So, you were working on a new idea and this time you were more serious than your last hackathon and you decide to actually formalize something. Now at this point, you would not be knowing what that something is, it could be –
- Proprietorship
- Partnership
- Limited Liability Partnership
- Private Limited Company
Let’s discuss in brief what each of these things is
Proprietorship – This is when there is a single owner and you would like to move really fast. There is minimal paperwork required for this purpose. Keep in mind there is an unlimited liability in this case, i.e. if things go wrong and you are sued, then you might end up losing your personal property as well in order to make the payments. There is an alternative to it that was recently introduced called the One-person company – here the liability is limited and the turnover is supposed to be less than 2 crores. Proprietorships are ideal for small-time traders and merchants as it requires minimal paperwork and is easy to set up.
Partnership – This is where we have partners and there is an agreement or a registration that happens. You do not have to register with the MCA, though a pan card is required to carry out transactions. Again, we have unlimited liabilities in this case. A partnership is valid till the end of an agreement, or if the partner/partners declare insolvency or if the partner/partners die. So, the life of a partnership is limited. Nature of the business can be kept private.
Limited Liability Partnership – This is something that was introduced into 2008. Using this the liability of the partners is limited. There has to be a registration that happens at the MCA. Though the liability is limited, these have a shorter life than a private limited company (same cases as a partnership). Raising funds and global expansion can be difficult, as well as going public is not possible in a limited liability partnership. Nature of your business can be kept private.
Private Limited Company (Pvt. Ltd. Company) – This the recommended route if you are looking at the bigger picture and have a business in the organized sector. There is paperwork involved in this process and you have to register with the MCA. The life of a private limited company is longer and can be closed only as per law. There are companies that are more than 100 years old. From a trust standpoint, Private Limited is much better. Some of the bigger companies might not even deal with companies that are not Private Limited. You can raise funds and play around with equity for your expansion. You can definitely go public with this structure. Nature of the business cannot be kept private.
Our advice – Private Limited Company is a better way to go. Here you protect yourself against anything that goes wrong (up to the extent of the paid-up capital) and can expand without limitations when things go well. Though the other modes are also quite popular depending on the person and the nature of the business.