Selection of Business Entity

Selection of Business Entity

So you have decided to start a new business?You have also decided upon which activities you will be doing. One of the most important things for you now is choice of business entity. The ease of activities and success of the business vastly depends on your selection.

Let us see what all types of business entities are there in India.

1.       Sole-proprietorship: Here you are the only owner of the business. You bring in the capital and you enjoy the profits. You also have unlimited liability for the company’s debts

2.       Partnership: Here you have an agreement with one or more people and run the business jointly. You decide on your liability ratio and profit sharing ratio mutually. This form of partnership is best when you have people from different fields of expertise working towards one goal.

3.       Limited Liability Partnership: All the partners has liability to the extent of their contribution hence it is limited liability.

4.       Private Limited Company: The shareholders have liability only to the extent of shares taken up by them. These shares cannot be exchanged or transferred or traded.

5.       Public Limited Company: in this case too, shareholders have liability to the extent of shares. But here the shares are freely transferable.

6.       One Person Company: There shall be only one shareholder. This was introduced in the companies Act 2013.

 

Now let us look into various factors you need to consider while selecting a business entity.

1.       Capital: Most important resource for business is money. It is important to consider the avenues of funds that are available now and what will be available for future.

Sole-Proprietorship

Less capital

Partnership

Less capital

LLP

Less Capital

Private Ltd Co

More capital

Public ltd Co

More capital

OPC

More capital

 

Starting a Sole-Proprietorship or partnership will bring in less capital to the business as compared to a Private Ltd or Public Ltd. If you wish to set up a capital intensive business, Private Limited, Public Limited Companies and OPC are better options. If you are planning to raise money from angel investors or Venture Capital in immediate future then registering a Private Limited company is the best option 

 

2.       Liability: It has to be kept in mind how much liability you can afford take up. How much will you be able to pay during adverse situations of your business?

Sole-Proprietorship

Unlimited

Partnership

Unlimited

LLP

Limited

Private Ltd Co

Limited

Public ltd Co

Limited

OPC

Limited

 

While OPC, Private Ltd Co and Public Ltd companies come with limited liability, there is limited profit sharing too.  A Sole-Proprietorship and partnership will give greater chances of earning more personal revenue. However these two come with unlimited liability.

3.       Taxation: Depending on which type of entity you chose you have to bear the tax burden on the profits earned by your company.

Sole-Proprietorship

Taxed as income of proprietor

Partnership

Profits charged @ 30% plus applicable cess

LLP

Profits charged @ 30% plus applicable cess

Private Ltd Co

Profits charged @ 30% plus applicable cess

Public ltd Co

Profits charged @ 30% plus applicable cess

OPC

Profits charged @ 30% plus applicable cess

 

You will definitely do your adequate tax planning and make sure you have a tax hit as minimum as possible.

4.       Separate Legal entity: It means that the company is a different legal person. It has detached accountability and its own rights.

Sole-Proprietorship

Not Separate Legal Entity

Partnership

Not Separate Legal Entity

LLP

Separate Legal Entity

Private Ltd Co

Separate Legal Entity

Public ltd Co

Separate Legal Entity

OPC

Separate Legal Entity

 

So if you start a sole-proprietorship or partnership, you have to remember that you will be personally sued for the defaults of the company. On the other hand, if legal entity is separate, the company itself is sued; not the shareholders.

 

5.       Cost of formation: The formation of a new business brings with it a number of formalities. These formalities can be costly and time consuming as well.

Sole-Proprietorship

Less cost

Partnership

Less cost

LLP

Moderate cost

Private Ltd Co

High cost

Public ltd Co

High cost

OPC

High cost

 

The amount you spent in forming your company should not be so much that it robs you of your capital. If you have fewer funds in hand and less money to invest, it is always better to go for sole –Proprietorship. These types of companies are also easy to form and take lesser time.

6.       Number of members:   There is a limit on the number of members that can be a part of each type of entity.

Sole-Proprietorship

One

Partnership

Min: 2; Max: 20

LLP

Min: 2; Max: unlimited

Private Ltd Co

Min: 2; Max: 200

Public ltd Co

Min: 7; Max: Unlimited

OPC

Only 2: Director & Nominee

 

If you are not willing to do partnership with someone your best choice is to start a sole-Proprietorship. Suppose you are 20 persons wanting to start up a business. You can choose to form a partnership. But say you are 30 persons or 100 persons then you could go for a Private limited or a Public Limited Company.