Why business structures are necessary for modern businesses

As an already-existing or potential business owner, you have to meet various requirements to conduct your operations. One such requirement is compliance with the law. While you might be familiar with certain legal compliances such as procuring licenses, paying taxes, and refraining from any illegal activities, you might not know that the foundation of it all is the business structure. This article will help you understand what business structure is and explore the types of legal business structures in India.

What is business structure?

Essentially, the business structure is an organisation's legal structure that is legitimised in a given jurisdiction. This legal structure is of immense importance because it can determine the kind of activities your business can undertake. For instance, it dictates how to raise capital, the distribution of business obligations responsibilities, the amount of taxes owed, and so on.

To pick the legal structure that will best suit your business, you must consider the needs and goals of your venture. Then, you must understand the features of the various kinds of business structures and pick the one that aligns with your unique business requirements.

What are the types of business structures for business owners in India?

  1. Sole Proprietorship: One of the oldest forms of business structures in India, the features of a sole proprietorship are as follows:

  • A single individual owns and controls the structure.

  • The owner takes complete responsibility for profits and losses.

  • The liability of the owner is limited.

  • There are fewer legal formalities in comparison to partnerships or companies.

  • The entire capital investment is the contribution of the sole proprietor.

  • Legally, the proprietor and business are the same.

  1. Partnership: An agreement between two or more people with the common aim to earn profits, a Partnership comprises the following features: 

  • A Partnership is formed with a minimum of two members and a maximum of 10 members, with 20 members for banking and other cases.

  • All partners have unlimited liability.

  • Profit-sharing between partners takes place as per the agreed ratio.

  • While not mandatory, it is advisable to get the Partnership firm registered.

  • Partnership deeds can assist in the resolution of disputes and conflicts.

  • All partners can act together or one can act on behalf of others, implying that mutual trust is a prerequisite.

  1. Limited Liability Partnership (LLP): Formed to provide limited liability to owners, the features of this type of business structure are as follows: 

  • It is a corporate body with a distinct legal existence.

  • The Limited Liability Partnership Act, 2008, provides LLPs autonomy to manage their affairs.

  • Becoming a partner in limited liability companies does not constitute a lengthy or complicated process.

  • All partners enjoy limited liability as per the extent of their capital investment.

  1. Private Limited Company: A company that is owned privately by individuals, the features of a Private Limited Company are listed here:

  • This structure is relatively more flexible when compared to Public company since several provisions of The Companies’ Act 2013 are not applicable.

  • It can be formed with two members and two directors.

  • The maximum number of partners allowed is 200.

  • The maximum number of shareholders permitted is 50.

  • Public invitation to apply for shares is not allowed.

  • Easy purchasing and selling of stakes have made this structure a popular option amongst investors.

Click here on how to choose between LLP and PVT LTD company here.

  1. Public Limited Company: A Public Limited Company is one that is either owned by the general public or wherein public subscriptions are allowed. Its features are as listed under:

  • Raising capital through the public via the direct issue of shares is permitted.

  • The minimum number of directors required is three, and the minimum limit of shareholders is seven.

  • There is no upper limit on the number of shareholders.

  • Shareholders enjoy limited liability to the extent of the face value of the shares and premium, respectively.

  1. One Person Company (OPC): A company that has only one person as a member who also acts as the director and a shareholder. The features of an OPC are as follows:

  • Individuals from outside India cannot incorporate an OPC; only Indian residents can do so.

  • It allows individual persons to begin their own business ventures.

  • It has features like perpetual succession and is a separate legal entity.

  • With fewer legal formalities, it can be easily incorporated with even a single person.

  • The minimum paid-up capital required is ₹1 lakh, whereas the maximum paid-up capital is ₹50 lakh.

Although this article provides information on what constitutes a legal business structure in India, it is advisable that you consult a professional lawyer who can guide you with further detail on the importance of business structure for your unique venture and help you choose the right option.

Loans for MSMEs

If you are looking for affordable financing for your business, HDFC Bank is here for you. Opt for a Working Capital Loan or Business Loan and get access to competitive interest rates and manageable tenures to take your business where it needs to be. HDFC Bank also offers a plethora of other financial instruments for MSMEs, such as Bank Guarantee and Letter of Credit.

To learn more about the various products and services at HDFC Bank that can benefit your enterprise, you can check out the MyBusiness page here.

​​​​​​​*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.