Picking the proper business structure for your business is as important as any other business-related activity. The right business structure will permit your enterprise to function efficiently and meet your need business targets. In India, every company must register them as part of the mandatory legal compliance. Before we learn how to register a organization or entity, let’s try and understand the types of business structures in India.
Let’s try and clarify the types of business structures currently present in India. Here is a list of some of them:
OPC is recently established in the year 2013, an OPC is the efficient way to start a company if they exists only one promoter or owner. It enables a sole-proprietor to keep on his work and still be part of the corporate framework.
A separate legal entity, Limited Liability Partnership (LLP) was first established in the Limited Liability Partnership Act of 2008. The cause it was established was to provide a form of businesses that was easy to carry and it providing support to the owners by providing them with limited liability. The advantage of opting for a Limited Liability Partnership over the traditional Partnership Firm is that an LLP provides each partner limited liability. This means that one partner is not taking in charge for the conduct and negligence of another partner. This is somewhat similar to what shareholders enjoy. Another character is that in an LLP, all partners have the right to operate the business directly.
A private limited company is a limited liability entity registered under Companies Act, 2013. Private Limited concern has a minimum of two directors (maximum of 15). A natural person who any person in the public can be a director and as well as shareholder, where a specified corporate legal entity can only be a shareholder. In addition to that, foreign nationals, foreign corporate entities or NRIs are also permitted to be the Directors and/or Shareholders of a Company with Foreign Direct Investment, creating it the referred choice of entity for foreign promoters.
A PLC is a voluntary association of members which is incorporated under company law. It has a separate legal entity and the liability of its members is limited to shares which they hold.
You can choose what business structure perfectly matches your business requirements best and accordingly register your business in that category. Here is a comparative list of the popular business structures available in India.
|Company type||Ideal for||Tax advantages||Legal compliances|
|Limited Liability Partnership||Service-oriented businesses or businesses that have low investment needs||Benefit on depreciation||Company tax returns to be filed ROC returns to be filed|
|One Person Company||Sole owners looking to limit their liability||Tax holiday for first 3 years under Startup India Higher benefits on depreciation No tax on dividend distribution||Company returns to be filed Limited ROC compliance.|
|Private Limited Company||Businesses that have a high turnover||Tax holiday for first 3 years under Startup India Higher benefits on depreciation||Company tax returns to be filed ROC returns to be filed An tax audit is mandatory|
|Public Limited Company||Businesses with a high turnover||Tax exemptions under||Company tax returns to be filed. Mandatory tax Audits|
It is essential to select your business structure carefully, according to your Income Tax Returns which is perfectly depend on it. While registering your entity or organization, remember that each business structure has different states of compliances that require to be met with. For your reference, a sole proprietor has to apply only an income tax return. However, a company has to apply an income tax return as well as an annual return with the registrar of companies. A company’s books of accounts are to be compulsorily audited every year. Enduring by these legal compliances requires spending money on auditors, accountants and tax filing experts. Therefore, it is essential to choose the right business structure when thinking of company registration. An entrepreneur must have a detail idea of the kind of the legal compliances he/she is willing to deal with. While, some business structures are relatively investor-friendly than others, investors will always prefer a recognized and legal business structure. For example, an investor may hesitate to provide money to a sole proprietor. On the other hand, if a good business idea is backed by a recognized legal structure (like LLP etc.) the investors will be more comfortable making an investment. Let’s take a look at some important queries every entrepreneur must ask himself before he/she finally decides upon a business structure.
How many owners/partners will your business have?
If you are one person who owns the entire initial investment needed for the entire business, a One Person Company would be ideal for you. On the other hand, if your business has two or more owners or partners and are actively seeking an investment from other parties a Limited Liability Partnership (LLP) or Private Limited Concern would matches you best.
Should your initial investment determine your choice of business structure?
The answer to that query is – Yes, if you need to spend less investment initially, it would be wise to go in for a Sole Proprietor, or a HUF or a Partnership. But, if you are sure that you will be able to recover the setup and compliance costs, you can suit for a One Person Company, LLP or a Private Limited Company
Willingness to carry the entire liability of the business
Company structures like sole proprietor, HUF, and partnership firm have unlimited liability property. This means, in case of any issue in loans, the entire money will be collected from the members or partners in profit sharing ratio. The risk to personal properties is high in these cases.
Whereas, LLPs have a limited liability property to protecting their personal assets. This means that the liability of its members is restricted to the amount of contribution made by them or the value of shares each member carries.
Income Tax Rates Applicable to businesses
Income tax rates available to a sole proprietorship firm and a HUF are the normal huge amount rates. In case of a sole proprietorship, the business income is combined with the other individual’s income.
But in case of other entities like partnership and company a tax rate of 30% is available.
Plans of obtaining more money from investors
As mentioned earlier, it is difficult to obtain investments when your business structure is unregistered. Businesses like LLP and Private Limited Company are trusted when it comes to investment. Ensure that you select the proper company structure; need support of an expert so that you register under right guidance.
Registering a company in India is now simplified as a simple 4-step process. Here is what you’ll want to get:
With help of the above mentioned document, we have covered the basics of how to register a company. If you still want help registering your company, don’t stress over it, and let Solubilis guide you.
A Private/Public limited company has several advantages over proprietorship and partnerships, as elaborated below.
First and foremost advantage of doing business through company is the limited liability consulted upon the company’s directors and shareholders. As a sole trader or partnership business, personal properties of the proprietor or partners can be at risk in the event of a failure of the business, but this is not the case for a organization. The unfortunate events like business failures are not always under an entrepreneur’s control; hence it is essential to prevent the personal assets of the businessman in the event of above circumstances. Unlike proprietorship and partnership, if a business becomes insolvent in some certain crises and is wound up, only the assets of the company are used to clear its debts. The Directors or Shareholders of the company have no personal liabilities and are not made bankrupt and are free to keep on their business. The Company defines as a separate legal organization as from its members. The liability of the company is totally different as from its members of a company. Liability for repayment of debts and lawsuits occurred by the Company lies on it and not the owner. The liability of a company can be separated into 2 major segments.
A private limited company is a separate legal entity; a juristic person introduced it under the Companies Act. It has its presence separate from its directors and members. Private limited company enables you to be taken more seriously than a proprietorship/partnership entity does. Functioning as a private limited company often provides suppliers and customers who are all have a sense of confidence in their owned business. Huge organizations in specific will prefer in dealing with private limited companies than proprietorship/partnership organizations. It is easy to attract quality workforce and achieve strategic motivation of employees by utilizing comfortable and huge range of management designations.
Important feature of a private limited company is perpetual succession. It is a popular state that the directors may come and go the members may come and go, but the existence of a company remains forever. A company once incorporated stays alive unless and until it is closing up by complying with the provisions of Law. The death, disability or retirement of any of its directors or members does not affect the functioning of the company, irrespective of modification in its membership. There is no agreement for a Private limited company to commence business and its brand trading within any set time period after its incorporation. An incorporated company has perpetual succession. The Company shall continue to exist till its wound up with respect of the provisions of the relative law.
For entrepreneurs moving for hi-tech or high capital producing projects it is always advantageous to move in for a company form of organization. Where the financial situations involved is high, it is determined that banks and financial institutions while providing financial assistance, insist on having a private limited company.
Where it is approached to sell the business as a highly moving organization, all that is need is to transmit the entire shareholding to the purchaser and thus facilitate easy modification in management and ownership. This feature will save time and money of the Promoters. Large amount of stamp duty is prevented. The shares and other interest of any member in the Company shall applicable to be a movable property and can be transferable in the manner so presented by the Articles of such company. Therefore, it is easier to commit or leave the membership of the Company. Also it is easier to transmit the ownership.
It is possible for a company to create an available effective contract with any of its shareholders/directors. It is also possible for a person to be in maintenance of a company and at the same time be in its employment. Thus, a person can at the same time act as a shareholder, director, creditor and employee of the same company itself. For examples:
A) As a director he can obtain remuneration.
B) As a shareholder he can obtain dividend.
C) As a lessor he can obtain lease rent.
D) As a creditor he can invest money and earn interest.
E) As a supplier he can provide goods from his/his family business.
A organization or entity enjoys better facilities for borrowing of funds. It can provide debentures, secured as well as unsecured, accept deposits from the public, etc. Even banking and financial institutions prefer to render huge financial assistance to the organization rather than partnership firms or proprietary organizations. The company enjoys better facilities for borrowing of funds among all types.
Individual traders and partnerships may pay income tax. Companies pay Corporation audit tax on their taxable profits. There is a huge range of allowances and tax deductible costs that can be cancel against a company’s profits. As everyone requires minimizing his tax burden thus companies as per the income tax act 1961 has another main advantage of incorporation towards taxation. Companies are often taxed at a least rate and are given with better taxable advantages as compared to other forms of organization.
Public Limited Companies can increase large amount of capital from the general public by provide of shares and public deposits. Private Limited Companies can increase its capital only by private placement of shares and deposits. Raising money as a small business and a sole proprietorship or partnership can be complex. But as per Companies act 2013 a concern can sell shares to the public or can accept deposits from public and can therefore increase money easier than other business types. The types of financing business carried on by company are numerous. Moreover, since the companies are governed by particular law and have to appear with stringent disclosure norms, therefore they enjoy good credit worthiness with several financial institutions.
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