How to start a Business? Sole Proprietorship vs LLP vs Private Ltd. | Business Basics #1

Summary

This video script introduces a series on business basics, focusing on choosing the right business entity for new ventures. It compares Sole Proprietorship, Partnership, OPC, LLP, and Pvt. Ltd., discussing their registration processes, legal implications, and tax liabilities. The speaker, with personal and professional experience, provides insights on which entity suits different business needs and highlights the benefits of a HUF for tax savings, exclusively for Hindu families. The script also promotes a free payroll app for managing staff attendance.

Takeaways

• 😀 Starting a new business requires choosing the right business entity type based on the nature of the venture.
• 🏢 The types of business entities discussed are Sole Proprietorship, Partnership, OPC (One Person Company), LLP (Limited Liability Partnership), and Pvt. Ltd. (Private Limited Company).
• 📝 Sole Proprietorship requires no registration and has the owner bearing all liabilities and profits.
• 🤝 A Partnership is formed by an agreement and can be registered or unregistered, with shared profits and liabilities.
• 🏭 Private Limited Company is governed by the Companies Act, with a structured setup including directors and shareholders.
• 🔒 LLP is an evolved form of a partnership with limited liabilities for partners and is governed by the LLP Act 2008.
• 👤 OPC allows an individual to start a company with limited liability and is suitable for businesses needing loans but not wanting to take much personal risk.
• 📜 Registration requirements vary, with Sole Proprietorship and Partnership requiring less formalities compared to Pvt. Ltd., LLP, and OPC which are registered under MCA.
• 💼 Legal liability in Sole Proprietorship and Partnership is unlimited, whereas in Pvt. Ltd., LLP, and OPC, it is limited to the extent of share capital or contribution.
• 💼 Taxation varies by entity, with Sole Proprietorship being taxed as personal income, and Pvt. Ltd. & OPC potentially benefiting from lower tax rates under certain conditions.
• 📉 The choice of business entity depends on factors like compliance preference, business size, risk appetite, and the need for external funding or expansion plans.

Q & A

What are the different types of business entities mentioned in the script?

The script discusses five types of business entities: Sole Proprietorship, Partnership, Private Limited (Pvt. Ltd.), Limited Liability Partnership (LLP), and One Person Company (OPC). Additionally, a sixth type, the Hindu Undivided Family (HUF), is briefly mentioned.

What is the main difference between a Sole Proprietorship and an OPC?

A Sole Proprietorship requires no formal registration and the individual owns the entire business with unlimited liability. An OPC, on the other hand, is a registered entity that allows a single person to start a company with limited liability.

What is a Partnership firm, and what are its key features?

A Partnership firm is a business entity where two or more individuals agree to conduct business together. It does not have a separate legal entity and can be either registered or unregistered, with the agreement typically documented in a Partnership deed.

What are the registration requirements for a Pvt. Ltd. company?

A Pvt. Ltd. company is registered under the Companies Act and requires compliance with various regulations, including having directors and shareholders, and is overseen by the Ministry of Corporate Affairs (MCA).

What is the significance of the suffixes in the names of Pvt. Ltd., LLP, and OPC entities?

The suffixes in the names of these entities, such as 'Pvt. Ltd.', 'LLP', and 'OPC Pvt. Ltd.', provide a distinct identity and indicate the type of business entity, which is important for legal recognition and compliance.

What is the difference between a registered and an unregistered Partnership firm?

A registered Partnership firm has a legally recognized Partnership deed and is registered with the government, while an unregistered Partnership firm operates based on a verbal or written agreement without formal registration.

How does the liability of the promoters differ between different business entities?

In Sole Proprietorship and Partnership firms, the promoters have unlimited liability. In contrast, in Pvt. Ltd., LLP, and OPC, the liability of the promoters is limited to the extent of their share capital or contribution.

What are the tax implications for different business entities?

Sole Proprietorships are taxed as individual income, while Pvt. Ltd. and OPC entities are taxed at a flat rate of 30%, with some conditions allowing for a reduced rate. Partnership firms are taxed based on the income distributed to partners.

What is the purpose of the HUF business entity, and which communities can form it?

The HUF (Hindu Undivided Family) is a business entity that allows Hindu, Jain, Sikh, and Buddhist families to conduct business together with a separate tax identity. It enables tax savings and financial planning within the family.

What are the considerations for choosing the right business entity for a new venture?

The choice of business entity depends on factors such as the size and nature of the business, the level of risk involved, the need for external funding, the desire for limited liability, and the complexity of compliance and taxation.

What is the role of the Quick Payroll App mentioned in the script?

The Quick Payroll App is a tool designed to help manage and record employee attendance and payroll efficiently. It is offered for free and includes a feature for direct chat support with the LLA's team.

Outlines

00:00

🚀 Introduction to Business Entity Types

The script introduces a series on business basics, focusing on the selection of the right business entity for new ventures. It discusses the results of a community poll that revealed a strong interest in learning about business foundations. The speaker, a Labour Law Consultant and entrepreneur, outlines the topics to be covered, including the choice of business entity, registration processes, compliance, taxation, government subsidies, working capital management, and investment strategies. The series aims to benefit entrepreneurs, students, and salaried individuals looking to start their businesses. The speaker's qualifications, including his experience in various business entities, are highlighted, along with the promise of expert insights throughout the series.

05:01

📜 Registration and Naming of Business Entities

This paragraph delves into the registration processes and naming conventions for different types of business entities. It explains that no registration is required for a sole proprietorship, while partnerships may be either registered or unregistered, with the latter being more common. The paragraph also covers the registration of Pvt. Ltd., LLP, and OPC under the MCA, and how these entities are named with specific suffixes to denote their legal structure. The speaker emphasizes the importance of choosing a unique name due to the high number of existing companies and discusses the unlimited liability of sole proprietorship and partnership firms versus the limited liability of Pvt. Ltd., LLP, and OPC.

10:09

🏢 Business Entity Suitability and Taxation

The script discusses the suitability of different business entities based on the nature and scale of the business. It suggests that sole proprietorships are ideal for unorganized businesses with low risk and no need for loans, while partnerships are recommended for startups testing business models or for established businesses with turnovers over 40 lakhs to 1 crore. Pvt. Ltd. companies are best for ventures requiring growth, high turnover, and international expansion, especially for startups seeking external funding or offering ESOPs. The paragraph also addresses the tax implications for each entity, noting that while sole proprietorships and partnerships pay tax at the individual rate, Pvt. Ltd. and OPC may benefit from reduced rates under certain conditions.

15:11

📊 Business Entity Comparison and HUF Overview

The final paragraph compares the compliance, setup, and annual costs of different business entities, highlighting the low compliance of proprietorship and partnership firms and the highest costs associated with Pvt. Ltd. companies. It also introduces the concept of HUF (Hindu Undivided Family) as a separate tax entity for Hindu families running a family business, allowing for tax savings and income distribution among family members. The script concludes with a teaser for future detailed videos on each business entity and a reminder about the Quick Payroll App, which is offered for free to manage staff attendance.

Keywords

💡Sole Proprietorship

A sole proprietorship is a type of business entity where one person owns and runs the business. It is the simplest form of business and does not require any formal registration, making it ideal for small-scale operations. In the video, it is mentioned as a suitable choice for individuals who want to avoid compliances and manage a business with low risk, such as running a grocery shop or a consulting business.

💡Partnership

A partnership is a business entity where two or more individuals share the ownership and management of the business. It can be registered or unregistered, and the partners share profits and losses according to a partnership deed. The video script refers to partnerships as suitable for businesses with a big vision in the initial testing phase, such as startups creating a Minimum Viable Product (MVP).

💡Private Limited Company (Pvt. Ltd.)

A private limited company is a type of business entity that is governed by the Companies Act and has a separate legal identity from its owners. It requires registration and has a structured management with directors and shareholders. The video emphasizes that Pvt. Ltd. is suitable for businesses aiming for growth, high turnover, and international expansion, and is the preferred entity for startups seeking external funding.

💡Limited Liability Partnership (LLP)

An LLP is a business entity that combines the flexibility of a partnership with the limited liability of a company. It is governed by the LLP Act 2008 and offers protection to partners from personal liability for the business's debts. The script mentions LLPs as suitable for professional firms like CAs, law firms, and businesses with many partners and no significant capital investment.

💡One Person Company (OPC)

An OPC is a single-owner company that allows an individual to start and run a company with limited liability. It requires registration and is suitable for businesses where the promoter wants to expand but does not want to take on much personal risk. The video script suggests OPCs for businesses such as opening a restaurant or taking a franchise, where the investment ranges from 50 Lakhs to 1 crore.

💡Compliance

Compliance in the context of the video refers to the adherence to rules, regulations, and legal requirements that different business entities must follow. Sole proprietorships and partnerships have low compliance requirements, while private limited companies have the highest, and LLPs and OPCs have moderate compliance needs.

💡Taxation

Taxation in the video is discussed in relation to the different types of business entities and how they are taxed. Sole proprietorships are taxed as personal income, while other entities like Pvt. Ltd., LLP, and OPC have separate tax identities and may benefit from different tax rates and exemptions.

💡Registration

Registration is the process of officially recording a business entity with the relevant authorities. The video explains that sole proprietorships do not require registration, while partnerships, Pvt. Ltd., LLP, and OPC need to be registered under the Ministry of Corporate Affairs (MCA).

💡Legal Entity

A legal entity is an entity that has a separate legal standing from its owners, such as a company. The video distinguishes between sole proprietorships and partnerships, which do not have separate legal entities, and Pvt. Ltd., LLP, and OPC, which do, providing limited liability protection to their owners.

💡HUF (Hindu Undivided Family)

HUF is a unique business entity in Indian tax law that allows a Hindu family to operate as a single economic unit for tax purposes. The video mentions HUF as a way for families to save tax by having a separate tax entity, but it is limited to Hindu, Jain, Sikh, and Buddhist families.

💡Quick Payroll App

The Quick Payroll App is a tool mentioned in the video that allows business owners to manage their staff's attendance and payroll. It is highlighted as a free app to help with compliance and managing employees' records, which is an essential aspect of running a business.

Highlights

The video aims to help viewers determine the best type of business entity for their new venture among Sole Proprietorship, Partnership, OPC, LLP, and Pvt. Ltd.

A poll revealed an overwhelming majority interested in learning business basics, prompting the creation of the Business Basics Series.

The series covers topics like business entity selection, registrations, compliance, taxation, government subsidies, working capital management, and investment strategies.

The speaker's qualifications include being a Labour Law Consultant, director of a Pvt. Ltd. company, and having experience in various business types.

Sole Proprietorship requires no registration and has the owner bearing all liabilities, profits, and losses.

Partnership firms are based on a partnership deed and can be registered or unregistered, with a maximum of twenty partners.

Private Limited companies have a structured governance with directors and shareholders and are governed by the Companies Act.

LLPs offer limited liability to partners and are governed under the LLP Act 2008, providing an evolved version of a partnership firm.

One Person Companies allow an individual to form a company with limited liability and are registered under the MCA.

Registration processes vary from no requirement for sole proprietorship to complex procedures for partnership firms and MCA registration for companies.

Business naming conventions are discussed, including restrictions on suffixes and trademarked words for different entity types.

Legal entities and liabilities differ, with sole proprietorship and partnership having unlimited liability, while Pvt. Ltd., LLP, and OPC have limited liability.

Taxation varies by entity type, with sole proprietorship taxed as individual income and companies taxed at a flat rate, with some exceptions for Pvt. Ltd. & OPC.

The choice of business entity depends on factors like compliance preference, business size, risk, and growth potential.

HUF (Hindu Undivided Family) is introduced as a separate tax entity for Hindu families, allowing tax savings and family income distribution.

A Quick Payroll App is promoted for managing staff attendance and compliance, available for free download.

The video concludes with a teaser for separate detailed videos on each business entity, covering rules, compliances, registration, and taxation.

Transcripts

If you are starting a new business then which type of business entity is best for you,

Should you go with a sole proprietorship, Partnership, OPC, LLP & Pvt. Ltd.,

Which one is better for you? You'll be able to find that, by the end of the video

A few days ago, we had posted a poll on our community tab, Where we had asked you

Whether you would like to know about the business basics And I was shocked to know that,

That you guys said yes with an overwhelming the majority, from which not only I got excited,

Because it is subject of my passion, But I and my brother Sambhav had made a

Course on 'How to Raise Startup Funding' In which I talked about how you can raise VC fundings,

You'll get the link to it in the desc. box and I am very happy to that LLA's community would like to learn about business,

So what's this Business Basics Series? - In this series will discuss the following topics,

That if you are starting a new business then what type of business entity you should choose?

And for that new venture, what all registrations, certificates, the compliance you have to do?

What are the rules for taxation in it, how you can take subsidies and grants for the government?

How working capital is managed, how the loan is taken and how external investment is raised?

Apart from that will discuss some basic topics of finance, Which every entrepreneur must know

Like how to read a balance sheet, and do the valuation of the company, all this we will cover in this series

This series is helpful not only for entrepreneurs but also for students and salaried individuals,

Who wants to start their venture, Now you'll ask how I am qualified to tell you about all this,

I am a third-generation Labour Law Consultant, We consult over more than 500+ companies,

Moreover, I am a director of a Pvt. Ltd. company. I am a partner in multiple partnership firms

And I am also the sole proprietor of my sole proprietorship, I have done many kinds of

Like ed-tech, consulting, digital marketing, publishing So I'll share my personal experience with you,

Apart from this the deeply researched practical knowledge that LLA's team bring for you,

We Will also bring many experts in this series, Who'll tell you the complex topics in a simplified way,

So let's get started with episode 1 of the Business Basics series,

[ Intro Music ]

In today's video, I will give you an answer about a crucial topic, That you'll get to know till the end of the video

That if you are starting a venture then which type of business entity is best for you,

From Proprietorship, Partnership, OPC, LLP & Pvt. Ltd.,

From these, which one is best for you and only one will be best for you that

You'll be able to find that, by the end of the video,

And towards the end of the video, I will tell you about the sixth type of business entity,

About which only a few people know but it can save a lot of tax of common people like you and me,

And don't worry this is not Public or Limited company, but a very basic company

So let's first compare our five business entities, Sole Proprietorship, Partnership

Private Limited, LLP, & OPC, - So what is a sole proprietorship?

You just started your business by opening a current A/c is known as a sole proprietorship,

There is no registration required in this means all liabilities, profits and losses as an individual are yours only,

Now assume that I and Mandeep together started a business, so we have formed a partnership firm

Again this doesn't have any separate legal entity, but agreement

Between us is decided based on partnership deed, and we can decide our profit-sharing ratio etc.

Next is Private Limited company, It is governed under companies Act and it has many compliances

Like it has directors, shareholders which lays down a proper structure of a company.

LLP, This is an evolved version of normal partnership firm, Where liabilities on partners are limited,

We, Will, talk about limited liability soon, It is governed under LLP Act 2008

And MCA handles its registrations and governance,

Last is One Person Company, A company where there is no need for 2 directors

And an individual solely wants to start his company and want to form an entity like Pvt. Ltd.

So the government has given him an option, which is One Person Company.

Now you'll be thinking what is the difference between sole proprietorship and OPC,

And what is the difference between partnership firm and an LLP, We are covering all this...

So where you have to register to form them? - In a sole proprietorship, no registration is required,

If you are an individual then assume that your sole proprietorship is already formed

Whenever you want to start a business just take a certification like Shop&Estb., GST

From which you'll be able to open a current A/c against your name in the bank,

My name is Rishabh, but if I want to open my current with my firms' name that is witbox media

Then I'll take a Shop&Estb. certificate on my firm's name which from I'll be able to open my firm's current A/c,

For a partnership firm, it is a complex process, You have to make a partnership deed, partnership

Can be of two types - registered and unregistered, for which at least a partnership deed is required,

Agreement means between you and your partner an agreement has happened, which states

That how you'll do business and how you will distribute profit etc.

If an individual wants then he can register his partnership firm, It is mandatory when

When they want to purchase immovable assets in their company like a warehouse and land

But 90% of partnership firms are unregistered and are only governed on basis of partnership deed,

The rest of the three companies are registered under MCA,

Now, let's talk about how these businesses entities are named?

There are no rules and regulations for proprietorship but obviously, you can't use suffixes like 'Pvt.' 'Ltd.' etc

And any trademarked word like Reliance Industries will also be not legal,

So you can name, for example, I can name my company like Rishabh & Sons etc.

In a partnership firm, any name of your choice like 'RM associates', 'Rishabh Mandeep & Company' etc.

Pvt. Ltd.'s, LLP's, and OPC's names are approved by MCA, means if a company is already presented

With that same or similar name then MCA will not approve it,

Along with that after their names a suffix is added which give them a distinct identity,

Like the following examples -

RM Trading Pvt. Ltd.

RM OPC Pvt. Ltd.

or RM Trading LLP

There is one more minute detail in it, which is that already more than 17 Lakhs of companies are registered,

So it will be not easy for you to get the name, So your brand name doesn't need to be the same

As for your brand, Like the name of the company of Demat A/c which we use is RKSV Securities Pvt. Ltd.,

But their app name is Upstox, by the way If you have don't have Demat A/c then you open

It through the link given in the description below,

Now, A point which can steal the sleep of many people, that what is the legal entities of this

Business entities and what is their liabilities on their promoters,

So when we talk about sole proprietorship firm or partnership firm, So their promoters

Either partner or proprietor has unlimited liability, This means if a business incurred a loss of 10 lakhs

And in businesses account there are only 5 lakhs, then rest of the 5 lakhs can be recovered

From the sale of promoter's assets of the business, Means liability is unlimited,

But in Pvt. Ltd., LLP., OPC., liability is limited, Which means the liabilities of shareholders

This means if a business incurred a loss of 10 lakhs and the company has only 5 lakh including all assets,

Then 5 lakhs will be recovered from there and liabilities of promoters

Are limited to the share capital contributed by them, So there is a complete separation between

The businessman and the company formed by him in this case but not in proprietorship and partnership,

Now, what are the limitations on members?

In a proprietorship, the only person is there who is the proprietor of the firm,

In partnership firm maximum of twenty partners can be there,

In Pvt. Ltd. company minimum 2 directors 2 shareholders should be there and maximum of 200 shareholders,

In this, a shareholder can be a Pvt. Ltd. itself also,

This means a Pvt. Ltd. company can buy shares of another Pvt. Ltd. company.

In LLP. minimum of two partners should be there but there is no upper cap on the maximum numbers of partners,

In One Person Company, 2 persons are required. first one the director and the second a nominee for director

If any mishap happens to the first director, then the nominee will be the director of the company,

Before we move forward And discuss taxation, and which type of business entity is best for a venture type,

I would like to tell you that whenever you form a business entity, the second you do is hiring,

Interns & employees and when you hire them, You should manage and record their attendances from day one,

So that you don't have any hassle in the long term with the compliances,

Keeping this in mind, We have launched our Quick PayRoll App, You'll be able to manage

Your staff's attendance effortlessly just by using the mobile app, Also this App is

Completely FREE for you, You can download this app from the link given in the description box below.

There is one more interesting about it, There is a help button in it by clicking on which,

You can chat directly chat with the LLA's team and can get your genuine questions answered,

How much tax you have to give in these different business entities?

As there is no difference between a sole proprietor -ship and the proprietor, So whatever income

You generate from the business will be added in your income and you have to pay tax against your PAN only,

In all other cases, PAN card will be different and you will have to pay 30% tax in all,

But in the case of Pvt. Ltd. & OPC in some conditions this tax is reduced to 25% or even less,

Now, Let's come to the most important thing! - Which type of business entity is best for which business?

So sole proprietorship firm is best for the people who don't want to get into the hassle of compliances,

In this, you have to only file one return, that you may be already filing, which is an income tax return

That too if your turnover is under 20 lakhs then you will also not need GST...

So if your business is unorganized & has low risk, Where you don't need loans then you can go with a sole proprietorship

For example, if you have a grocery shop, clinic, e-commerce reselling or consulting business,

For example, if you are running a consultancy of Labour law, Then all these types of activities

Where you don't need much investment and work with your intelligence only, Then sole

Proprietorship will be best for you in this case.

In partnership firm all those businesses that are involved in a proprietorship are also involved here,

But you'll be able to see two more types of business in this, That I am recommending you

For example, you want to start a startup with a big vision, But you have just met your

Co-founder And you are trying the business model There is a term in startup 'MVP', You are making an MVP

Then you can start with a partnership firm, For my first business to test it and my compatibility

We formed a partnership firm, We worked on it for few months and after getting the results

Then we converted it into Pvt. Ltd. company,

Many people who want to test whether the business that they are going to do is their or Cup of Tea or not,

Then this firm is easy to form and dissolve.

Apart from this if your proprietorship firm is getting big and making turnover over 40 lakhs - 1 crore,

Then in this case you would like to keep your business income separate from your income,

And if you don't want to take GST on your name but on the firm's name then you can form it,

Now, You'll say I don't have a partner as I do my business on my own, It is not a problem

As you can make any member of your family a sleeping partner, Means they'll don't have

Any role in the day to day activity, But for income tax your PAN, GST will be in the firm's name.

And you'll have two separate balance sheets so that you'll not be booking this income in your capacity,

Pvt. Ltd. Company is very multi-dimensional and it is used for a different types of businesses,

Especially for the businesses that are formed for growth, high turnover, risk, international expansion

Where if you'll say that you have a proprietor ship firm than you would not even get the entry,

Where a matter of trust comes, then you should form a Pvt. Ltd. Company.

As I told you liabilities of all the shareholders are limited, So when you are doing a big venture,

It will have a big risk also, so if you want to mitigate the risk then you should form a Pvt. Ltd. company,

Especially for the startups if they want to raise external funding, or want to give their employees ESOPs,

Then Pvt. Ltd. company is the only option in those cases, Pvt. Ltd. examples are,

If you want to open a manufacturing plant, financial services, startup post MVP, etc.

Then in all these cases Pvt. Ltd. Company is best for you.

LLP is generally formed in the firms of CAs, law or management, Where many partners are there,

Apart from this in manpower supplies, sales promotion, digital marketing agencies

In big companies where there is no big capital investment but they have grown very big,

Then you can form an LLP.

At last, it is OPC, You can understand it in away, Promoter wants to expand his business

For which he needs loans, But he doesn't want to take much personal risk, so a promoter who wants to

Keep his liability limited, and want to keep 100% control to him, Then he can form an OPC.

You have to keep in mind, If you're Paid Up Capital is more than 50 Lakh or your Annual

Turnover is crossing is 2 crores for 3 years then you'll have to convert your OPC to Pvt. Ltd.

For OPC, the Best examples are if you want to open a restaurant, a showroom where you are

Doing an investment from 50 Lakhs to 1 crore, or if you want to take any franchise then you can form it,

So if you have understood this structure, just for a comparison, let's understand...

Compliances of partnership firm and proprietor ship firm is very low, It is highest in the Pvt. Ltd.

And LLP & OPC it is moderate, Apart from this the setup and annual cost is also the least in

Proprietorship and partnership firm and highest in the case of Pvt. Ltd.

I know I have to tell you the Bonus Tip, But before it pauses the video and tells us

Now on all these different business entities will make a separate detailed video, Where will

Tell you about their rules, compliances, registration, taxation, All this!

So tell us in the comment box below on which the business entity you want the first video to be made.

What is this HUF? - So assume that there is Mr. Sharma who

Along with his family, run a family business A showroom, and all of them give their contribution in the showroom,

So it is unfair to add this income to Mr. Sharma's the account only, As the whole family is working for it,

Then in this case any Hindu family can create its entity, Which is called 'HUF'

And again there is no need of registering but although you can write a deed.

There is an interesting thing about it, in that family only four members are there,

But from a tax perspective, HUF will be considered a separate tax entity, Which means HUF will also

The same rebates which an individual gets like no tax on its first 250 K + 80C,

Apart from this income generated in HUF can be taken as salary, and can also be given to family,

If your children are 18+ then you can also add them and pay salary to them

And deduct their expenses, You have to finally, give tax on the profit, So if you are

Coming in 30% tax slab and formed HUF entity then you'll able to save a lot of tax annually.

There is the drawback in this that HUF entity is only for Hindu, Jains, Sikhs & Buddhists.

Sadly for Muslims, Parsis & other religions concept of HUF is not there, I don't why this but it is like that.

So we have launched our FREE Quick Payroll App that you can check out from the link in desc. box.

That's all for today.

Jai Hind, Jai Bharat