What Kind of Business Structure Should You Opt For?

Over the last decade, India has seen steady growth in number of startups. This is largely due to the changing mindset of the younger and older generation. We see people of all ages starting their own businesses. Whether it is teenagers or experienced professionals, we are all looking to be entrepreneurs. And though, this journey begins with an inspiring idea and is taken forward by hard work, constant engagement and marketing prowess, the form of business entity that you choose plays an important role along the way.

It is estimated that currently there are over 75 million startups in India and this number is only going to grow in the coming years. These businesses contribute to over 30% of India’s GDP and are aiding in India’s economic recovery at the moment.

A dilemma that is often faced by new and budding entrepreneurs and questions that we have had to answer a lot are, “What kind of legal entity should we register?”, “Should we operate as a partnership firm or register an LLP or is it easier to get funding if we register as a company?”, “Is it even necessary to operate as a separate entity? To answer these questions and put your minds at rest, we will take you through the difference between these entities and benefits which they bestow upon your business starting from the simplest to more complex to setup. We hope that reading this article will help you choose the form of entity you would want to operate as (if any).

Sole Proprietorship A sole proprietorship is the easiest type of business to establish or take apart, due to lack of government regulations. As such, these types of businesses are very popular among traders, individual self-contractors, and consultants. Sole proprietors can do business under their own names or any name that does not infringe on an existing Trademark. Sole proprietorship are unincorporated businesses that has just one owner who pays personal income tax on profits earned from the business. To setup a Proprietorship one needs to acquire only the business specific licenses, GST (where necessary), registration under Shops and Establishments act or Trade License wherever applicable. Getting a MSME registration is advisable to receive benefits of Government schemes for Micro, small and Medium Enterprises.

PARTNERSHIP

Suppose 2 or more individuals wish to do business together they can establish a partnership firm. Partnership Firms are governed by the Indian Partnership Act of 1932. However unlike a company which is a legal entity, a Partnership is not a separate entity in itself. On the contrary, any act committed by one of the partners of a partnership firm shall be deemed to be an act committed on behalf of all the members of a partnership firm.

Another key difference is that while a company comes into existence via law, a partnership firm arises from an agreement. Now although it is not compulsory for to register a partnership, doing so goes a long way in avoiding and resolving dispute, if any. A partnership deed is the main document along with GST registration number (if applicable) to start of a partnership firm, along with a separate bank account and PAN card.

COMPANY

A company is the most secure form of business establishment in terms of liability of its owners, but also the most complex and expensive to setup and maintain.

From a legal standpoint, a company can be defined as “a legal entity, separate from it’s members with limited liability, perpetual succession, with the capacity to hold property and sue as well as be sued”, a company is a legal person, that comes into existence by law. This means that a Company has a corporate personality i.e. a separate entity. Therefore, it can own property, have a separate bank account and is capable of suing and being sued. In the event of bankruptcy, their liability to repay debts will only extend to the assets of the company and not the member’s personal assets.

Another key feature of a company is that a company never dies, it has perpetual succession. Unless and until a company is wound up, a company shall live on regardless of the death or departure of any member.

Companies are governed under the Companies Act 2013. Setting up a company requires several documents some of them are Directors Identification number, Name registration with the ministry of Corporate affairs, Articles of association and Memorandum of association then PAN and TAN numbers of the company are applied for.

LIMITED LIABILTY PARTNERSHIP (LLP)

A limited liability partnership is a fairly new contender to this field. It is best described as a hybrid between a company and a partnership. Similar to a company, a limited liability partnership is also a legal entity and shall have perpetual succession. Due to an LLP being a legal person, the assets of an LLP shall be separate to the assets of a partner in an LLP. In case of bankruptcy, the personal assets of a partner shall remain safe. Furthermore, the partners in an LLP are not liable for the independent and unauthorized acts of other partners and can only be held liable for their own acts.

Now that we have a general idea of the various business structures, what would best suit the needs of your business? I guess you still need some clarification. We, at Contriance will keep bringing you more information over the coming weeks and will do a separate article on each form of business over the course of time.

The form of business entity depends on your business circumstances, goals and objectives and the kind of business you wish to operate. We hope this helped settle some of your questions.

By Guest Author - Shreya Shankar