As a startup, founders of the business has to decide on legal form of business. This is based on many factors like nature of business, type of customers (businesses or individuals), volume, scalability of business and procurement of external funds or investors. It is equally important to note that as a startup, cost is a major concern. Thus, founders must wisely choose the form of business. Let me explain it in three different cases.
First case, a single founder of the business looking to start a Private Limited Company can choose One Person Company initially which mandatorily gets converted into private limited company subject to fulfillment of certain conditions as laid down in Companies Act, 2013. (Assumed here founder is also looking for co-founder)
Second case, single founder or multiple founders having individuals or businesses as customers and amount involved in a transaction is high, should choose between private limited company, LLP or one person company. As these form of business are governed by some statute, creates trust amongst customers and helps in scaling up. This is also applicable in reverse situation i.e. when the number of customers are high and amount per transaction is low.
Third case, single founder or multiple founders are not confident enough about their startup should stick to Sole proprietorship or Partnership respectively.
Following table may help you in decision making on legal front.
| Particulars | Private Limited Company | One Person Company | Limited Liability Partnership | Partnership | Sole Proprietorship |
| Legal | |||||
| Min. no. of directors | 2 | 1 | 2 | 2 | 1 |
| Max. no. of directors | 200 | 1 | No limit | 20 | N.A. |
| Minimum Capital | `100000 | `100000 | No such requirement | No such requirement | No such requirement |
| Audits | Compulsory | Compulsory | Capital > `25 lacs or Turnover > `40 lacs | Turnover > `1 Cr | Turnover > `1 Cr |
| Statutory Compliance | Compulsory | Compulsory | Compulsory | N. A. | N. A. |
| Liability | Limited to amount unpaid on shares | Limited to business assets | Limited to his share as in agreement | Unlimited liability | Unlimited liability |
| Funding | Ideal & credible form of business | N. A. | Difficult | Difficult | N.A. |
It is important for all the entrepreneur to know about various post incorporation statutory compliance as required under different statute.
Table below gives a snapshot of all the statutory compliance requirements:
| Particulars | Private Limited Company | One Person Company | Limited Liability Partnership | Partnership | Sole Proprietorship |
| Book Keeping | Y | Y | Y | Y | Subject to IT provisions |
| Statutory Audit | Y | Y | Capital > `25 lacs or Turnover > `40 lacs | N.A. | N.A. |
| Secretarial / ROC Compliance | Y | Y | Y | N. A. | N. A. |
| Tax Audit | Turnover > `25 lacs or `1 Cr | Turnover > `25 lacs or `1 Cr | Turnover > `25 lacs or `1 Cr | Turnover > `25 lacs or `1 Cr | Turnover > `25 lacs or `1 Cr |
| Service Tax Compliance (Ref. 1) | Y | Y | Y | Y | Y |
| Income Tax Return | Y | Y | Y | Y | Y |
| TDS Compliance | Y | Y | Y | Y | Y, when tax audit is applicable |
| Profession Tax Compliance | Y | Y | Y | Y | Y |
| Payroll | Y | Y | Y | Y | Y , in case of permanent staff |
| VAT Compliance | Y, if dealing in goods | Y, if dealing in goods | Y, if dealing in goods | Y, if dealing in goods | Y, if dealing in goods |
About the author- Mohit Gangwal is Chartered Accountant and Founder of Taxnotion.com.
Image credit : shutterstock
2 comments
Say I initially get a sole proprietorship registered, and later my venture grows bigger and I want to register a private limited company, how difficult/easy would that be?
Dear shreshth,
There is no difficulties to convert your sole proprietorship in to the Private limited company. but its advisable to you that when you start your business you should trademark your name of business as when you convert in to the private limited company it will help you to make your company with the same name as you used in sole proprietorship.