Types of Business Entities
1. Sole Proprietorship
A sole proprietorship is a business owned and run by one person, with no legal distinction between the owner and the business itself.
Features of Sole Proprietorship
Legal Identity and Liability Protection: No separate legal identity. The owner has unlimited liability and is personally responsible for financial obligations.
Governing Act and Registration: Not regulated by any act; no registration required.
Taxation: Taxed as individual income; can opt for 44AD or 44ADA.
Min and Max Members: One owner only.
Compliance Requirements: No compliance requirements.
Pros
Simple, low-cost setup
Minimal compliance
Ideal for small-scale operations
Full control
Cons
Unlimited personal liability
Personal assets at risk
Difficult to raise capital
Limited business continuity
Examples
Small retail shops (grocery stores, boutiques)
Independent contractors (freelancers, photographers, personal trainers)
Service-based businesses (salons, repair shops)
2. Partnership Firm
A partnership is a business owned by two or more individuals who agree to share profits or losses. It is governed by the Indian Partnership Act, 1932.
Pros
Easy to form & low startup costs
Shared workload and decision-making
Flexible profit-sharing ratios
Cons
Unlimited personal liability for partners
Liability for other partners’ actions
Difficult transfer of ownership
Potential disputes between partners
Taxed at 30% flat
Examples
Small legal or accounting firms
Retail shops
Consultancy firms
3. Limited Liability Partnership (LLP)
An LLP combines the benefits of a partnership with the liability protection of a company.
Features of LLP
Legal Identity and Liability Protection: Separate legal identity; liability limited to contribution.
Governing Act and Registration: Governed by the LLP Act, 2008; registration under the Ministry of Corporate Affairs (MCA).
Taxation: 30% tax rate; no presumptive taxation benefits.
Min and Max Members: Minimum 2 members; unlimited maximum.
Compliance Requirements: Statutory audit (if turnover exceeds ₹40 lakhs) and annual return filing.
Pros
Limited liability for partners
Protection from other partners’ misconduct
Flexible management and profit distribution
Less complex than corporations
Cons
Requires registration and annual filings
Cannot issue shares to raise capital
Examples
Law firms
Accounting firms
Architectural firms
Financial advisory firms
4. Private Limited Company
A Private Limited Company (Pvt. Ltd.) is owned by a small group of shareholders, and its shares are not publicly traded.
Features of Pvt. Ltd. Company
Legal Identity and Liability Protection: Separate legal entity; shareholders’ liability limited to share capital.
Governing Act and Registration: Registered under the Companies Act, 2013 with MCA.
Taxation: Flat 22% (plus surcharge & cess).
Min and Max Members: Minimum 2; maximum 200.
Compliance Requirements: Annual ROC filings, board meetings, statutory audits, maintaining registers, etc.
Pros
Limited liability protection
Perpetual succession
Easier capital raising via shares
Cons
Complex and costly setup
Strict regulatory compliance
Potential double taxation (corporate + dividend level)
Examples
Flipkart
Ola
Zomato
FAQs
1. What is sole proprietorship?
A sole proprietorship is a business owned and run by one person, with no legal distinction between the owner and the business itself.
2. What is a sole proprietorship and its advantages?
Advantages:
Low setup cost
Few government rules and laws
Swift decision-making due to full control
Confidentiality
No profit distribution
3. Why choose a sole proprietorship?
It is the easiest and cheapest business structure, provides complete control, and has a simple tax system. Ideal for freelancers, small businesses, and entrepreneurs testing new ventures.
4. What are the 4 types of business ownership?
Sole Proprietorship
Partnership
Limited Liability Partnership (LLP)
Private Limited Company
5. What are the three types of business?
Sole Proprietorship
Partnership
Company
6. What is the full form of LLC?
Limited Liability Company