The foremost thing to deal with while starting your own business is fulfilling the legalities to ensure the smooth running of your business entity. Company registration is the first step in the process that grants you a legal authorization to conduct business. It involves abiding by a set of rules and regulations prescribed under the Companies Act. Company registration is a primary process that all business owners need to accomplish. The Companies Act 2013 lists different types of companies that can be incorporated in India.
What are The Different Types of Companies in India
There are several types of companies under Companies Act, 2013 that can be formed, each with its own legal structure, requirements, and implications. The main types of companies include:
1) Private Limited Company
A Private Limited Company is a business registration by private entity meant for small businesses. As per the provisions of the Companies Act 2013, there can be a minimum of 2 members and a maximum of 200 members in a company. In this form of company, there are a group of shareholders and the total capital is made up of shares withheld by each member.
In a Private Limited Company, the liability of members is limited to the number of shares held by them. Business assets and personal assets are treated separately. Shares of a Private Limited Company can be sold or transferred to individuals, who in turn become owners of the company. The shares, however, cannot be publically traded.
Classification of Private Limited Company
a) Company Limited By Shares
Here the liability of members is limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.
b) Company Limited By Guarantee
In this type of Private Limited Company, the liability of the members is limited by the memorandum to such amount, which the members may respectively contribute to the assets of the company, in the event of it’s going bankrupt.
c) Unlimited Company
In this form of company, there is no limit on the liability of the members. This implies that in an event of a loss if the company assets fall short to pay off the creditors, the private asset of its members are then consumed to clear debts.
| Private Limited Company | Details |
|---|---|
| Minimum Requirements | * Minimum 2 shareholders * Minimum 2 directors (can be the same as shareholders) * At least one director must be a resident of India |
| Maximum Limit | * Maximum 200 shareholders |
| Liability | Limited to the amount unpaid on shares held by the members |
| Share Transfer | Restricted; shares cannot be freely transferred |
| Company Name | Must end with “Private Limited” or “Pvt. Ltd.” |
| Compliance and Regulations | – Mandatory statutory audits<br>- Annual filing with the Registrar of Companies (RoC)<br>- Compliance with Companies Act, 2013 |
| Taxation | Subject to corporate tax rates applicable in India |
| Raising Capital | Can raise capital through private equity, venture capital, and issuing new shares to existing shareholders |
| Annual General Meeting (AGM) | Must be held within six months of the end of the financial year |
| Registrar of Companies (RoC) | The government body responsible for company registration and compliance in India |
Supporting article: 6 quick steps to set up a Private Limited Company in India
2) Public Limited Company
A Public Limited Company shares can be purchased by the general public. The company must have 3 directors and a minimum of 7 shareholders. In a Public Limited Company, there is no limit on the number of shares.
The shares are listed on the stock exchange and can be traded freely. Such companies are owned by their shareholders. Companies under this category require a certificate from the Registrar of Companies (ROC) before starting their business operations.
| Public Limited Company | Description |
|---|---|
| Ownership | Owned by shareholders who can buy and sell shares on public stock exchanges. |
| Share Capital | Can raise capital by issuing shares to the public. |
| Management | Managed by a board of directors elected by the shareholders. |
| Examples | Companies like Apple Inc., Microsoft Corporation, and Tesla Inc. |
| Transferability of Shares | Shares can be freely bought and sold on the stock market. |
| Annual General Meeting (AGM) | Required to hold AGMs where shareholders can vote on important matters. |
3) Partnership Company
This is one of the different types of companies where business transactions and operations are handled by partners. The responsibilities, roles and the number of shares withheld by the two individuals are clearly defined in the legal partnership agreement. The profits or loss incurred by the business is divided among the partners as stated in the agreement.
| Partnership Company | Description |
|---|---|
| Legal Structure | Partnership company is a business entity where two or more individuals share ownership and responsibilities. |
| Formation | Typically formed through a partnership agreement outlining rights, responsibilities, and profit-sharing. |
| Eligibility | Partners must be legally competent individuals or entities capable of entering into a contractual agreement. |
| Liability | Partners have unlimited liability, meaning they are personally responsible for the company’s debts. |
| Taxation | Partners report their share of profits or losses on their individual tax returns (pass-through taxation). |
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4) One Person Company
It was introduced under the Companies Act 2013, in favour of entrepreneurs who possess the capability to run a business singlehandedly, yet successfully. The minimum paid-up capital of shares in an OPC is INR 1 Lakh.
This new addition to the different types of companies in India was a pleasant change as it allowed a single person to take charge of the company affairs while other types of companies required a minimum of two individuals to function as members in any company. It is highly beneficial for owners of small businesses who do not need partners.
| One Person Company | Description |
|---|---|
| Minimum Requirements | One Director, who is also the shareholder. |
| Liability | Limited liability of the owner, meaning personal assets are protected from business liabilities. |
| Taxation | Subject to the same tax rates and regulations as other types of companies in the jurisdiction. |
| Conversion | Can be converted into a private limited company if the turnover exceeds the specified limit. |
| Name | Must end with “OPC Private Limited” to distinguish it from other business structures. |
| Nominating a Nominee | OPCs must nominate a nominee director who will take over the management in case of the owner’s death. |
Supporting article: A comprehensive guide to register a One Person Company
5) Sole Proprietorship
Sole Proprietorship is a type of company registration wherein a single person manages the entire business operation. The business and the owner are treated as one identity and he/she solely bears the profit or loss made thereafter. The company in Proprietorship is registered in the name of a single individual only. All accounting is done under the owners account for taxation purposes. Proprietors here have to bear unlimited business liability.
| Sole Proprietorship | Description |
|---|---|
| Legal Structure | A business owned and operated by one person. |
| Liability | The owner is personally liable for all debts and obligations of the business. |
| Taxation | Business income is reported on the owner’s personal tax return (Form 1040) and taxed at individual rates. |
| Formation | Relatively easy and inexpensive to start; typically no formal registration required. |
| Continuity | The business ends if the owner dies or decides to close it. |
6) Limited Liability Partnership (LLP)
In a Limited Liability Structured Company (LLP) requires a minimum of two partners. It is also a newly introduced corporate business structure that conjoins two terms company and Partnership Firm. An LLP is a separate legal entity from the partnership and personal and business assets are distinguished.
The liability of the partners is determined by the number of their share capital. When compared to Sole Proprietorship and Partnership, an LLP shows better credibility among its investors. This is attributed to appropriate maintenance of incorporation records, financial records and tax records.
| Limited Liability Structured Company | Description |
|---|---|
| Formation Requirements | Registration with the appropriate state or jurisdiction. Typically involves filing formation documents and paying fees. |
| Taxation | Pass-through taxation, where profits are not taxed at the entity level but instead passed through to partners’ taxes. |
| Ownership | Owned and operated by two or more partners. |
| Legal Liability Protection | Protection against personal liability for the actions of other partners or employees. |
7) Section 8 Company
This type of company registration is as a Non-Profit Organization (NPO). The objective of an NPO is primarily to promote arts, commerce and various forms of social welfare in the form of education, charity, religion and protection of the environment, to name few.
Any profits, if generated, here are used in achieving its aforesaid objective. The dividends are also not paid to its members.
| Aspect | Description |
|---|---|
| Purpose | Non-profit motive, promoting art, science, commerce, charity, religion, education, etc. |
| Profit Distribution | Profits reinvested into the organization for achieving its objectives |
| Tax Benefits | Eligible for tax exemptions under Section 12A and Section 80G of the Income Tax Act |
| Minimum Members | Two individuals as subscribers |
| Audit Requirements | Mandatory annual audit of financial statements by a qualified auditor |
| Management Structure | Managed by a board of directors or governing body |
In India, no business registration can be treated as a company if it is not registered with the registrar of companies under the Companies Act 2013. It is only after registration that a company becomes a separate legal entity from its members.
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In India, there are primarily three types of companies: Private Limited Companies, Public Limited Companies, and One Person Companies (OPCs). Each type has its own set of characteristics and regulatory requirements.
The main difference between a Limited Liability Partnership (LLP) and a Private Limited Company (Pvt Ltd) lies in their structure and liability. In an LLP, partners have limited liability, meaning they are not personally liable for the debts of the business. In a Pvt Ltd, shareholders’ liability is limited to the extent of their shareholding. Additionally
The three main types of business are sole proprietorship, partnership, and corporation. Sole proprietorship is owned and operated by a single individual, while partnership involves two or more individuals sharing ownership.
MoA stands for Memorandum of Association, which is a legal document that contains the fundamental objectives and scope of activities of a company. AoA stands for Articles of Association, which outlines the internal rules and regulations governing the management and operations of the company.
LLC stands for Limited Liability Company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.