One of the most important decisions you will make when starting a business is the type of legal structure you will use for your company. This decision will not only affect how much you pay in taxes but also the amount of paperwork your business is required to do and your personal liability. Now, how to choose the best business structure for your start-up?
When deciding on the type of business structure to form, you must consider several factors, including liability, tax implications, the cost of incorporation, and ongoing administration and record keeping.
In this blog, we will describe various business structures that you can adopt for your business.
1. Sole Proprietorship
The Sole Proprietorship is the most basic structure, as it usually involves only one person who owns and operates the business. If you do not create a separate legal entity for your business, it is a sole proprietorship. This is true whether you run it under your own name or a trade name.
Advantages of Sole Proprietorship
- Simple and Affordable
- Less Paperwork
- Simpler Income Tax
- Simplified Ownership
- Straightforward Banking
Disadvantages of Sole proprietorship
- Unlimited Liability
- Small size
- Limited life span
- The limited scope of diversification
- Lack of Financial Control
- Difficulty in Financing and Business Credit
2. Partnership Firm
If your company will be owned and operated by several people, you should consider structuring it as a partnership. The partners in a general Partnership manage the Firm and are personally liable for the Partnership’s debts and other obligations. Partnership firms can be formed by executing an agreement between the partners, are relatively simple to establish, and are common among small and medium-sized businesses in unorganized sectors. A General Partnership is a business structure in which two or more partners (thereby) manage, operate, and share profit and loss according to the terms of the Partnership agreement.
Advantages of Partnership Firm
- Easy to setup
- Name registration is not required
- Annual ROC Filing is not required
- Flexibility in Operations
- Easy to Dissolve
Disadvantages of Partnership Firm
- Unlimited Liability
- No legal status
- Instability (arising due to death or Lunacy of Partners)
- Limited Capital
3. Limited Liability Partnership
Limited Liability Partnership, or LLP, is a hybrid form of Partnership that allows owners to reap the benefits of both the company and partnership forms of business. Because of the lower incorporation costs and fewer compliance requirements, many entrepreneurs prefer Limited Liability Partnership as their business structure. As a result, LLPs are ideal for start-ups and small businesses that are just getting started and want to have minimal regulatory compliance formalities.
Advantage of LLP
- No Minimum Capital Requirement
- No Limit on the Number of Partners
- Low Registration Cost
- Less Burden of Compliances
- No Compulsory Audit
- No Dividend Distribution Tax
Disadvantages of LLP
- Limitations in Formation of LLP
- Limitations of Funding
- Higher Tax Rate
- Penalties on Non-Compliances
- Limitations in External Commercial Borrowings
4. Private Limited Company
When most people think of forming a business entity, a Private Limited Company is likely the first thing that comes to mind. As a business structure, a Private Limited Company is a legal entity that is separate and distinct from the shareholders who are the founders, and thus the responsibility of managing the company can be delegated to the persons known as directors. A Private Limited company can buy and sell assets, incur debt, enter into contracts, and sue or be sued. A Private Limited company’s ownership interests can be easily changed, and shares can be transferred without affecting the company’s existence or continued operation. The debt of a company is not considered the debt of its owners, so establishing your business as a Private Limited Company does not put your personal assets at risk. A company can also keep some of its profits without the owner having to pay taxes on them. Another advantage is a company’s ability to raise funds from both internal and external sources.
A Private Limited Company is one of the most complex business structures, so unless you are just starting out and working by yourself or with a few partners, and have ambitions of raising major investments from abroad and requiring a large number of employees, a Private Limited Company is the standard form of business structure you are looking for.
Advantages of Private Limited Company
- Limited Liability
- Easy to register, manage & run
- No minimum capital required
- Easy to dissolve or wind-up
- Preferred by banks, VCs & investors
- Easy allocation of ownership and management
- Continuous Existence (is not affected by any member’s death or lunacy)
- Distinct Legal Entity
- Transferable Ownership
Disadvantages of Private Limited Company
- Restriction on transfer of shares
- Prohibition on the issue of shares to the public
- Compliances Burden
- Division of ownership
5. One Person Company
The concept of One Person Company (OPC) was introduced in India through the Companies Act, of 2013 to assist entrepreneurs who are capable of starting a venture on their own by allowing them to create a single-person entity.
A one-person company gives a single promoter complete control of the company while limiting the owner’s liability to the business. Small entrepreneurs can set up a one-person company without sharing their profits with another individual. Because such companies have only one member, they enjoy certain advantages or exemptions over other companies.
Advantages of One Person Company
- Limited Liability
- Requires Minimum Capital
- Single Owner
- Less Compliance Burden
- More than One Director
- Distinct Entity
Disadvantages of One Person Company
- Ownership Limitations
- Prohibition to carry out Non-Banking Financial Investment activities
- Restriction on Banking Activities
- Restriction on Conversion
As mentioned above, the details and characteristics of various entities would assist you in making a better decision. Prior to making any such decisions, it is always advisable to consult with business professional experts. Registration Arena is the expert hub that can assist you with your business requirements. For more details visit us at https://registrationarena.com/ or call us at 8600544411 / 8600544422.