Choosing a business structure

01 The one question that matters most: liability

Liability means who pays if the business cannot pay its debts. With unlimited liability, your personal savings, house and land can be used to pay business debts. With limited liability, you normally lose only what you put into the business.

Limited liability does not protect you from loans you personally guarantee, from fraud, or from unpaid taxes in many cases. Banks often ask directors and partners to sign personal guarantees.

02 The five structures compared

Here is the short version. Costs are shown as low, medium or high because official fees change and professional fees vary by city.

• Sole proprietorship: one owner; you and the business are the same in law; unlimited liability; lowest cost; least paperwork. You prove it exists through registrations such as GST, Udyam or a shop licence.
• Partnership firm: two or more partners under the Indian Partnership Act, 1932, with a partnership deed; unlimited liability, and each partner can be made to pay the firm's debts; low cost. Registering the firm with the state Registrar of Firms is advised, because an unregistered firm cannot sue others to enforce its contracts.
• Limited Liability Partnership (LLP): at least two partners under the LLP Act, 2008; limited liability; medium cost; registered with the Ministry of Corporate Affairs (MCA) and must file an annual return and a statement of accounts every year.
• One Person Company (OPC): one owner under the Companies Act, 2013, who must be an Indian citizen; since 1 April 2021 the owner may live in India or abroad and there is no limit on paid-up capital or turnover; limited liability; medium to high cost; company law filings apply.
• Private limited company: at least two directors and two shareholders, at most 200 members, under the Companies Act, 2013; limited liability; highest cost and compliance, including a yearly statutory audit; easiest structure for raising equity from investors.

03 How to choose

Start simple if the risk is small: a proprietorship lets you test the idea at the lowest cost. Move to an LLP or company when you take on large loans, sign big contracts, bring in partners or plan to raise investment.

Partners should always sign a written agreement on money, roles, profit share and exit, whatever the structure. Most partner fights start where nothing was written down.