While starting business anxiety and uncertainty hits every time in minds of start-ups. The main role of entrepreneur is to cross the ocean of uncertainty and impossibility and by positive attitude monetize the idea. The main difference between entrepreneur and businessman is that entrepreneur makes his imagination true by positive attitude and businessman earns profit for his livelihood. The deed of entrepreneur impacts lives of many people while businessman is the man inside entrepreneur.
Every businessman while starting business dream of laying down strong foundation and entrepreneur starts with analyzing advantage and disadvantage of form and structure of business organization which largely impacts future of his imagination. Let us discuss 7 types of business structures which will be practical and legal roadmap of your business.
This is the simplest form to start business. You will be individually responsible for all the debts and losses and also enjoy profits. Normally there is no registration required to start Sole Proprietorship business. You need to take permission from local administrators under Shop and Establishments Act and jump into ocean of uncertainty and thrill to drive your boat. You can further take GST Registration and Udyog Aadhar under Micro, Small and Medium Enterprise Act known as Udyog Aadhar for your business. There is very less compliance cost in forming sole-proprietorship and tax savings can also be enjoyed to the extent of minimum exemption limit. If you dream of starting of your own, jump into market.
2. One-Person Company–
Sole Proprietorship has disadvantage of unlimited liability and to form Private Limited Company at least 2 persons are required. Therefore Govt. had introduced this business structure for an individual who wish to climb ladder of success being One-Man Army. OPC is meant for Solo Entrepreneurs. If revenue of business is over 2 crores and paid-up capital is above 50 lakhs then OPC is required to be converted into Private Limited Company. If you want to start business by securing your personal assets then this structure is for you. Offcourse there will be some legal compliance at the cost of limited liability. It is taxable at flat rate of 30% plus applicable surcharge and cess.
When two or more persons come together to operate business, then it is called Partnership. Starting of partnership is very inexpensive as it requires only partnership deed. Partnership deed is written agreement between partners setting objectives of business and sharing ratio. It is regulated by Partnership Act, 1932. It is not compulsory under Indian law to get Partnership firm registered but a registered firm enjoys various benefits over non-registered firms. In general partnership all partners have unlimited liability. It means in case of losses or to pay debts personal assets of partners is at risk. The basis of partnership is mutual trust and confidence among partners. Partnership firms are taxable at flat rate of 30% plus applicable surcharge and cess. If you find someone else of your confidence then you can start business as a team with minimal start-up cost. The main disadvantage of partnership is unlimited liability which gave rise of Limited Liability Partnership.
4. Limited Liability Partnership–
The liability of partners is limited to the extent of contribution made by each partner. It is separate body corporate incorporated under Limited Liability Partnership Act, 2008 and is a legal entity separate from that of its partners. It contains elements of both a corporate structure as well as a partnership firm structure. It is much cheaper than starting Private Limited Company with less legal compliance. There is no limit on number of partners in LLP. Tax is applicable at flat rate of 30% plus applicable surcharge and cess. If you want to play safe with partners, it is best form to start.
5. Private Limited Company–
Company is an artificial legal person having its separate legal entity with perpetual succession and common seal. Start-ups, who want to grow fast, raise funds and attract talent by offering Employee State Option Plan, can start as private limited company. Private Limited Company can be incorporated with at least 2 persons and minimum paid up capital of Rs.1 lakhs under Companies Act, 2013. The liability of directors is limited to amount invested by them. It has average legal compliance and tax advantage because companies with lower turnover are chargeable @ 25%. Normally Companies are taxable at flat rate of 30% plus applicable surcharge and cess.
6. Public Limited Company– The main difference between Private and Public Company is that Public company can invite general public to invest their money in company. It can be listed on recognized stock exchange or may be unlisted. It has more compliance because hard earned money of general public is invested in company. It can be formed with at least 7 persons and minimum paid up capital of 5 lacs. Public Companies are taxable at flat rate of 30% plus applicable Surcharge and Cess. The main intention for forming public limited company is to raise money, protect yourself and build reputation which drives sales to company.
Apart from all the business forms and structures, one business structure which really works is your mindset to form and run business. There is not a general answer to the question that which business structure is best. It depends on needs and cost-benefit analysis of particular business to reach the conclusion. Factors like legal compliances, cost involved, flexibility, risk taking power and future needs of business play very vital role in taking decision. Before forming any business entity one should always take advice of an expert to break the chain of discomfort.
The above comments do not constitute professional advice. The Author can be reached at firstname.lastname@example.org or visit website www.financialtreecompany.com. My name is CA Divya Agrawal and I am Practising Chartered Accountant, CEO and Founder of FINANCIAL TREE COMPANY (An online return filing and Tax Consultancy Company).