Do you know the types of legal structures you choose for your business can have a significant impact on various aspects of your operations, including liability, taxation, management and fundraising. Different legal structures offer varying levels of protection, control, and flexibility to business owners.  In this blog we will explore what are the types of legal structures in  business is,  its types and how to choose the right one for your business.

A business legal structure refers to the legal and organisational framework that a business entity adopts to operate, manage its affairs, define ownership, and establish relationships with stakeholders.  Here are some different types of legal structures of a business in India.

1. Sole Proprietorship
2. Partnership
3. Limited Liability Partnership (LLP)
4. Private Limited Company
5. Public Limited Company
6. Section 8
7. One Person Company
8. Trust

1. Sole proprietorship: This is the simplest form of business ownership. The business is owned and operated by a single individual. The owner has complete control over the business but has unlimited liability. The business’s income and expenses are usually treated as the owner’s personal income and expenses.  Therefore, the owner is taxed according to their individual income tax rate. While there is no formal requirement to register a sole proprietorship, obtaining necessary licences and registrations is crucial to operate legally and avoid potential penalties. Depending on the nature of the business, you might need to register for GST, obtain  a Shops & Establishments Act licence, or adhere to specific industry regulations.
2. Partnership Firm: Partnerships are formed through a partnership agreement, which outlines the rights, responsibilities, and obligations of each partner. Each partner is personally and jointly liable for the partnership’s debts and obligations. This means that if the partnership cannot meet its financial obligations, creditors can pursue individual partners for the entire amount owed.  Although registration of partnerships is not mandatory, it’s advisable to register with the Registrar of Firms for legal recognition and protection of partners’ rights.
3. Limited Liability Partnership (LLP): It is an upgraded version of partnership. It combines the features of a partnership and a corporation, offering partners limited liability protection while retaining the flexibility of a partnership. An LLP is formed through the process of incorporation, involving the registration of the LLP with the Ministry of Corporate Affairs (MCA). The LLP Act, 2008, governs the establishment and functioning of LLPs in India. An LLP must have a minimum of two designated partners, and there is no maximum limit to the number of partners.  LLPs are treated as separate legal entities for taxation purposes. Compliance with the LLP Act and other applicable regulations is essential to maintain the LLP’s legal status.
4. Private Limited Company (PLC): It is one of the popular business structures in India. It offers limited liability protection to its shareholders while providing opportunities to expand while maintaining a level of privacy and control. To establish a Private Limited Company, a minimum of two shareholders and two directors are required, with one of the directors being an Indian resident. Private Limited Companies are required to prepare annual financial statements in compliance with applicable accounting standards. Private Limited Companies are subject to corporate tax rates.
5. Public Limited Companies:  A public Limited Company allows businesses to raise capital from the public through the issuance of shares on the stock exchange. To establish a Public Limited Company, a minimum of seven shareholders and three directors are required, with at least one director being an Indian resident. One of the key advantages of a Public Limited Company is the ability to raise substantial capital by issuing shares to the general public through an initial public offering (IPO).  After the IPO, the company’s shares are listed and traded on stock exchanges, providing liquidity to shareholders.
6. Section 8: is established for promoting charitable, educational, scientific, religious, social, or philanthropic purposes. These companies operate with the primary goal of benefiting society.  These are governed by the Companies Act, 2013, and are registered under Section 8 of the Act. These provide limited liability protection to their members.
7. One Person Company: It is owned and managed by a single Individual who acts as both shareholder and director. One of the major advantages is that it offers Limited Liability Protection to the sole owner. It is treated as a separate legal entity from its owner. OPC are subject to corporate taxes. Necessary documents like MOA & AOA have to be submitted to ROC. OPCs have certain restrictions, such as not being able to raise funds through IPOs and limited access to external funding.
8. Trust: A trust is a legal entity established to manage and administer assets for the benefit of specific individuals or causes.  A trust is governed by a trust deed, which outlines the objectives, administration, powers, and responsibilities of the trustees. The trust deed is a legally binding document that defines the terms under which the trust operates. Public charitable trusts require registration with the relevant state authorities under the Indian Trusts Act, 1882.

Choosing the right legal structure:

The legal structure you choose not only affects the way you conduct business but also influences your ability to attract investors, manage risks, and achieve your long-term goals.

Let us explore in detail the different aspects which help in choosing the right business structure.

1. Begin by gaining a deep understanding of your business’s nature, goals, and operations
2. Assess how much personal liability protection you need. If you want to shield your personal assets, structures like limited liability companies (LLCs) are suitable
3. Examine the tax implications of each legal structure. How profits are taxed, is there any double taxation etc.,
4. Think about how you plan to raise capital for your business. If you are planning to seek external financing then Private Limited  are more suitable
5. Consider who will own and manage the business. Think about how you want to distribute decision-making authority and responsibilities.
6. Research the legal and regulatory requirements associated with each structure. Assess your willingness and capacity to meet these requirements.
7. Evaluate your tolerance for risk. Structures like partnerships or sole proprietorships expose you to greater personal liability, while limited liability structures offer more protection

Most popular among them are Private Limited Companies for the various advantages it offers. Remember that your choice of legal structure isn’t permanent. As your business evolves, you can reevaluate and change your structure to better suit your needs. Some structures even allow for conversion or transition to more complex options.  Seeking advice from legal, financial, and business experts is advisable to make an informed decision that maximises your business’s potential for success while minimising risks and liabilities.