A good start is more than half the race, I think, and our starting-point or principle, once found, clears up a number of our difficulties – Aristotle
Choose the right legal structure for your business
When you plan to start a new business, we may have many queries. Choosing a best legal structure for our business should be one of the most well analysed decision among all. It is very crucial for every business owner to identify the business structure that helps to structure their business’s direction and grow better as per their dream.
We have listed out five major legal entity structure to help you decide the best suitable one.
As the name indicates, this is a single owner business entity. This is the simplest form of business entity where formation is as simple as opening a bank account with your own PAN. This is the low cost one and since single owner you have all the power to close down the business at any time. The owner exercises complete control and risk bearing, with the benefit of no profit sharing. The owner is liable to pay all debts due to the firm if the business is unable to meet its liabilities. Business comes to a standstill once the owner is unable to continue business. It is suitable for business like local markets, artistic works, personal services, etc where there are no major operational risk or expansion plans.
Partnership is a form of business where two or more persons come forth to start a new business. In this, the partners share the profit and loss and take decisions together. There are two types of partnership business, one is general partnership where everything is shared among the partners equally and the other is limited partnership where one partner has the overall control of operations of the firm and other partner share the funds and receives profit. In partnership business entity, the partners have to draft a Partnership Deed containing the profit-sharing ratio, capital contributions, bank account operations, rights and duties of partners including a scenario of retirement, admission or death of the partners.
Partnership business entity is more expensive when compared to sole proprietorship .They enjoy optional registration with the Registrar of Firms. A minimum of 2 and maximum of 50 partners can be appointed and these general partners are liable to unlimited liability jointly and severally. This form is highly adopted for services like professionals, construction, legal and medical services.
3.Limited Liability Partnership (LLP)
An LLP has to be registered under Registrar of Companies. Partners are required to draft a LLP agreement and has to include a minimum of 2 partners. There has to be minimum 2 designated partners, who perform the same functions as of a director in any company. An LLP need not perform mandatory audit, provided turnover or partner’s contribution doesn’t exceed forty and twenty-five lakhs respectively. Partners are liable to pay off business debts only to the extent of their unpaid contributions. Unlike a private company, there are no restrictions in raising funds/loans from outside parties for business purposes. Also, they are recommended only for profit running businesses.
4.One Person Company (OPC)
An OPC is a company with only one person as member, paid-up capital not exceeding fifty lakhs and a turnover of less than two crores. The company enjoys a separate legal status and so the owner enjoys limited liability, i.e., his personal assets are safe. The owner and has to be a resident of India and can appoint a nominee. OPC will be suitable for a business with very little expansion plans. If you are someone with several business plans, this may not be the one for you. A person can be owner to only one OPC at a time.
5.Private Limited Company
A Company is governed by Companies Act and is a separate legal entity. A company is required to file forms, prepare Memorandum of Association and Articles of Association prior to its formation. Its shareholders should be limited between two and two hundred shareholders having a minimum of two directors to take care of the working of the company. Liability is limited to the extent of unpaid share capital. Company form of legal structures are preferred by investors, banks, venture capital companies, etc for extending loans and investments. Although they suffer from high compliances, they do enjoy a set of government schemes and benefits from law. It would be suitable for businesses with huge opportunity and great plans of scale. Flipkart, BookMyShow, Ola are a few examples of Private Limited Companies
COMPARISON AMONG VARIOUS BUSINESS ENTITIES
|COMPARISON AMONG VARIOUS BUSINESS ENTITIES|
|Liability||Unlimited liability||Unlimited liability||Limited liability||Limited liability|
|Tax rate||Individual tax rates||30%||30%||Starting at 15%|
|Foreign Direct Investment||Not Permitted||Not Permitted||*Specific sectors||*Some sectors|
|Transfer of shares||Not Applicable||With consent of all partners||Ease of transfer|
|Investment in other businesses||Not Permitted||Not Permitted||Permitted||Permitted|
|Availability of information(Public)||Not available||Not available||Available.
|Formation||Ease in formation||Ease in formation||Time consuming||Time consuming|
|Scalability||Low scalability||Low scalability||Moderate||High|
*100% automatic route – does not require any prior approval from RBI or Government. All kinds of FDI is prohibited in agriculture, plantation and real estate.
From the above table we can clearly see that no two forms are similar nor is any one form the best. Every entity has a different identity. You have to focus on what each form offers and match them with your own requirement. Choosing the right kind of business structure is the key to the smooth functioning of business. Aristotle had said the very famous proverb, “Well begun is half done”.
Click here to watch CA. Anand Kumar, partner at JAKS & Associates talk about different types of entity structures/legal forms available and how can we decide upon the right business structure
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