Types of Companies | The Startup Process
So now that you have done all your homework, all the stakeholders are on board and you have the perfect business model in place, it is time to move to the step all entrepreneurs wait for the most i.e. setting up and registering the company. It is your vision coming to life and existing for posterity, long after you are gone. But before we move on to the guide on how to register your company/business, let us first discuss the different types of companies your startup can be registered as.
Different Types of Companies
There are many ways to classify the types of companies. They can be classified on the basis of liability, formation, ownership, control, and domicile. There are basically six types of business ownership which you can register.
Public Limited Company
The legal existence of a Public Limited Company is separate from its members (shareholders) and the liability of its members is also limited. Its existence is thus not affected by the retirement or death of its shareholders. A minimum of 7 members is needed to form a Public Limited company but there is no maximum limit on this. The company collects its capital by the sale of its shares to the shareholders. The shareholders of a company do not have the right to participate in the day-to-day management of the company, thus separating ownership from management. All the major decisions of the company are taken by the Board of Directors.
Private Limited Company
Private Limited (Pvt Ltd) companies have more than 2 and less than 50 members and their liability is limited or unlimited depending on the type of the company it is. Unlike Public Limited companies, here the transfer of shares is limited to its members and the general public cannot subscribe to its shares and debentures. Pvt Ltd companies are exempted from many rules and regulations which are applicable to Public Limited companies, for example, the need to file a prospectus with the Registrar, the need to hold the statutory general meeting or maintain annual reports etc. Also, it can start operations after receiving just the certificate of incorporation, whereas a Public Limited company needs a certificate of commencement as well. It is a great option if you want the advantages of limited liability and yet want greater control over your business and maintain its privacy. This is the most popular type of company for start-ups to be registered as.
There are three types of Pvt Ltd companies:
- Limited By Shares – The liability of the shareholders is limited to the extent of the face value of shares held by them. Most Pvt Ltd companies are of this type.
- Limited By Guarantee – In these companies, in case of liquidation, the shareholders promise to pay a certain fixed amount to cover the liabilities of the company.
- Unlimited Liability – There is no limit on the liability of the shareholders. In case of liquidation, they might have to pay even from their personal assets to cover the liabilities of the company. This type of company is quite uncommon today due to obvious reasons.
A business that is registered in the name of an individual is called Sole Proprietorship. Thus only one person is completely responsible for the business. The owner and the business are not separate from each other and hence the onus of funding the business and bearing the losses lies with him. Any profits from the business are just added to the owner’s income for taxation purposes. For any additional money required to cover the losses of the business, the owner’s personal assets can be used too.
A Partnership is quite similar to a Sole Proprietorship except for the fact that more than one individual is involved in a partnership. There is a legal partnership agreement in which the roles, responsibilities and the share of each partner is defined. The partners are personally responsible for any profit or loss of the company and have to compensate the losses with their personal assets, if the need arises.
Limited Liability Partnership
A Limited Liability Partnership (LLP) is a structured business model similar to a Partnership but here, the partners have limited liability as the name itself suggests. The maximum liability of every partner is capped by his share capital in the partnership. It is also a popular option for start-ups for registration.
One Person Company
One Person Company (OPC) as a company type was introduced in the Companies Act of 2013 in India. It is similar to a sole proprietorship but the owner shall have limited liability and thus his personal assets would not be at risk if losses need to be recovered or if the company is liquidated.
There are a lot of options to choose from when you plan to register your startup. Make sure you research the pros and cons of each and register your firm accordingly. Now that you know about different types of companies, let’s move on to the guide on how to register your company.
The Startup Process
We know how important your dream business is to you. Therefore, we’ve come up with an all in one guide: The Startup Process to help you turn your vision into reality.