There has always been a confusion among people when they want to start a business. I should go for Proprietorship, Partnership, LLP or Company. You definitely ask your friends, family members and co colleagues. You are very serious about your new venture, you have already validated your idea, done the right market research, but selection of a wrong structure for your business can definitely create lot of problems for you.
Here I give you’re the right structure for the right kind of Business, along with the tax implications
Proprietorship firm
If you are the only person running the business, no partner then you can always go with a proprietorship firm.
Advantages:
- No interference by any third party
- No hassles of compliance. Just income tax return and audit would be applicable on the basis of the turnover. For that refer
- Easy to setup. Just apply for MSME Certificate and have a bank account. You can start the operation.
- All the money earned are your profits and losses incurred are also yours
- Privacy and confidentiality can be maintained.
- All 80C benefits can be availed by filing income tax return of business as there is no separate PAN
Disadvantages
- Difficult to get investor funding as it is not a legal entity in the eyes of law.
- Personal assets can also be seized for any fraud and losses. No guarantee.
- Corporates normally do not prefer proprietorship for business. However, it depends which industry you are in. For example: a retail cloth store may not have any problem. However, an event management company may face problem for getting corporate clients.
To understand the tax structure, refer the link
Partnership firm
Partnership firm is formed between two or more person. Maximum partners in partnership firm can be 20.
Advantages:
- Risk will be borne by all the partners compared to proprietorship where it is to be managed solely.
- Partnership firm will have a different PAN Card as it is a separate entity. Partnership deed is prepared, submitted to bank for for opening current account.
Disadvantages:
- It is not a legal entity in the eyes of the law. However, if the partnership is formed through ROF, then it is a registered entity. It is always advisable to go for ROF (Registrar of Firms).
- All the partners are jointly and severally liable for the loss. Also, personal assets would be at stake if anyone does anything wrong or in the case of loss. (Except registration through ROF would enjoy all the benefits.
- Normal partnership deed through notary has no existence.
- Profits are taxable @ flat 30%
Limited Liability Partnership:
LLP Act came into existence in 2008. It is the most preferred form of entity to go for in the case of services if you have two or more partners. It is always preferred over partnership as it has a legal existence in the eyes of law.
Advantages:
- LLP can sue anyone and can be sued.
- Legal existence in the eyes of law.
- Easy to setup. It takes around 15-20 days to form an LLP.
- Basic documents required for LLP. LLP Agreement contains all the details of Profit-sharing ratio, contribution etc.
Disadvantage:
- Tax rate is flat 30% on profits.
- More compliance than Partnership. However, less than Private Limited Company.
Private Limited Company:
If you are looking for investor funding or cracking corporate clients and brands, Private limited company will always have an advantage over any other form of entity. Except compliances, it has all the benefits
Advantages:
- Preferred by investors. All startups looking for investor funding do for this entity.
- Legal existence and the tag of private limited company.
- It can be incorporated within 7 days.
- Shareholders and directors are different. If one person wants to start a company and does not have anyone else, he or she can start it by giving 1 share to the other person and have 99% stake in the company.
- If you have a vision for the company and looking for long term, always go for Private limited company.
Disadvantages:
- Many compliances are applicable to private limited Company like Audits, ROC Compliance. However, that can always be managed with a good consultant.
One Person Company
This is a new initiative started by a Government, One-person Company. One single person can also start his own Private Limited Company i.e he can be the only shareholder. This is preferred by business owners who were running the business initially through proprietorship. The only difference between private Limited company and One Company is
It would be named as below:
XYZ Services Private Limited (In the case of Private limited company)
XYZ Services OPC Private Limited (In the case of One-person company)
Advantages:
- Legal existence and the tag of private limited company.
- It can be incorporated within 7 days.
Disadvantages:
- Compliances are fewer than Private Limited company. However, once your OPC crosses a sale of 2 Crore, it has to mandatorily convert itself into Private Limited Company.
Section 8 Company
This is the legal structure given for trust. Trust can also be formed in the form of a company which is called Section 8 company.
Advantages
- Always preferred trust because of its legal existence and structure.
Disadvantages:
- It is much more time consuming to form Section 8 company. Document requirement checklist is also many.
Once you have selected the right structure as per your needs, approach a consultant and go for it. If you have difficulty in selecting the right structure, a CA or a consultant can always help you.
Once you form a company, apply for the necessary business license like IEC if you are into import export, MSME License, GST Registration as per your turnover criteria.
Then consult your CA and also maintain the accounts from day one so that you have the details of profits/loss and finance from day one of your business. Accounts helps you in taking the business decisions. A right and real time accounts helps you in projections and funding.
Look out for a team as per your requirement. Always prefer a CRM Software to keep a track of all the sales leads.
Marketing:
It is not just compliance which is important for your business. Marketing plays a key role. Find out the effective marketing strategy for the right business. Whether it is social media presence, offline marketing, blogging, inbound marketing etc. Ensure steps are taken and plan your marketing well.
Conclusion:
We hope that you have got the information on how to start the business. Discuss it with your friends, validate your idea, do right market research, gets your team and bang on. Go for it. Let us know if you have any query.
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