The Beginner’s Guide to Choosing the Right Business Type For Your MSME

LLP, OPC, and Public limited company…etc

Do the many options in types of business ownership feel confusing?

Picking the right business structure to build an MSME business sets the base for how your company runs. 

• A good choice helps things go smoothly, makes it easier to secure funding, and keeps your personal assets safe. 

• A bad choice can lead to legal hurdles, tax complications, and a frustrating cap on how much your company can grow.

This blog helps you understand the advantages and disadvantages of various business structure types. 

We’ll also explain the types of companies available to you, simplifying complex terms, comparing structures side by side, and giving you a clear plan to set your business up for long-term success. 

Let’s start with the different types of business structures. 

Types of Business You Should Know

Let’s look into the 5 main business structures found in India among MSMEs. 

Each has its own blend of benefits and drawbacks, ranging from legal liability to administrative complexity, especially for types of small businesses.

Sole Proprietorship 

A Sole Proprietorship, or you can say a business sole trader, is the most common type of business used in India. 

This business is owned and managed by a simple person. So, if you’re a freelancer, a consultant, or a small local shop owner, you might already fall into this category without knowing it. In a Sole proprietorship, there’s no separation between you and your business. 

This business structure does not require any formal registration.

Advantages of Sole Proprietorship	Disadvantages of Sole Proprietorship
Easy to set up with less paperwork and no formal registration.	Unlimited personal liability due to no legal separation of personal assets from the business.
Total authority with the business owner over decisions, and retains all profits.	It is difficult to secure investments, such as funding or loans, as credibility relies on the owner.
Low regulatory requirements and business income are taxed as personal income.	The business may end if you can no longer operate it due to death or incapacitation.
High operational flexibility and offers privacy, as it is not listed in government databases.	Tax rates are high for income over Rs. 10 lakhs as compared to corporate taxes.

Overall, the business type, sole proprietorship, is best suited for independent workers, small consultants, and local businesses with low risk, such as corner shops, clothing boutiques, or home-based catering services.

Partnership Firm

When it comes to the types of business partnerships, a Partnership Firm is a type of business in which two or more people run a business together. This business structure is governed by the Indian Partnership Act, 1932. 

To form this structure, a minimum of 2 partners is needed, and a maximum of 50 partners is allowed. Similar to a sole proprietorship, the firm and its partners are not separate entities.

This business structure requires registration, but it’s optional. 

Advantages of a Partnership Firm	Disadvantages of a Partnership Firm
Partners share responsibilities, skills, and resources to enhance the business.	Unlimited liability as partners share responsibility for each other’s mistakes, putting personal assets at risk.
Easy to start with fewer legal steps than forming a company, though a written partnership deed is advisable.	Lack of a separate legal entity leads to no perpetual succession, making ownership transfer and business expansion challenging.
Shared decision making, problem solving and risks.	Arguments among partners can lead to conflicts and hinder business operations.

Best suited for small businesses where the co-founders have strong trust in each other.

Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is a popular choice among new era legal entity types that offers the benefits of a traditional partnership with limited liability protection, without any minimal capital requirement. 

This structure operates as a separate legal entity distinct from its partners. In an LLP, partners’ liability is limited according to their agreed-upon contribution and can be started with a minimum of two partners, and no upper limit on the number of partners. 

This business structure requires compulsory registration with the Ministry of Corporate Affairs. 

Advantages of Limited Liability Partnership (LLP)	Disadvantages of Limited Liability Partnership (LLP)
Partners’ personal assets are protected, and only the invested amount is at risk.	LLPs require registration with the Ministry of Corporate Affairs and also annual return filings.
LLPs can own assets, incur liabilities, enter into contracts, and engage in legal actions independently.	LLPs require registration with the Ministry of Corporate Affairs and also annual return filings.
No minimum capital requirement and fewer government restrictions.	Financial statements of LLPs are publicly accessible.
Businesses can continue operating despite changes in partner associations.	A fixed rate of 30% on income, plus additional surcharges and cess, has to be paid as Tax
Designated partners can manage day-to-day operations.	Raising funds from investors is more difficult in LLPs

Best suited for professional businesses, such as lawyers or accountants, IT consulting services, and MSMEs looking to grow and protect personal assets.

One Person Company (OPC)

The One Person Company (OPC) is a type of business structure introduced under the Companies Act, 2013, for solo entrepreneurs to operate a corporate enterprise with limited liability. 

An OPC must have one director and one shareholder, and it’s not suitable for financial or investment activities. The business owner must be an Indian citizen and resident.

Advantages of a One Person Company (OPC)	Disadvantages of a One Person Company (OPC)
Personal assets are safe due to limited liability for owners..	Lack of credibility as compared to a large private company. companies
OPC is recognised as a separate legal entity, different from the owner	Not suitable for financial or investment activities.
Complete control of management and operations lies with the business owner.	Legal and regulatory requirements are time-consuming and costly.
Eligible for gov. MSME benefits.	A business becomes a slow process as only one person is doing everything.

This structure is a prime example when discussing types of entrepreneurship with examples.  It is best suited for professional businesses, such as lawyers or accountants, IT consulting services, and MSMEs looking to grow and protect their personal assets.

Private Limited Company

A Private Limited Company is a go-to choice for startups and businesses aiming for significant growth. This corporation-type business operates as its own legal entity, giving owners (shareholders) the benefit of limited liability and is governed by the Companies Act, 2013. 

This business structure requires two shareholders and two directors, and a maximum of 200 shareholders and 15 directors, at least one of whom must be an Indian resident. There is no minimum limit for authorised share capital.

This business structure requires compulsory registration. 

Advantages of a Private Limited Company	Disadvantages of a Private Limited Company
Shareholders’ personal assets are safe as liability is limited to their investment.	It’s a costly setup with complex paperwork and higher government fees
Fundraising is easy with high credibility with investors and banks.	Numerous compliance requirements must be met, including attending board meetings, maintaining accurate legal records, conducting annual audits, and submitting multiple filings.
The business can continue independently, even in the event of ownership changes.	A maximum of 200 shareholders might restrict large-scale investment.
Tax planning is better as a business has access to various tax deductions.	Operational expenses like accounting and audit fees are high.

Best suited for businesses seeking to raise funds, MSMEs aiming for significant growth, and ventures seeking a solid corporate image.

What Type of Company Registration and Licenses Do You Need?

Have you chosen the structure for your business? The next step is to gather your business information and secure the proper type of business license to operate your business. 

“Remember, skipping or avoiding licenses might put you in serious trouble and high penalties”.

MSME (Udyam) Registration

While Udyam Registration is not legally mandatory for all businesses, it is recommended for every MSME that qualifies. 

It’s a free, paperless, permanent registration that opens doors for government benefits like low-interest loans.

Eligibility Criteria 

• Micro Enterprise: 

Investment is less than Rs. 1 crore AND Annual Turnover ≤ Rs. 5 crore.

• Small Enterprise: 

Investment is less than Rs. 10 crore AND Annual Turnover ≤ Rs. 50 crore.

• Medium Enterprise: 

Investment is less than Rs. 50 crore AND Annual Turnover ≤ Rs. 250 crore.

• Eligible entities include individuals, startups, partnerships, LLPs, companies, SHGs, and cooperatives.
• Primarily includes manufacturing, service industries, retail, and wholesale trade, but excludes activities such as gambling, forestry, fishing, domestic staffing, and operations of extraterritorial bodies.

Documents Required 

• Aadhaar Number, 
• PAN Number, 
• Business Address Proof, 
• Bank Account Details, 
• GST Number (if applicable), and 
• Investment/turnover details
• Partnership deed for Partnership firms

Benefits of MSME Registration

• Access to collateral-free loans and low-interest rates in this MSME scheme by the government. 
• Exemptions from direct taxes and offer tax rebates
• Receive preference and waivers on security deposits on government contracts
• Subsidies on patent registration, electricity bills and tech upgrades. 

GST Registration

GST stands for Goods and Services Tax. This registration is required for tax compliance purposes for many businesses in India with specific turnover thresholds. 

This licence is mandatory if you come under this turnover threshold.

• Goods Suppliers –  

Turnover exceeds Rs. 40 lakh. For Special Category States, it’s  Rs. 20 lakh

• Service Providers –  

Turnover exceeds Rs. 20 lakh. For Special Category States, it’s Rs. 10 lakh

• Mandatory Registration Regardless of Turnover – 
  • Inter-state suppliers
  • E-commerce transactions
  • Reverse charge mechanism
• GST Composition Scheme

Lower Tax payments for small businesses with a turnover of up to Rs. 1.5 crore

Online Registration Process

• Part A
  • Visit the GST Portal
  • Register as a taxpayer
  • Provide business details
  • Verify via OTP to get the Temporary Reference Number (TRN)
• Part B
  • Use TRN to complete the application.
  • Upload documents 
  • Submit using EVC (Electronic Verification Code) and DSC (Digital Signature Certificate), the e-Sign method (Aadhaar OTP)
• Required documents
  • PAN card
  • Aadhaar card 
  • Bank details
  • Proof of business address 
  • Digital Signature. 
  • Additional documents are needed for companies and LLPs.

Benefits of GST Registration

• Signal registration allows you to conduct nationwide operations
• Business owners can claim the Input Tax Credit (ITC), which reduces their tax liability.
• Simple online system to file returns with low paperwork and low compliance costs. 

Other Essential Licenses

These licenses require registration, depending on your business and location. 

• Shop and Establishment License

Required for most commercial shops and offices to regulate working conditions. Any business must register within 30 days of starting. 

• Trade License

This license is issued by your local municipality (like BBMP in Bengaluru) to ensure health and safety compliance. This license is valid for one to five years, with annual renewal

• Professional Tax Registration

A state-level tax on professionals and employers. Mandatory registration involves an online application, and employers are required to deduct tax for employees earning over Rs. 25,000 per month.

• FSSAI License

Mandatory registration with FSSAI for food businesses. 

• Import Export Code (IEC)

Mandatory registration in the IEC for import/export activities in any business. 

• Factory License

Mandatory registration for manufacturing units under the Factories Act, 1948. 

How to Choose the Right Business Type For You?

I won’t recommend any one business structure as the “best option,” as the choice among various business entity types depends entirely on what your business is, what your goals are for your business, and how much risk you are willing to take, among other factors. 

To help you, I can ask you a few critical questions that will assist you in making a decision for your business. Let’s start…

Liability – How much risk can you handle?

• If keeping personal assets safe is your top priority, then look into an LLP or a Private Limited Company. 
• If you’re in a very low-risk business, then starting off as a Sole Proprietorship might be enough.

Fundraising – Are you planning to raise money from investors?

• If the response is a clear “yes,” then going with a Private Limited Company is almost non-negotiable.
• Investors strongly prefer this structure due to its transparent processes and straightforward equity options.

Compliance – How much complexity and cost can you manage?

• Private Limited Companies come with the most responsibility. Can you allocate as much time and resources as possible to staying compliant? 
• If you need a balance between protection and simpler compliance,  an LLP works well as a middle option.

Control – Do you want complete control over decisions?

• If maintaining total control is important to you, a Sole Proprietorship or a one-person company (OPC) is a perfect choice. 
• If you’re collaborating, analyse how much trust exists in a Partnership compared to the clear structure of an LLP or Private Limited Company.

Scalability – What is your long-term vision?

• Ask – Where do you see your business in five years? Do you picture big growth, multiple branches, or a larger team?
• Then, starting with an LLP or Pvt Ltd will save you the trouble of converting your business structure later.

While selecting a business structure, avoid this mistake: 

• Entrepreneurs choose a Sole Proprietorship for its initial simplicity. Later, they find themselves unable to secure funding or stuck shouldering huge personal risks.
• Begin with the structure that aligns with your vision for growth. 

While the right legal structure prevents future problems, the right operating systems create future freedom. If you’re ready to build for growth and freedom, this is for you.

Final Thoughts

Now you know that choosing from the different company structures is more than just a legal checkbox. The business structure influences how others perceive your business, how you expand, and how stable your future growth becomes. 

So, are you ready to build a business that will last? 

Use this guide as your starting point. Seek professional help if needed, and recognise that investing time in building a solid legal foundation is the most critical step you can take for your business. 

You now have the map. Go ahead and take that confident next step.

Ready for the next step? Explore our library of articles on business compliance, tax planning, and growth strategies for MSMEs.