5/10 Determine your business structure

There are so many things that comes with starting a business. There’s lot of joy bringing your hard work in to live. Related to this, first important decision you will make is deciding which form of business to establish. This decision requires time and consideration, this can affect the way you run your business, impacting from liabilities, taxes and most importantly control over the Business.

If you are confused in this step then you can take help of the legal or financial consultants, so that they can help you in taking this decision. Depending on the annual compliance, licences, regulations & permits, control, investment, nature of business, flexibility, and your risk appetite they can suggest you the suitable structure.

As this is the crucial step you cannot go wrong in this step. You have to spend some time to analyse pros and cons of each type of entity. The most common forms are the sole proprietorship, one person company, partnership, limited liability partnership, company, non-profit organization etc. We have just outlined few features of each type of organization to throw some light which will help you in taking this decision:-

  • Sole Proprietorship:- This is the simplest form of unincorporated business organisation. An individual is automatically considered as sole proprietor if they are doing any business. This do not require separate business registration. This means the assets and liabilities of business is same as assets and liabilities of proprietor. The applicable tax rate will be same as individuals.
  • One Person Company (OPC):- This is the new concept in India. This is organised structure of sole proprietorship in which owner has limited liability as owner and entity are separate in the eyes of law. In OPC there are substantial list of compliances applicable. The applicable tax rate will be same as the Company.
  • Partnership and Limited Liability Partnership:- Partnership is the arrangement between two or more individuals. In this the partners and firm are not considered as separate legal entity. Hence Partners are personally liable for the unlimited liability of partnership firm. In this no annual compliance are required. Limited Liability Partnership (LLP) is the organised form of partnership firm. In this the Designated Partners and firm are considered as separate. This means liability of LLP is separate from liability of Designated Partners. There are number of compliances are applicable to LLP.
  • Company:- Company is a legal entity in which the ownership is distinct from the management. The ownership lies with shareholders and management is in hands of board of directors. Due to various legal requirements, it can be more costly affairs to form and manage Company but it provides strongest protection to its owners against personal liability. In case of Company, profits are taxed twice. First when Company makes profits and second when it distributes the profits.

Companies can raise finance through banks, selling their shares and through foreign funding as well.

Deciding on a business structure is one of the most important early business decisions of an organization. It is a good idea to take help of the consultants while making this decision.

As getting the business structure right is important because changing business structures can be complicated and expensive, so be sure to proceed through this exciting process with a clear understanding of the wants and potential outcomes to you and your partners.

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