Choosing a Business Structure: A Complete Guide

So after years of developing and nurturing your ideas, after daring to move away from the conventional route; you have finally decided to become an entrepreneur. All your dreams and goals for future now depend on the company you are about to start. One basic question that comes before most entrepreneurs is: What kind of business structure should they follow? A business structure is basically a legal personality that you give to your business. Following are the kinds of business structure with their important features which will help an entrepreneur to decide what form of business structure to choose from:

Kinds of Business Structure in India

Proprietorship

It is the simplest and the oldest form of doing business. In a proprietorship business, the business belongs to one single person and there is no difference the identity of the person doing business and the business itself.  A proprietorship is mostly suitable for small and simple businesses. Even though simple in nature, it also has unlimited liability.

Related: How to Start a Food Business in India [Legal Checklist]

Private Limited Company

A private limited company is a form of business where the business is different from its owner. The liability of the owner is limited to the shares it owns it. The private limited company is a professional way to manage a business and is highly scalable. A company is not suitable for micro businesses.

Businesses which are also looking forward to raising investment must incorporate as a company.

Related:6 Steps to Incorporate a Private Limited Company

Public Limited Company

A public limited company is another form of a company, however, a public limited company can trade its shares in the market. A public limited company is unsuitable for most entrepreneurs because they do not need to trade shares in public and is mostly suitable for government companies and companies with large funds. When the company’s stocks are traded in the share market and it’s buying and purchasing is open to the general public then the company can be called a public limited company.

Related: Important Government Regulations Required to Start a Business in India

Partnership Firm

A partnership firm is a business form where two or more individuals agree to run a business for a share of profit. It must be noted that a partnership is very similar to a proprietorship but there are multiple persons running a business. The relationship between the partners is usually governed by a contract between the partners known as a “Partnership Deed”. It is not necessary to register a partnership deed but it is recommended that it is done so.

Like a proprietorship, a partnership also has personal liability of the partners. Such form of business is best suited for family run traditional businesses as well as professional services like legal services and account services.

Limited Liability Partnership

A Limited Liability Partnership or an LLP is a relatively new business structure. An LLP is basically a cross-over between a company and a partnership form of business.

It is best suited for professional services business where the business has the potential to grow large as well as where it is required that the liability remains limited. Unlike a partnership, in an LLP the partners liability is limited i.e. their personal assets do not come into the picture is something goes wrong.

Further, an LLP has less compliance than a company and is also provides more control to the partners. However, investment is still difficult to secure in an LLP.

Related: 6 Steps to Incorporate a Limited Liability Partnership(LLP)

Factors to Consider When Choosing  a Business Structure

Your rights and liabilities can vary drastically from one business structure to another. Therefore, deciding which business structure really suits you is a decision that needs to be taken seriously. Once decided, it is both impractical and complicated to change the structure of your business.

Every business has different needs therefore, not all business can be similarly structured.  More often than not entrepreneurs are unaware of the various kinds of business structures and their benefits and drawbacks and hence they end up making a mistake that costs them huge in future. There keep in mind the following parameters to reach an intelligent conclusion when deciding the business structure of your company.

Risk

Every business entails certain risks. The type of structure you are willing to take should minimise your risk while maximizing your profit. If you are dealing in a sector where risk is high you might want to opt for a structure that minimises any risk to your personal assets. For such businesses structures such as LLP and Company are best suited. Both LLP and Company minimize any risk to your personal assets.

Taxes

We all must duly pay our taxes but we all must also exercise our right to minimize our tax liability but financial planning and business structure planning. As a company, you will invariably end up paying more taxes when you are a sole proprietorship.

Related: What is GST and How It Will Affect You

Ownership

Ownership is another major factor that you should consider while deciding the structure of your business. Remember, the lesser the liability the lesser direct control you can exercise over your business. Therefore, in a company, you will have less control over your business than you will have as a sole proprietor.  However, since ownership is absolute in a sole proprietorship, investors seldom invest in it. Similarly, in Partnership, there is an unlimited liability over your personal assets but then that liability is also shared by other partners. However, if you are not concerned with ownership but want investors and professionals to manage your business then a company is the most suitable structure.

Capital

Depending on the amount of money you are starting with and whether you require investors or not? You can decide your business structure. If your business is not investment heavy and will most likely not require an investment in future then proprietorship and partnership are best suited for you however if your business is investment heavy then company is most suitable structure. Similarly, if you are pooling money and that you also want to exercise control then LLP is the best-suited option.

Future

You all want your business to grow but you all must also remain realistic. With a realistic approach in mind, you must balance ambition with reason and then decide on your business structure. Once you have done your research, decide how you want to run your business and whether you desire to control or profit, professional setup or a family run business. Once you are able to answer a question like these then decide on the basis of those answers what business structure would be best suited for you.

The structure for your business depends on the type of business you have. Depending on the characteristics of your business as well as your goals and aspirations from it, the ideal structure would vary. But also, remember while change is difficult it is not impossible.

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