How to start a business with different business entity in India
If someone want to start a business in india he should have registered his or her business in the eye of law .So he has to see which type of business suits for him and to which type of business entity he should registered .When setting up a business in India, the term ‘company’ is commonly used. However, most people have a common misunderstanding about this term. In legal terms, ‘company’ has a completely different meaning; a company is just one of the many different types of business entities there exist.Businesses may all look the same when you look at the building in which they operate, the employees they hire and the product they sell. However, they can be very different when it comes to their legal structure. The legal structure determines the type of entity they are which in turn determines the rules that will be applied to them. Here is a list of the types of entities and their relevance to accounting.
Different types of business entities
- Sole Proprietorship
- Joint Venture
- Private Limited Company
- Public Limited Company
This is the most easy business entity to establish in India. It doesn’t need its own Permanent Account Number (PAN) and the PAN of the owner (Proprietor) acts as the PAN for the Sole Proprietorship firm. Run by a single individual who bears the sole responsibility of the whole business. Business and owner is one entity, so much so that the personal property of the Proprietor may be attached to fulfill business liability. Profits earned in the business are added to the business owners income which are later subject to taxation. Same for losses. Personal Property of the Proprietor may be attached to fulfill business liability; •
Ownership not transferable though assets can be transferred. Can trade in his own name or name of the business.
E.g. Mr. A trading as X business.
Hindu Undivided Family (HUF) is a type of entity which exists in India only. It has a head of the business called the “karta” who has decision making powers and unlimited liability. In a HUF, the rules for the functioning of the organization are laid down by the “Karta”. These rules include rules on drawings.
HUF is taxed separately from its members. A Hindu family can come together and form an HUF. Buddhists, Jains, and Sikhs can also form an HUF. HUF has its own PAN and files tax returns independent of its members.
An HUF is taxed separately from its members. Therefore, deductions (such as under Section 80) or exemptions allowed under the tax laws can be claimed by it separately. For example, if you and your spouse along with your 2 children decide to create an HUF, all the 4 of you as well as the HUF can claim a deduction for Section 80C. HUF is usually used by families as a means to build assets.
Partnership business entities are quite similar to sole proprietorship. The basic difference between partnership and sole proprietorship is that more than one individual is involved in a partnership. In fact, there could be several partners involved in a partnership business. The roles, responsibilities and the share of each partner are specifically defined in a legal partnership agreement.
Any profit earned by the business is shared between partners according to the legal partnership agreement. In case there are losses, each of the partners is personally responsible. Personal assets of partners may be used to compensate the losses incurred, if any.
A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance.
A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants’ other business interests.
A separate, legal entity formed through a state charter using articles of incorporation. It is authorized to perform primarily all the business activities an individual can, including such things as filing and paying taxes, signing contracts, and making loans. It is formed through the issuance of stock or securities. There are two main types: Regular (“C”) or Subchapter S (“S”).
Public Limited Company
A limited company grants limited liability to its owners and management. Being a public company allows a firm to sell shares to investors this is benificial in raising capital. A minimum of three Directors are required for establishing a Public Limited Company and it has more stringent regulatory requirements compared to a Private Limited Company.
Public Limited Companies are those types of companies where minimum number of members is seven and there is no cap on the maximum number of members. A public limited company has most of the characteristics of a private limited company. A public limited company has all the advantages of private limited company and the ability to have any number of members, ease in transfer of shareholding and more transparency. Identifying marks of a public limited company are name, number of members, shares, formation, management, directors and meetings, etc.
Private Limited company
Private limited company is held by few individuals privately having a separate legal entity. In this, the shareholders cannot trade publicly shares. It restricts its number of shares to 50. Shareholders cannot sell their shares without the approval of other shareholders. It is a company which restricts the right of its members to transfer its shares and it doesn’t send the invitation to the public for subscription of its shares. Characteristics of private limited company is mentioned below.