How to choose your legal avatar?

You are planning to start on your own.  How do you choose the legal form you need to operate as?

Some of the parameters you need to consider are taxability, registration requirements, legal compliances, continuity, ownership and very importantly, liabilities.

The options range between a sole proprietary concern, partnership or a limited liability company.  India does not have limited liability partnership yet and is still being debated as a concept. There are many other forms like the Hindu Joint Family business, registered society too.

Here’s the feature comparison:

Features Sole proprietary concern Partnership firm Limited liability company (includes Private limited and public limited companies)
Liability of business debts Unlimited liability.  Liability extends to the individual’s private property. Unlimited liability.  Liability extends to the individual’s private property for satisfaction of partnership debt. Limited liability. Limited to the extent of shares held but not paid.
Minimum and maximum no. of people One person Minimum 2 but not more than 20. In a private limited company the minimum is two and maximum is 50. In a public limited company the minimum is seven and no limit on maximum.
Separate legal entity status No separate legal entity It does not acquire a separate legal personality even if registered. Has a corporate personality distinct from the individuals who are its members.
Charter documents None Partnership Deed Memorandum and Articles of Association
Registrations required to start. Other registrations required are under the purview of separate legislations such as service tax, professional tax, PF, ESI etc. as applicable. None. Register the Partnership Deed with the Registrar of Firms. Incorporate the company with Registrar of Companies
Termination / continuity Dissolved on the death of the sole proprietor. Dissolved on the death of a partner, unless there is a contract to the contrary. Can be terminated by voluntary action of dissolving the partnership. Perpetual. Terminated through prescribed winding up processes.
Ownership of property Property belongs to the individual. The property of the firm belongs to the partners and they are collectively entitled to it. Property belongs to the company.
Capacity to sue Not a separate legal entity, hence the individual can sue or be sued. Only a registered partnership firm can sue or be sued.  Else, action may be brought in the name of the members either individually or collectively. Since a separate legal entity, a company can sue and be sued in its own name.

The key differentiator between private limited and public limited company to consider while starting up, are the numerous legal compliances applicable to a public limited company even though the company may be closely held among just 7 members.

To mention a bit about the current income tax slabs applicable:

Sole proprietary concern

Partnership firm

Company

Taxed as an individual. 

Tax Slabs:

Upto Rs. 1,50,000 : No tax

Rs.1,50,000 to Rs.3,00,000: Taxed at 10%

Rs.3,00,000 lakhs to Rs.5,20,000: Taxed at 20%

Rs.5 lakhs to Rs. 10 Lakhs: Taxed at 30%. No surcharge

Above Rs. 10 Lakhs: Taxed at 30% + surcharge

 

Taxed as a partnership firm.  The profits from partnership is not included in the partner’s (individual’s) tax  return.Tax Slabs:Upto Rs. 1 crore: Taxed at 30% + cess

Above Rs. 1 crore: Taxed at 30% + surcharge + cess

Taxed as a company.  Dividend tax to be paid by the company.Tax Slabs:

Upto Rs. 1 crore: Taxed at 30% + cess

Above Rs. 1 crore: Taxed at 30% + surcharge + cess

Post your comments below.

Disclaimer:  This article is for informational purposes only and is intended but not promised or guaranteed to be correct, complete and up-to-date. This is not a legal advice or opinion.

This information in this article is as of 20 August 2008

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