Choosing the right structure of business is of utmost importance as it impacts compliances with various laws and regulations and operational efficiency. This article analyzes various business structures in India and their impact on taxation, liability, and operational control. The structure of business is usually decided based on various factors summarized below:
• Personal Liability aspect: Different business structures provide varying levels of personal liability protection. When choosing a business structure, it’s crucial to consider the level of liability the owner is willing to assume.
• Taxation aspect: Taxation aspect need to be checked whiling deciding the business structure for your business as every business structure enjoys different tax structure.
• Creditworthiness: Selecting the right structure can also impact your branding and credibility of your business.
• Control level: If you desire complete control over your business operations, opting for a sole proprietorship or a one-person company is the ideal choice.
• Ability to raise finance: Businesses typically require external funding to meet financial obligations. Banks and financial institutions often hesitate to lend to sole proprietorships, one-person companies, partnerships, and limited liability partnerships, preferring corporates instead.
Various Business structure operating in India:
1. Sole Proprietorship: It is the most simplest and common structure set by a single individual. It grants the owner absolute control over the business. This structure proves appropriate for small business having low risks and minimal regulatory requirements.
2. Partnership: In this structure two or more people join hands to do business under the partnership.
3. Limited Liability Partnership(LLP): An LLP, established under the Limited Liability Partnership Act of 2009, offers a distinct advantage over traditional partnership firms: partners aren’t held personally liable for the company’s debts and obligations beyond their invested capital.
4. Private Limited Companies: A private limited company is a separate legal entity from its owners, and the liability is limited to the share capital contributed by its shareholders. It requires a minimum of two directors and two shareholders, and it must be registered with the Registrar of Companies.
5. Public Limited Company: As against private companies, Public companies can issue shares to the public and can have unlimited shareholders. It requires a minimum of three directors and seven shareholders.
6. One Person Company: A one-person company is a hybrid of a sole proprietorship and a company. It offers limited liability to its owner and requires a minimum of one director and one nominee. A person can only incorporate one OPC at a time.
7. Section 8 Company: It is formed for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, or any other charitable objectives. Profits, if any, are applied towards promoting its objectives rather than distributing them to members. Section 8 companies are registered under Companies Act, 2013
Income Tax Applicable, Advantages and Disadvantages of Various Business structure operating in India:
| Structure | Income Tax Applicable | Advantages | Disadvantages |
|---|---|---|---|
| Sole Proprietorship | As per individual’s tax slab rate. | – Easy to set up and operate – Cost-effective – Complete control over the business – Less compliances – Flexibility to make quick decisions – Tax advantage – No separate legal entity | – Unlimited Liability meaning personal assets can be used to repay debts. – Limited resource and expertise – Limited growth potential |
| Partnership | Flat 30% | – Shared responsibility – Pooling of resources and expertise – Separate legal entity | – Unlimited liability of partners – Potential for Conflict – Dependency on other partner(s). |
| Limited Liability Partnership (LLP) | Flat 30% | – Limited Liability – Less Compliance – Capital Requirement – Separate legal entity – Perpetual Succession | – Registration and Compliance – Joint and Several Liability in Certain Circumstances |
| Private Limited Companies | 15%-30% | – Separate Legal Entity – Suitable for startups – Better borrowing capacity – Perpetual Succession | – Regulatory Compliance – Restricted Transferability of Shares |
| Public Limited Company | 15%-30% | – Ability to raise huge capital
– Limited liability – Separate legal entity – Perpetual succession |
– Stringent Regulatory Requirements
– More disclosure of information – Loss of privacy |
| One Person Company | 15%-30% | – Limited liability – Single Ownership – Separate legal entity | – Limited fund-raising options
– Compliances |
| Section 8 Company | Exempt if charitable activities and necessary registrations are taken. | – Promoting charitable objectives
– Profits applied towards promoting objectives – Registered under Companies Act, 2013 |
-Limited ability to generate profits
-Stringent regulatory requirements -Limited operational flexibility -Additional Compliance burdens |
Conclusion:
Choosing the right business structure is crucial for tax compliance, operational ease, and achieving future goals. Understanding the advantages, disadvantages, and regulatory requirements of each structure is essential for making an informed decision tailored to your business needs.
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