Types of Different Business Entities | Part 1

 

Hey Everyone! After a long time! I hope you are doing well in your lives and are chasing your dreams. So, the topic of today's blog post is the Types of Different Business Entities or Structures in India. If you want to start your own business, want to become an entrepreneur, or are interested in business. Then you are at the right place. After reading this blog, I can guarantee you that you will be able to know everything about starting a business in India. 

Before I start, just give me a quick favor by commenting down your thoughts and sharing it with your friends and family members so that they can also know how to start a business in India. I again request you to do these steps because it requires a lot of effort and time to write such blogs that everyone can understand easily for free! I have been blogging for 3 years now, but unfortunately, I don't get any engagement. So, I again request you to do those steps because it will encourage me to write more valuable blogs for you people. Without wasting any time, let's start!

Types of Business Entities:

Basically, we have 6 main types of Business Entities, and in this blog (Part 1), we are going to discuss about the first two business entities: Sole Proprietorship and Partnership Firm, and we are going to understand these entities in depth. In subsequent blogs, we will discover the remaining business entities. Firstly, let me make you aware of all the business entities:

• Sole Proprietorship
• Partnership Firm
• Private Limited Company (Pvt. Ltd.)
• Limited Liability Partnership (LLP)
• Public Limited Company (Ltd.)
• One Person Company (OPC) 

As discussed earlier, we will only understand about first two types i.e. Sole Proprietorship and Partnership Firm.

1. Sole Proprietorship

A Sole Proprietory is one-man entity which means the business is only owned by one individual known as a Proprietor. To understand this let's take a real-life example. Think about the shops that you see in your vicinity; they all are sole proprietory businesses which simply means they are only owned by one person i.e. the shopkeeper himself. 

In Sole Proprietorship, there is no difference between the owner and the entity. All the liability is on the owner and he takes all the profit or losses himself. Huh! You might think what does this mean? Let me make you understand by an example: 

If you own a Sole Proprietory Business and have raised a loan for the business, unfortunately, you can't pay the loan i.e. Liability back to the creditor. But the creditor wants his money back. Here, in Sole Proprietory Business, the creditor can go on the owner's personal assets e.g. house, car, money in the bank, gold, etc. to get his money back because there is no legal distinction between the personal and business assets, which means the owner is fully responsible for all the liabilities. In other words, Sole Proprietorship has Unlimited Liability.

You also might get confused about "he takes all the profit or losses himself ." For instance, you own a Sole Proprietory Business which simply means you are the 100% owner of the company. What if your business generates profit? who will own it? Yeah! You guessed it correctly. You will own all the profit because you are the only business owner of that business. What if your business incurs loss? Who will pay for it? Again, you are responsible for it. Which means "he takes all the profit or losses himself ." 

Now you know what is Sole Proprietorship. By the way, if you still have any doubts you can mail me at ahtishamasiftantray@gmail.com for a free webinar. But it's not the end so let's dive deep into it!

● Registrations Required For Sole Proprietorship:

No registration is required, you simply need a Current Bank Account and a GST Certificate (Optional).

● Choosing a Name For Your Sole Proprietorship: 

You can choose any name of your choice for the business e.g. Mohan and Sons, etc. But you can't choose a name ending with suffixes like Pvt. Ltd., and can't opt for trademark names e.g. Reliance®. It is super simple bro!

● Taxation in Sole Proprietorship:

In Sole Proprietorship, business income is treated as personal income which means that the tax would be applied on your personal income plus business income. What? Yesss! You heard it accurately. For example, your personal income is Rs. 4 lakhs per year and your business income is Rs. 2 lakhs. It means your total total taxable income would be Rs. 6 Lakhs. And you have to file an ITR (Income Tax Return) for Rs. 6 lakhs. Yeah! It's very expensive if your both incomes are high.

● Who Should Opt For Sole Proprietorship:

Individuals who have:

Less Capital, Low Tax Rates, Lower Compliance (Legal Requirements), Testing a Business Model, etc. 

 

2. Partnership Firm

Partnership Firm is owned by two or more people (upto 20) where ownership and share in profit and losses are split between the owners in a certain agreed ratio and it is done through a Partnership Agreement or Partnership Deed. And partners are collectively called Firm. It is the same as Sole Proprietorship but has some differences (will discuss them later). To understand this let's take a hypothetical example: You and your friend want to start a company in which both will be owners of the business. You will apply for a Partnership Firm where the equity, profit, and loss will be split inbetween you and your friend through an agreement called Partnership Agreement or Partnership Deed. Simple? Yeah, it is!

In  Partnership Firm, there is also no difference between the owners and the entity which means all the liability is on the owners and they take all the profit or losses themselves - Unlimited Liability. Yeah, you got it! (if not, already explained).

 Now, you also know what is a Partnership Firm. By the way, if you still have any doubts you can mail me at ahtishamasiftantray@gmail.com for a free webinar. But it's not the end so let's dive deep into it!

● Registrations Required For Partnership Firm:

There is a registration required for Partnership Firm which is under the Partnership Act 1932. But, but, but it's optional. A Partnership Firm can be registered or not,  legally. For Partnership Firm that owns an immovable tangible assets like land (if you want a detailed blog about types of assets then comment down) then it is mandatory, and for a firm that doesn't have any immovable asset; it is not mandatory. And let me tell you a fact 90% of Partnership Firms are unregistered. So, it's your choice to register in case of not having an immovable tangible asset.

● Choosing a Name For Your Partnership Firm: 

  Same criteria as Sole Proprietorship.

● Taxation in Partnership Firm:

In the case of Sole Proprietorship, your business income is combined with personal income. But in a Partnership Firm, the tax is levied on only business income because of having a separate PAN. In India, a flat 30% is levied on the taxable income with a 12% surcharge on the 30% of your income (tax payable) if your taxable income crosses over Rs. 1 crore per year, and a 4% cess.

So, the calculation would be:

• Total Revenue = ₹5 crore 
• Total expenses = ₹4 crore 
• Taxable income = ₹5 crore - ₹4 crore = ₹1 crore 
• Basic tax: ₹30 lakhs 
• Surcharge: 12% of ₹30 lakhs = ₹3.6 lakhs 
• Total tax before cess: ₹30 lakhs + ₹3.6 lakhs = ₹33.6 lakhs 
• Health and Education Cess: 4% of ₹33.6 lakhs = ₹1.344 lakhs
• Total tax payable: ₹33.6 lakhs + ₹1.344 lakhs = ₹34.944 lakhs

(if you want to know what is cess and why the tax is not levied on the total revenue, so checkout my previous blog, click here) 

● Who Should Opt Partnership Firm:

Individuals who have the same needs as in Sole Proprietorship but the difference would be that if you have a co-founder and want separate tax filing of your business, then Partnership Firm is good for you. 

So, here we have it! Congratulations on reading the full blog  and I hope you have understood it well. If not you can you can mail me at ahtishamasiftantray@gmail.com for a free webinar. 

Stay tuned for part 2 and keep learning!

*Proudly Written By Ahtisham Asif Tantray*