Startups are becoming increasingly popular, heralding a new age of entrepreneurship. However, there remains a prevalent knowledge gap among budding entrepreneurs about various aspects of establishing a business, including choosing the right business structure. Your choice of business structure could significantly influence the lifespan and success of your startup. This article will delve into different types of business structures, their benefits, and essential factors to consider when deciding on a suitable model for your startup.
1. Sole Proprietorship: This is a business structure where the owner manages and makes all major decisions, bearing all profits and losses. In India, this is one of the most common and oldest business structures. The owner is personally liable for all the business debts, and in the eyes of law, the owner and the business are the same entity.
2. Partnership: A partnership firm involves two or more individuals who share profits and losses as per an agreed ratio. It is not mandatory to register partnership firms, but it is advisable to do so. A partnership deed detailing the invested capital, jurisdiction, and profit-sharing ratio of each partner should be prepared.
3. Limited Liability Partnership (LLP): In an LLP, the liability of the partners is limited to their invested capital. The procedures to incorporate and tax an LLP are distinct from those of a private limited company.
4. Private Limited Company: Fast becoming the preferred choice of many startups, a private limited company can have 2 to 200 members. In India, such a company is taxed at 25% depending on their turnover.
5. Section 8 Company: This is a non-profit making company. Any profits generated are used to promote a specific cause or interest.
There are other types of business structures, such as unlimited companies, co-operatives, Joint Hindu family businesses, and public limited companies.
1. Legal Liability: You must consider the legal liabilities associated with your chosen business structure. Legal risks can be higher in a partnership firm or sole proprietorship.
2. Taxation: Different business structures have different taxation processes. For instance, a sole proprietor’s tax will include both personal and professional income and expenses.
3. Formation and Administration Cost: The cost of forming and administering your company is a crucial factor. If high bookkeeping or formation costs are involved, you might consider a sole proprietorship instead of a private limited company.
4. Flexibility in Line with Your Goals: Your chosen business structure should offer the flexibility needed to achieve your company’s goals.
5. Future-Oriented Approach: Choose a business structure that aligns with your future vision. For example, if you start a private limited company (SME), your future goal could be an IPO listing of your SME.
Your choice of business structure plays a crucial role in the future of your startup. By understanding the features and implications of different business structures, you can make an informed decision that aligns with your business goals and vision. We hope this article helps clarify your understanding of business structures and guides you in choosing the right structure for your business.
Author is A Practicing Chartered Accountant with over 5 years of rich experience in Company Law, Audits, Accounts & taxation. She is keen in streamlining business accounts of the Company and provide Business advisory services She can be connected on firstname.lastname@example.org or on 9819244185