How do you choose what is the Ideal Form of Business for you?

 In Uncategorized

An old proverb or saying an old friend, my guide always used to preach about, and today as I sit and pen my thoughts down, in retrospect remind me of the same. It applies to our ordinary every day and also to the most critical aspects or decisions of our life. The proverb is etched on the belief and stresses the importance of a good plan.

It’s not the destination that matters But it’s the journey That matters the most
Deducing from the proverb & applying the same to your business plan. Herein, understanding the importance of that every decision will have its consequences. The pressure of executing your business idea could be difficult. Though, these founding decisions require careful consideration because these are to the pillars on which the entire business infrastructure is going to rest on. And one important support structure to your business plan is the choice of the right business structure.

Let’s figure this; it’s this framework on which the entire business hinges on. Let’s scale up our resource base, to understand the different business models & chalk out a comparative analysis bearing in mind some pointers listed below. The pros & cons of each business model:

Sole proprietorship: The most common form of businesses used by most micro and small businesses operating in the unorganised sectors.

Ownership Rights: A type of unregistered business entity that is owned managed and controlled by one person, hence the name, Sole Proprietorship

Name of Entity: The name of choice suggested by the owner or promoter can be used as no approval is required

Status of Legal Entity: Not recognised as a separate legal entity

Members Liability: Proprietor has Unlimited liability and is responsible for all the liabilities of the Proprietorship

Foreign ownership: Not allowed

Initial investments: Minimal

Existence & Dissolvability: Dependent on the Proprietor

Annual filing: N/A

Taxation: As in sole proprietorship the individual is the owner, they are taxed as individuals, based on the total income of the Proprietor

Scalability:  N/A

Transferability: Not transferable

Risk Exposure/Liability of members: As there is only one person who is the Sole Proprietor. The Proprietor personally liable for all the liabilities of the Proprietorship

Registration procedure: No mechanism provided by the Government of India for the registration. Existence established through tax registrations and other business registrations according to rules & regulations

Minimum & Maximum no of members: N/A. Only one member

Annual Statutory Meetings: N/A

What does it lack: Benefits such as limited liability proprietorship, corporate status, separate legal entity, independent existence, transferability, perpetual existence – which are desirable features for any business.

Joint Partnership: A type of a business that is owned, regulated and controlled by an Association of people and the objective of which is division of profit earned

Name of Entity: The name of choice suggested by the owner or promoter can be used without any approval

Status of Legal Entity: not recognised as a separate legal entity

Members Liability: Partnership confers unlimited liability and is responsible for all the liabilities of the Proprietorship

Foreign ownership: Foreigners are restricted from investments

Initial investments: Minimal

Existence & Dissolvability: Partnership business is dependent on the Partners. Partnership can be dissolved in the event of death of a partner

Annual filing: No requirements to file annual report with Registrar of Companies. Income tax mandatory for Partnership

Taxation: Profits are taxed at 30% plus surcharge & cess as applicable

Transferability: Not transferable

Risk Exposure/Liability of members: As it is an unregistered form of business it is not recognised as a separate legal entity and the promoters/partners are personally liable for the liabilities

Registration procedure: No compulsion on registration of the firm. A partnership deed crafted by partners could suffice registration.

Minimum & Maximum no of members: Minimum of 2 members & a Maximum of 20 partners

Annual Statutory Meetings: No requirements to conduct annual statutory meetings

What does it lack: With the introduction of LLP’s and their added benefits, joint partnership firms are losing popularity?

One Person Company (OPC): It’s a recent and exciting addition to the array of options available and is in existence since 2013.

  • Name of Entity: Promoters/Panels suggested name must be approved by the Registrar of Company (ROC). Identical names and names similar to existing entities company or LLP names & names that are offensive or derogatory in any way would not be allowed. The name of the entity or the firm must end in OPC or One Person Company
  • Status of Legal Entity: Separate legal entity registered under the Companies Act, 2013. The Director and Nominee Directorof a One Person Company are not personally liable for the liabilities of the Company
  • Members Liability: Director and Nominee Director have limited liability only to the extent of his/her share capital
  • Foreign ownership: OPC’s restrict Director and Nominee Directors to be Foreigners
  • Existence & Survivability: It is not dependent on the Director or Nominee Director. Could be dissolved voluntarily or by Regulatory Authorities
  • Annual filing: OPC’s must file Annual Accounts and Annual Return with the Registrar of Companies (ROC) each year. Income Tax Return must also be filed for the One Person Company
  • Taxation:  Profits are taxed at 30% plus surcharge and cess as applicable
  • Scalability: Yes
  • Transferability: Ownership can be transferred.
  • Risk Exposure/Liability of members: The Director and Nominee Director of a One Person Company (OPC) are not personally liable for the liabilities of the Company
  • Registration procedure: Registered with the Ministry of Corporate Affairs under the Companies Act, 2013
  • Minimum & Maximum no of members: A minimum & maximum of 2 people are required to start the company viz. Director & Nominee director
  • Annual Statutory Meetings: No requirements
  • What does it lack: OPC must nominate a director in the MOA, AOA -who will become the owner in case of disability of the disability? OPC must be converted to a PLC if the annual turnover crosses 2 Cr. rupees.

Limited Liability Partnership (LLP’s):

  • Name of Entity: Promoters/Panels suggestion of name must be approved by the Registrar of Company. Identical names and names similar to existing entities company or LLP names & names that are offensive or derogatory in any way would not be allowed. The name of the entity or the firm must end in LLP or Limited Liability Partnership
  • Members Liability: Partners have limited liability and are liable only to the extent of their contribution to the LLP.
  • Foreign ownership: Foreigners are allowed to invest in an LLP only with prior approval of Reserve Bank of India(RBI) and Foreign Investment Promotion Board (FIPB)

Initial investments: Minimum share capital of 1lakh Rupees

  • Existence & Survivability: Existence of an LLP is not dependent on the Partners. Could be dissolved only voluntarily or by an Order of the Company Law Board
  • Annual filing: must file Annual Accounts and Annual Return with the Registrar of Companies each year. Income Tax Return must also be filed for the Private Limited Company
  • Taxation: Profits are taxed at 30% plus surcharge and cess as applicable
  • Scalability: Yes
  • Transferability: Ownership can be transferred
  • Risk Exposure/Liability of members: Partners have limited liability and are liable only to the extent of their contribution to the LLP
  • Registration procedure: Registered with the Ministry of Corporate Affairs under the Limited Liability Partnership Act, 2008
  • Minimum & Maximum no of members: Minimum of 2 members & a Maximum of unlimited partners
  • Annual Statutory Meetings: Board and General Meetings must be conducted periodically.
  • What does it lack: Except for the initial investment there isn’t any premise over which the LLP structure doesn’t score over other business structures

Private Ltd Company:

  • Name of Entity: Promoters/Panels choice name suggested must be approved by the Registrar of Company. Identical names and names similar to existing entities company or LLP names & names that are offensive or derogatory in any way would not be allowed. The name of the entity or the firm must end with Private Limited Company
  • Status of Legal Entity Status: Separate legal entity registered under the Companies Act, 2013. The Directors and Shareholders of a Private Limited Company are not personally liable for the liabilities of the Company
  • Members Liability: Shareholders have limited liability and are liable only to the extent of their share capital.
  • Foreign ownership: Foreigners are allowed to invest in a Private Limited Company under the Automatic Approval route in most sectors
  • Initial investments: Minimum share capital of 5lakh Rupees & for registration as India Pvt Ltd, the share capital required is 10lakh Rupees
  • Existence & Survivability: Existence of a Private Limited Company is not dependent on the Directors or Shareholders. Could be dissolved only voluntarily or by Regulatory Authorities
  • Regulatory compliance requirement for started and operating:
  • Annual filing: N/A
  • Taxation: Profits are taxed at 30% plus surcharge and cess as applicableScalability: Yes
  • Transferability: Ownership can be transferred by way of share transfer
  • Risk Exposure/Liability of members: Shareholders liability limited to their share only
  • Registration procedure: Registered with the Ministry of Corporate Affairs under the Companies Act, 2013
  • Minimum & Maximum no of members: Minimum of 2 persons & maximum of 200 shareholders
  • Annual Statutory Meetings: Board and General Meetings must be conducted periodically
  • What does it lack: Very similar to LLP structure interns of ability to raise funds

Further, we have listed the major differences categorically for your reference. But given the choices listed above on a comparative basis LLP offers options which give it the edge above all other business structures. It doesn’t restrict you in terms of the turnover; you can opt for an LLP having a turnover of 5 lakh or 10 Cr.

Also, all participating members enjoy limited liability.
Easy incorporation of LLP’s makes it hassle-free and the most preferred choice.

Leave a Comment

Contact Us

We're not around right now. But you can send us an email and we'll get back to you, asap.

Not readable? Change text. captcha txt