Comparison of Business Types in India for Startup Registration

Type of Business based on the Business Activity

The businesses must determine the set of activities they will engage in before deciding on the most appropriate business type. Different business types have different objectives depending on the activities they engage in. For example, businesses focusing on social welfare have different goals than those selling products or services for profit. Therefore, they must be registered as other business types. Below is a table that lists the most suitable business types based on their activities.

FDI for different types of businesses

Foreign Direct Investment (FDI) in India can be made through two routes: automatic and approval. Most sectors allow 100% FDI under the automatic route where no prior government approval is required. However, few strategic sectors and FDIs from neighbouring countries require approval before investment. A report in FC-GPR is to be filed with the RBI through AD Bank after receiving FDI. The table below mentions the applicability of Indian and foreign investments for different types of business in India.

Risk & Liability of a Business Structure

We advise considering the risk or possible liability in a business and then deciding its type. One can see that a small retail shop has negligible risk or liability in comparison to a business that is involved in foreign trade or dealing in hazardous chemicals. From the perspective of Risk and Liability, business structures may be divided into two categories. The first category is where the owner’s liability is limited to the capital that he has subscribed, and second category is where the liability of the owners is unlimited.

Concept of Limited Liability : For structures where the businesses and the owners are considered separate legal entities, the owners enjoy protection against the losses and liabilities of the business. Their liability of the owners in a limited liability business is restricted to the share capital that they have subscribed. The below table categorises businesses based on the liability of their owners.

Control and Management in Specific Business Type

Business structures like proprietorships and Partnership Firms have no separation between ownership and management. The sole owner of a proprietorship is responsible for its control and management, whereas each partner in a partnership firm or as decided in the Partnership Deed, is responsible for the management and control of the firm. However, structures like a company or an LLP have a separation between ownership and management. The table below categorises each type of business according to the separation between its ownership and management.

Formation Cost of Various Business Structures

The cost of starting a business can vary depending on several factors such as the professional fee, government fee, stamp duty, and taxes. The government fee is determined by the initial authorized capital, location of the registered office address, and the number of promoters involved. To learn more about the overall cost of forming different types of businesses, you can visit our dedicated pages. If you need further assistance, our consultants are just a click away. Contact us and we will guide you through the entire process of setting up your business.

Cost of Compliance of Several Business Structures

The cost of compliance varies from one business type to another based on their specific compliance requirements. The regular costs of compliance like accounting, GST, TDS, Advance Payment of Taxes, Payroll Processing, etc., are almost the same in every business type. However, there are differences in the overall costs mainly because of the annual filing of returns to the ROC. The table below mentions the applicability of annual filing for different business structures in India.

Taxation of Various Business Forms

The Income Tax is levied differently on different types of businesses, so we advise you to obtain a proper consultation and refer to the updated laws for the payment of taxes and filing of tax returns. Given below is a brief discussion on the taxability of the income of the common business structures in India.

Income Tax Rate for Proprietorship Firms

A proprietorship is not considered a separate legal entity. The income earned by a proprietorship firm is added to the proprietor’s income tax return. This means that no separate tax return is filed for the proprietorship firm. The tax rate applicable to a proprietorship is based on the income it earns and ranges from 5% to 30%. The proprietor can claim deductions under section 80C to U on their income. The individual tax rate slabs for a proprietorship are listed below.

Partnership & LLP : Under the Income Tax Act, all the provisions applicable to the partnership firm apply to the LLP. The Income Tax Rate for the partnership firm and the LLP is 30% flat on the total income earned.

The income tax for companies ranges from 15% to 30%, depending on specific categories. There are two categories of companies as mentioned below.

Newly Incorporated Company : For companies incorporated on or after 1st October 2019, and which do not claim any concession, deduction, or exemption under the Income Tax Act, the tax rates are mentioned in the table below.