of the AGM.
Shareholder Meetings: The company must hold shareholder meetings to approve certain transactions, such as the issuance of new shares, the sale of assets, or the change of the company’s name.
Compliance Certificates: The company must obtain compliance certificates from its auditors and company secretaries, certifying that the company has complied with all the provisions of the Companies Act.
Shareholding Disclosures: The company must disclose the details of its shareholders and their shareholdings to the ROC.
Statutory Registers: The company must maintain various statutory registers, such as the register of members, register of directors, register of charges, etc.
Disclosure of Directors’ Interests: The directors of the company must disclose their interests in other companies or businesses to the board of directors.
Secretarial Compliance: The company must appoint a company secretary to ensure compliance with all the provisions of the Companies Act.
These are some of the compliance requirements that a public limited company must follow in India. It is important to ensure that the company complies with all the regulations to avoid any penalties or legal issues.