How to Select Business Structure for Starting a New Business?

One has to follow a long to-do list to set up a new business entity. As you gain control over the business part, we would like to shed some light on one crucial aspect i.e. selecting the right business structure.  

Selecting the right structure from various forms can be an intimidating task for anyone. But the clarity about the goal and scale of business ease out the process to a considerable extend. You must ascertain the threshold of control you wish to have or the level of compliances you want to fulfill.   

What are the Various Types of Business Structures in India?

In the purview of Companies Act, 2013 here is the tabular representation of a different classification of business entities exists in India; 

Deep Analysis on Types of Company Registration

Registering a company is the first and foremost process by which entrepreneurs incorporate their company. Since different company types exist in India, the business owner has to make sure that they choose the right type of business model that fits their operations. In our country, the Companies Act, 2013 has underpinned some directions for various types of company registration. The section below discusses the different business types in India . 

• Public Limited Company: A Public Limited Company or Public company is that company which is owned by public or in which the public can subscribe. They can raise capital from the public directly through issues of shares. The minimum number of directors is 3 and the minimum number of shareholders is 7. There is no limit on the maximum number of shareholders. The shareholders have limited liability to the extent of the face value of its shares and the premium respectively.

• Private Limited Company: A Private Limited Company is that company which is owned privately by the individuals. It is more flexible and easy to form than a Public company because many provisions of the Companies’ Act 2013 are not applicable to this. It can be formed with just 2 members and 2 directors. But there is a restriction in the maximum number of its partners which is restricted to 200. The number of shareholders is limited to 50 only. A Private company cannot invite public to apply for its shares. This kind of company is more preferred by investors because they can buy/sell stakes easily.

• One Person Company: It is also symbolized by OPC. It has only one person as a member who will act in the capacity of a director as well as a shareholder. No one from outside India can incorporate OPC. It is only permitted to a resident of India to incorporate a One Person Company. It was basically introduced in India so that an individual person can also start their own venture. Under the Companies Act, it is classified as a Private Company. It’s features like perpetual succession and the separate legal entity is similar to a Private Company. It can be easily incorporated without many formalities and with just one person. 

• Sole proprietor: Here the business is run by the owner himself and all the major decisions are his alone as are all the profits and losses. This structure is said to be the most common and one of the oldest business structures in India. Starting and liquidating a firm with sole proprietorship requires no legal formalities. All the debts in the business belong to the owner alone since this structure doesn’t involve any other member. As also in the eyes of law, the owner and his business are the same.

• Partnership: A partnership firm is formed between two or more individuals. The profits and losses are borne by them and shared as per the agreed-upon ratio. It isn’t necessary to register partnership firms but always advisable that you do so. One has to make a partnership deed which details the capital invested by each partner, the jurisdiction of each partner, and the profit-sharing ratio.

• LLP: Limited liability partnership is wherein the liability is limited based on the capital invested. The formation of an LLP is an easy procedure. We have already seen in detail how an LLP is incorporated.  LLP’s formation and taxation processes are different from a private limited company.

• Section 8 company: A section 8 company is a non-profit making company. Here the profits made are utilized to facilitate a particular interest. The process for incorporation of section 8 companies is explained in one of our blog posts.

  These are prominently considered types of business structures by aspiring entrepreneurs. But there is also an unlimited company, co-operatives, Joint Hindu family, and a public limited company.

How to Get Correct Hands on the Right Business Structure?

The business structure could be a decisive element in ensuring the success of the organization. Indeed, you have the liberty to change it later if something goes wrong, but that might leave your business in standby mode for months. One has to consider and examined countless factors before getting hands on the right business structure. Some of the factors are explained below:

• Legal liability : Understand the legal liabilities that come with the company structure you want to incorporate. Legal risks increase if you have a partnership firm or a sole proprietorship.

• Taxation : The taxation process for every business structure differs. For instance, in sole proprietor will be taxed inclusive of personal and professional income and expenses.

• Cost for formation and administration : When you wish to start a company you will have to consider the cost for formation of the company and the cost to be invested in its administration. If your business structure requires a high amount to be invested in bookkeeping or formation you can take up sole proprietorship instead of a private limited company.

• Flexibility as per your goals : You have set goals in mind when you conceive the idea to start a company. These goals are to be achieved one step at a time. Your business structure should be such that it should give you flexibility to suit your goals.

• Futuristic approach : Pick a business structure keeping a vision for the future in mind. If you start a private limited company which is an SME your future goal can be IPO listing of your SME.

Conclusion

Choosing the right business structure could be a perplexing task if you aren’t aware of legal obligations and growth prospects about the same. There is no such thing as a “perfect structure” that offers everything other than disadvantages.

So, be watchful while considering your options. The factors above would let you simplify the selection process. In case if you feel uneasy or confused at any of the instances then don’t feel alone as our experts can help out to get rid of such a situation. All you need to connect with the Legal Window professional and share your concern.