“Legal entity – what is it, why do I need it?”
There are many questions revolving around this, and if you’re one of the business owners feeling unsure, overwhelmed, or just plain confused, you’re not alone.
Choosing the right legal entity is one of the first and most important steps in starting or scaling a business.
This blog provides simple answers to complex questions, breaks down different types of legal entities in India, and helps you understand which one best suits your business needs.
The concept of a legal entity is to provide businesses with a separate legal identity from their owners, ensuring protection and accountability.
This separation allows for the business to,
In simple terms, a legal entity in business is treated as a separate person when it comes to the law.
There are many types of legal entities in India that are governed by the Companies Act 2013.
One of the objectives of legal entity is to limit the personal liability of the business owners.
Many small business owners struggle to understand the importance of implementing a legal entity for their business.
So, here are a few key reasons why legal entities are important for your small businesses…
If you have the right legal entity for your business, you can save your personal assets from being used to fulfil the business debts or legal obligations.
This can help MSME business owners feel safer and relaxed about their finances, especially if they face legal issues or go bankrupt.
If your income graph looks like a rollercoaster, working with an MSME business coach can help you smooth the ride and grow steadily.
There are different types of legal entity that offer tax advantages for small businesses.
By choosing the right legal structure, small business owners can save money on taxes and take advantage of deductions and credits available to certain types of entities.
This can result in significant savings and help the business grow financially.
Forming the legal structure for your business provides you with clarity in terms of ownership, management, and decision-making processes.
This can prevent arguments and confusion between partners or shareholders, resulting in a smoother and more successful business.
Marketing, branding, and legal recognition are essential things to run a business.
A legal entity of your business provides credibility to investors and stakeholders.
That’s where the legal entity comes in and shows that the business is legitimate and obeys the rules and regulations, which attract more opportunities for growth and success.
If your business is structured as a legal entity, it can keep operating to exist even if the business owner or owners change, providing stability and longevity for the business.
If unexpected legal challenges arise, the legal entity of your business saves the company’s property and image.
As I mentioned earlier, there are many types of legal entities, each with its unique characteristics and benefits.
Let us see them in more detail and explore some examples of each type.
It is the most popular choice for many MSMEs because the structure provides limited liability to its owners and also allows for easy transfer of ownership.
A Private Limited Company is also referred to as Pvt. Ltd., and it is a separate legal entity with 1–50 shareholders and 2–15 directors.
In addition, its shares are privately held and cannot be publicly traded.
For example,
Tata Sons Private Limited – The holding company of the TATA group
Flipkart – First, it was registered as a private limited company. Later, in 2018, when Walmart acquired it, it became a public limited company.
If you’re running your business on your own, the simplest legal entity to choose is a sole proprietorship.
In this structure, the business owner and the business are considered one and the same legally. So, you have to take responsibility for all business debts and liabilities.
Example
A partnership is also a type of legal entity where two or more individuals come together to operate a business and share ownership, profits, and losses.
Example
You and your friend or like-minded people want to start a business together.
So each one in the partnership has a stake in the business and contributes their skills, resources, and capital to help the business grow and succeed.
This structure allows for shared decision-making and responsibilities among partners.
A Public Limited Company is a type of business in India that can sell its shares to the general public.
If you want your business to be a public limited company, you need at least seven shareholders and three directors.
Also, it is important to note that one director should be an Indian resident.
A public limited company allows for increased access to capital through the sale of shares on the stock exchange.
Example
There are many companies in India that are Public Limited companies. The following are some –
A one-person company (OPC) is a type of legal entity and is best for entrepreneurs who want the benefits of a private limited company.
It allows a single person to start a company with limited liability, meaning your personal assets are protected if the business faces losses.
OPC is introduced under the Companies Act, 2013, to encourage small businesses and startups to operate in a more organised and secure manner.
Example
A Limited Liability Company is a combination of a company and a partnership.
It means that partners may have limited personal responsibility but still control the running of the business.
This structure provides business owners with flexibility in management and decision-making processes, making it an attractive option for MSMES looking to grow and establish themselves
Here are the best example of LLC
IBM Credit LLC, a subsidiary of IBM, is an example of an LLC showcasing how large corporations use this structure for specific business operations.
It is a type of legal structure that is typically used for organisations that are focused on charitable, educational, or social purposes.
Nonprofit organisations are free from paying certain taxes and can receive donations from individuals and businesses to support their mission.
This structure also allows for transparency in financial reporting and accountability to stakeholders.
Example
In a joint venture (JV), two or more businesses, usually one Indian and one foreign, get together to create a new company.
They share profits, losses, investments, responsibilities, and risks.
Example
Forming a legal entity for your business is important as it provides a clear structure for ownership, management, and decision-making within the organisation.
The following are the important steps to form a legal entity for your business..
It is important to choose based on the specific needs and goals of your business, depending on which you choose from sole proprietorship, partnership, limited liability company (LLC), etc.
Also, consider factors such as liability protection, tax benefits, and ease of administration when making your decision.
In case you are having difficulty choosing the right structure for your business, taking support from the legal experts and business experts is more helpful.
The success of a business depends on its ability to be remembered by consumers, which requires a name that is memorable, unique, and easily recognisable.
A registered business name gives your business the legal protection and helps build your brand identity in the market.
To prevent future legal problems, it is also important to make sure the name you have chosen is original and hasn’t been used by another organisation.
If your business is operating in a regulated industry or selling certain products, you may need to get specific licenses and permits to legally operate.
Based on your business location and the nature of your business, these licenses and permits may vary.
So, obtaining the required papers will ensure that your business follows the local rules and laws.
As a business owner in India, securing the right tax identification numbers is a crucial first step.
You will need a PAN card for tax reasons, and a GSTIN if your revenue goes beyond the GST limit or if you sell goods between different states.
Tax Identification numbers are essential for –
If your business has shareholders, co-founders, or directors, make sure to create written agreements that clearly define each person’s role, responsibilities, ownership share, and how profits will be divided.
So that the legal entity is properly structured, compliant with laws, and protected from future disputes.
The type of legal entity you choose directly influences how your business is taxed and can make a big difference in overall tax burden.
Here, I explain how it affects your business based on the business type.
If you want to choose the right legal structure for your business, you need to be more careful because it impacts everything from taxes and liability to ownership and growth potential.
Getting advice from the experts provides you with clarity in
Each business entity offers different levels of liability protection, and it is important to choose the one that best fits your specific needs and circumstances.
I hope this blog provides a better understanding of legal entities for your business to protect your assets and ensure overall success.
If you are interested in reading more articles like this, explore more informative blogs on business and entrepreneurship.
None can destroy iron, but its own rust can! Likewise, none can destroy a person, but their own mindset can.
Former chairperson of the Tata Group
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