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Types Of Self Employed Entity

Types of Self Employed Entities

Banks provide loan services to provide convenient financing options to individuals and companies. It has divided the entities into salaried and self-employed individuals. Salaried employees need to show their income tax returns and computation to avail personal loans, home loans or loan against property.

Self-employed entities can be self-employed professionals like lawyers, doctors and chartered accountants, rest are added into self-employed non-professionals.

Each business entity has its own tax and legal considerations.

There are mainly 4 entities in Self Employed Establishments.

  • Proprietorship Firm
  • Partnership Firm
  • Limited Liability Partnership Firm
  • Private Limited Company

Proprietorship Firm

It mainly comprises of a single entity; the identity of the enterprise is synonymous to that of the individual’s identity. It doesn’t have separate legal identity. The main factors considered for loan are the ITR of last two years, Computation, Profit and Loss Statement and Balance Sheet. Capital Gains and Interest obtained on investments are not considered in FOIR calculation as income. Only EBITDA of the company and any rental gains are considered. The income of the proprietorship is recorded on Schedule C of Form 1040. Examples are doctors, freelance journals and lawyers.

Partnership Firm

An enterprise is a partnership if it consists of two partnership with minimum capital investment in the ratio of 1:99. Resource, in form of money, property or human resource is contributed by each capital. In this case, the partnership entity has its own identity with its own PAN and Aadhar details separate from that of the individuals. For FOIR computation, income considered is that of partners and EBITDA of the company. Under Company’s Act, partners can take salary from the enterprise and all earn interest on partner’s capital. Factors considered are ITR of last 3 years, Computation, Profit and Loss Statement and balance sheet. The responsibility of servicing the loans lies on all the partners i.e. their personal assets can also be held liable to service the loan in case of default. Examples can be considered as firms with two doctors or lawyers operating as partners.

Limited Liability Partnership Firm

Limited Liability Partnership provides formalization to partnerships. In this case there’s a formal legal written agreement and annual reporting requirement as mandated by law. This set up frees the partners from personal liability of servicing the loan in case of default. There are no maximum number of partners in limited liability, also, in some places one member limited liability partnership is also allowed. It also has benefits over cost optimization where many professionals pool in business to reduce cost of doing business and increase capacity of the Limited Liability partnership by bringing in their own client and doing the business together.

Additional Reading: Checklist of documents required for loans

Private Limited Company

The private limited companies are in the process of becoming bigger in terms of scale and quite possibly on the way to become public limited companies. There are minimum 2 directors and 15 directors at maximum and two to 499 shareholders. The directors can be shareholders of the company or can be an individual not related to the company. They are supposed to fulfill managerial duties and make day to day decisions about company’s affairs.

The capital shareholders contribute to the entity is paid in capital and it is supposed to be less than a mandated capital called authorized capital. There is requirement of high compliance as they are on the way to become public limited companies. A Memorandum of association is signed with the government to register the company. Company has its company identification number (CIN) along with PAN and TAN. The requirements for the loan application are the EBITDA of the company and directors’ remuneration. 51% of shareholders should be co applicant in the loan along with the company.

The above requirements are in accordance of normal income program. There are many other alternatives of calculating income apart from gross profit of the company or a firm. For a premium interest, the bank sends chartered account to create a fresh profit and loss statement and come to an income figure to decide on the loan amount. The bank can also increase EMI amount of the existing customers who have shown good track record on repayment. This method sole focus is on cash flows rather than the income as shown in the statements. The latter method is more of borrowers favor as it increases his EMI and reduces time till the loan is fully paid.


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