Every quality step taken in the business is a way of succeeding in this field. The right decisions regarding your business choices will consist of various factors in a cascaded format. Tapping your energy, pitching in the opportunity at the right time in the right frame could be a game-changer when it comes to business. Being visionary and foresighted is a bonus to this.
How to Choose the Company Type
Limited Company: Private limited company or Public limited company
A limited company is a type wherein the liability is directly proportional to the amount you have invested in the company.
Private limited company - A Private limited company is a privately registered entity governed by the Companies Act (2013) & Companies Incorporation Rules (2014) with a minimum of 2 and a maximum of 200 members in a company. It is a separate legal entity where shares can be sold/transferred to individuals (turning them owners) but not publicly traded.
Public limited company - A Public limited company is publicly owned with no limit of shares trading wherein shares can be purchased by the general public. Governed by Company Act 2013, stock can be acquired through Initial Public Offerings (IPO)/Trades/Stock Market. A public limited company must have a minimum paid-up capital of at least Rs.5 lakh or a higher amount as the legislation prescribes.
Limited liability partnership - The Limited Liability Partnership (LLP) has become a popular form of organization among entrepreneurs since it combines the advantages of a partnership firm and a company into a single entity. In 2008, India adopted the concept of the Limited Liability Partnership (LLP). An LLP combines the features of a partnership and a company. In India, the LLP is governed under the Limited Liability Partnership Act, 2008. A minimum of two partners is necessary to form an LLP. In general, a partner's liability is unlimited, whereas, in the case of LLP, the liability of the partners is limited to the contribution made by each partner.
Ownership: One Person Company (OPC)/Collaborative Partnership/Sole proprietorship
One person company - One person company is recognized under Company’s Act 2013 for single ownership business in India. This change now allows a person to indulge in business making solely without the need for partners. In addition, it has limited liability protection ensuring ease at incorporation.
Sole Proprietorship - Sole proprietorship is registered individually under a single name needs mandatory registration or online portal visit/form fill-ups. But ensuring registration may avail certain benefits from the government.
Collaborative partnership - Collaborative partnership can be a well-networked or one-to-one relationship-based business. With shared goals, resources, knowledge, people and finances, this can become the breeding ground for some profound accomplishments.
Factors to consider while choosing the right business structure
Choosing one structure from a variety of options can be a daunting task. However, the clarity of the business's vision and scale simplifies this choice. You must choose the level of control you desire, the level of compliance you are capable of achieving, the amount of investment required and many more. However, the clarity of the business's vision and scale simplifies this choice.
The business structure has a considerable impact on the success of your venture. Even if you can alter your mind afterwards, you must make a sensible choice initially. Numerous aspects that contribute to the selection of the optimal business structure must be considered and revisited. These factors are as follows:
1) Ownership - The First factor you need to consider while choosing your business structure is the number of owners, which varies among the different types of business structures. If you want to be a single boss, you can go for opening a sole proprietorship or a one-person company. However, if you want multiple owners in your business, business structures like Private limited company, Partnership firm, and Limited liability partnership (LLP) should be on your priority list. But this is not the only criteria by which you can easily choose between the business structures, you must consider more factors before reaching a decision.
2) Control over business decisions - Owners unquestionably want control over business decisions. Again, the partnership distributes control among numerous partners. A partnership allows for greater freedom. 2) Control over business decisions - Owners unquestionably want control over business decisions. Again, the partnership distributes control among numerous partners. As a result, partners can agree on distinct rights and obligations for each. The director(s) of a company has direct control over all operational transactions. As a result, in the majority of Private Companies, the shareholder and director are the same people. This also works in OPC.
At the time of planning, you and your consultant can agree on a level of control for your preferred structure. However, the proprietorship is the only way to obtain undivided control.
3) Liability level and personal risk - The degree of risk is proportional to the activity and size of the business. When the associated risk is high, owners will seek to protect their personal risk. The proper business structure can undoubtedly mitigate the owner's personal risk. Moreover, with few exceptions, companies and limited liability partnerships entirely safeguard the owners' liabilities. When partnerships are chosen, the risk is spread among a large number of partners. As a result, a sole proprietor seeking to mitigate personal risk may choose a Person Company.
4) Cost of registration and Maintenance - In most cases, the registration fee is quite similar. However, proprietorship businesses are simple and affordable to establish. Given that registration is a one-time expense, you should concentrate on maintenance costs. It includes, in large part, the expense of compliance. A company's compliance level is the highest, followed by an LLP. The law requires both continuous and event-based compliance. However, you may wish to make a cost concession in exchange for the benefits provided by a particular structure.
5) Capacity to raise or borrow money - If the business is aiming for rapid expansion, it will require significant funding at various stages. A business may not be able to raise all of the necessary funds on its own. As a result, the capacity to attract investors or obtain financing is vital. Investors and banks prefer to lend money to more organised enterprises, as they are typically safer investments. Due to the equity ownership, venture capitalists and angel investors prefer to invest in private companies.
6) Perpetual existence - Businesses are extremely reliant on promotion. However, it has an effect on the business's existence. It may not be critical for new firms. However, it is unquestionably essential in the long run, particularly for funding. Investment firms desire business continuity in order to make a more secure investment. It is best provided by companies and limited liability partnerships (LLP's). Businesses at the pilot stage can pick an informal organisational structure that is easily converted later on.
7) Credibility - Companies and limited liability partnerships are more reliable structures. They benefit from increased credibility as a result of professional certification and centralized registration. Additionally, financial and other data are publicly accessible. As a result, third parties may easily rely on these structures. However, a structure such as a sole proprietorship possesses very little credibility in and of itself. Rather than that, it is contingent upon the proprietor's credibility.
8) Documents privacy - Certain business structures impose the need that all documents become part of the public record and are accessible to the public. While the company's documentation is completely accessible to the public, the LLP Agreement remains private. If you wish to keep the details of your business private, carefully choose the business structure.
9) Tax Structure - Each form has a distinct tax structure. Certain structures, as distinct legal entities, are taxed directly. For example, company and limited liability partnership. For tax purposes, a partnership firm is also a distinct entity. All of these entities are subject to a 30% basic tax (excluding small businesses, which are subject to a 25% basic tax). The income of a proprietorship business is taxed at a rate between 5% and 30% above the basic exemption limit. To plan for tax liabilities effectively, you must know the tax structure of any form.
10) Survival rate and privacy issues - Indulgence in limited liability protection for continuation and safe investment in business increases the chance of survival significantly. LLP also ensures your privacy by choosing the credentials you want to disclose.
Which business structure should I choose?
Consider the points mentioned above while determining the appropriate business structure for your business. Choosing the appropriate business structure in India for your organisation can sometimes leave you confused and annoyed. Switching from one company structure to another is simple if you have a professional who can guide you through the process of transitioning from a one-person business to registering as a partnership firm and ultimately converting into an LLP.
I hope this post inspired you to pursue your dream business because success is really the manifestation of your dreams!
