Startups are gaining popularity but most often the aspiring entrepreneurs are seen to lack knowledge about the business, how to develop it and what business structure to follow. The business structure must be the foremost concern of any entrepreneur because basis this decision the entire shelf life of your business gets decided. One has to thoroughly study the types of business structures you can implement for your business and the benefits you can derive from it. In the following blog post, we will see the types of business structures and the aspects to keep in mind when picking a model for your business.
Sole proprietor
Here the business is run by the owner himself and all the major decisions are his alone as are all the profits and losses. This structure is said to be the most common and one of the oldest business structures in India. Starting and liquidating a firm with sole proprietorship requires no legal formalities. All the debts in the business belong to the owner alone since this structure doesn’t involve any other member. As also in the eyes of law, the owner and his business are the same.
Partnership
A partnership firm is formed between two or more individuals. The profits and losses are borne by them and shared as per the agreed-upon ratio. It isn’t necessary to register partnership firms but always advisable that you do so. One has to make a partnership deed which details the capital invested by each partner, the jurisdiction of each partner, and the profit-sharing ratio.
LLP
LLP – Limited liability partnership is wherein the liability is limited based on the capital invested. The formation of an LLP is an easy procedure. We have already seen in detail how an LLP is incorporated. LLP’s formation and taxation processes are different from a private limited company.
Private limited company
Private limited company is the most popular business structure fast adopted by many upcoming startups. A private limited company can have 2 to 200 members. In India, a private limited company is taxed at 25% depending on their turnover.
Section 8 company
A section 8 company is a non-profit making company. Here the profits made are utilized to facilitate a particular interest. The process for incorporation of section 8 companies is explained in one of our blog posts.
These are prominently considered types of business structures by aspiring entrepreneurs. But there is also an unlimited company, co-operatives, Joint Hindu family, and a public limited company.
How to select the right business structure?
Legal liability
Understand the legal liabilities that come with the company structure you want to incorporate. Legal risks increase if you have a partnership firm or a sole proprietorship.
Taxation
The taxation process for every business structure differs. For instance, in sole proprietor will be taxed inclusive of personal and professional income and expenses.
Cost for formation and administration
When you wish to start a company you will have to consider the cost for formation of the company and the cost to be invested in its administration. If your business structure requires a high amount to be invested in bookkeeping or formation you can take up sole proprietorship instead of a private limited company.
Flexibility as per your goals
You have set goals in mind when you conceive the idea to start a company. These goals are to be achieved one step at a time. Your business structure should be such that it should give you flexibility to suit your goals.
Futuristic approach
Pick a business structure keeping a vision for the future in mind. If you start a private limited company which is an SME your future goal can be IPO listing of your SME.
With this, we hope that we have resolved your queries pertaining to the business structure and how to pick the right business structure for your business.
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