Before we all start a profit-oriented business, we have a query which form of business you should go with? Since there are lot of options we get confused like Proprietorship, Partnership firm, LLP, One Person Company, Private Limited and Public Limited Companies.
We have simplified the major forms of business existing in India; hence you can decide based on their advantages or disadvantages on which form you should go with.
Who should start with Proprietorship Form of business –
If you are looking to tap a small area with limited customer base you should opt for proprietorship business. Also, if you have a limited capital proprietorship is a good form to start with. (Example – Kirana Stores, medicine shops to name few).
Advantages of Proprietorship Form of Business –
1. Less compliance cost. i.e., cost to manage the compliances related to government.
2. Less Documentation.
3. Less cost to start the business (you need Shop Act, Professional Tax Registration, MSME Registration depending upon state to state and you can start the business).
4. Less Taxation (Since you get all the benefits of an individual taxation like slab benefits, 80C benefits to name few).
5. Fast Decision Making.
6. Full Financial Control, no sharing of profits with anyone.
Disadvantage of Proprietorship Form of Business –
1. Liability is unlimited – If any claim is lodged by anyone regarding defects in product or services you have an unlimited liability that is even the court can decide to sell off your personal assets to recover the damages filed by claimant.
2. If you want to go global or sell your product/ services at large proprietorships are usually not preferred.
3. Digital Branding becomes little tough. Once you setup an LLP or Private Limited there are number of websites which shows MCA information hence your online presence starts from the day they are incorporated.
4. Name is not unique. Whenever you go with proprietorship form and assuming you don’t get into IPR Laws your name can be used by someone else as well.
5. Bankers and other people who finances the business are least interested to lend their money to proprietors as risk of default is maximum.
6. Government agencies and corporates issuing various tenders do not prefer proprietorship form of business.
Who should start with Partnership Firm Form of business –
If a business is being started with more than 1 owner, who would share the profit and losses of the business and their business moto is to tap limited area or customer base then you should go with partnership form of business.
Advantages of Partnership Firm Form of Business –
1. Less compliance cost. i.e., cost to manage the compliances related to government.
1. Less cost to start the business (you need Partnership Deed, Shop Act, Professional Tax Registration, MSME Registration depending upon state to state and you can start the business).
2. Sharing of Losses.
3. Better Decision Making as any decision requires consent of majority of partners.
4. Higher scope of capital injunction as more people are involved.
5. People with different skills can be given a different task. Hence, overall burden reduces.
Disadvantage of Partnership Firm of Business –
1. Liability is unlimited – If any claim is lodged by anyone regarding defects in product or services all the partners have unlimited liability that is, even the court can decide to sell off your personal assets to recover the damages filed by claimant.
2. Taxation is very high. In India a partnership firm is taxed at 30% basic rate and most of the chapter VI deductions are not applicable to partnership firm (e.g., 80C). Also you don’t get any slab benefits hence a very high tax liability.
3. Conflict between partners leads to miscommunication and ultimately business has to be closed.
4. Banks do not prefer to give loans to partnership firm as chances of conflict is way too much between partners.
5. Profits has to be shared, also decision making takes time as consent is required.
6. Name is not unique. Whenever you go with partnership firm form and assuming you don’t get into IPR Laws (trademarks, patents, etc.) your name can be used by someone else as well.
7. Difficult to go global as customers have trust issues.
8. Digital branding has to start from scratch.
LLP or Limited Liability Partnership Firm
LLP is an extension of Partnership Firm overcoming disadvantages faced by partnership firm. These are similar to partnership firm but enjoys a better reputation.
LLP is a form of business best suited for those who are looking to run a business with more than 1 owner, but their targeted market or area is bigger and they don’t want to enter into something which has very costly compliance cost (every year) for their business.
Advantages of LLP Form of Business –
1. Their compliance cost is higher than partnership firm and proprietorship concerns but lesser than Company form of business.
2. Liability of partners are limited to the extent contributed to the business (apart from cases of negligence or fraud).
3. No compulsory Statutory Audits is applicable from the very start like the case in Company Form of Business.
4. Sharing of Losses with Partners.
5. Have a better reputation in front of their targeted crowds as compared to above mentioned business.
6. Digital Branding starts from the day LLP is incorporated.
7. Venture Capitalist and banks prefer an LLP over Proprietors or Partnership firm to lend or invest any money.
8. Can go global – LLP is recognised all over world so if you have a targeted crowd outside your county you can opt for an LLP. Since, it is registered with Central Government (MCA) they are given preferences.
9. Better Decision making and sharing of responsibility, hence skill management.
Disadvantages of LLP Form of Business –
1. Conflict between partners leads to miscommunication and ultimately business has to be closed.
2. Taxation is very high. In India a LLP is taxed at 30% basic rate and most of the chapter VI deductions are not applicable to LLP (e.g., 80C). Also, you don’t get any slab benefits hence a very high tax liability.
3. Hefty fees levied by ROC in case of noncompliance like non filing of Annual Returns (Rs. 100 per day).
4. All the documents are public hence anyone can pay an inspection fee with MCA and view all your financial statements.
5. Though compliance cost is lesser as compared to Company form but is higher than other forms of business.
6. Takes Time for incorporation – the formation is a time consuming and costly process if you compare with partnership or proprietorship concerns.
I shall discuss the Company form of business in upcoming article as this article would become lengthy.
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