Vijayarajan & Associates - What form of business should an entrepreneur adopt !!!
Being an entrepreneur is the very rewarding and challenging experience. With the passion to proceed with your business idea, you start thinking how to execute your dreams. You starts thinking about the your business plan. You will research about the existing players and market, identify your strengths and weaknesses and make a business plan .Once you have a profitable business model you start thinking about the form of business.
Legal structure of business is a very important decision. You should do enough research about the legal structure/form of business for your business ideas. This article is intended to help you to select the right legal structure.
There are different forms of business that you could adopt. Below mentioned are the business form in the order of ease of compliance.
- Sole Proprietorship
- Partnership firm
- Limited liability partnership
- One person Company
- Private limited company
- Public limited company
Let us take a bottom up approach through some question answers for understanding the right business form for you.
Q)Are you going to pursue your business idea while you are in employment elsewhere? / Do you want to just experiment or do a trial run of your business before actually starting the business ?
A)If so you should start a form which can be started / discontinued easily and has lesser compliance requirements. Sole proprietorship is the best option. Next option is a partnership firm .
Sole proprietorship is the form in which you are the owner and in charge of management of business and you are wholly responsible for all the activities of the business. Sole proprietorship will operate in your own PAN. You can have a name for your business different from your name and can open a current account in any bank in the name of business. You can also take a GST registration and do everything that a normal business could do. If you have income more than 2,50,000/-(including business and all other income like salary, bank interest etc) you will have to file income tax return at year end. Audit is not compulsory unless your turnover is on a higher side.
If there are more than one person is wholly involved in your business plan, you may go for partnership firm. All you need to do is to buy a stamp paper of value Rs.5000/- and write a partnership deed. This form is slightly more complicated than sole proprietorship. You need to take advice regarding term of your partnership deed. You will have to take a PAN card for the firm. Registration of partnership firm is not compulsory but registration with registrar of firms will become handy if there might be dispute between partners. Filing of IT returns is compulsory irrespective of your profit/loss. Audit is not compulsory unless your turnover is on a higher side.
Financial liabilities may be high depending on the nature of your business activities and each partner will have complete liability of any act done by the firm
Q) Does your business plan involve more than one person ? Do you want a registered form of business ?
A)Limited liability partnership(LLP) is the form that will be advisable to you .LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
LLP is registered with Ministry of Corporate affairs. You will have to file couple of form every year but compliance is lot lesser than that of a company. You should get your accounts audited only if the turnover is more than a certain limit.
Q) Do you need a form of business which is registered and liability is limited ?
A)If you need a registered form of business and if you can handle all Government compliances, then company is the best option for you. Your liability is limited to share capital. For a company, ownership and management are difference. You could be the owner without involving in business activity of the company. Company is registered with Ministry of Corporate affairs. There are lot of regulation and you have to file several returns with Registrar of Companies.Audit is compulsory every year irrespective of your turn over. Name of the company will be reserved and all activities will be governed by The Companies Act. Compliance and procedures are complicated than other form of business.
You can have one person company , private limited company or a public limited company depending on no of share holders and activities involved
Now let us discuss in detailed different forms of business:- Following tabular representation will guide you through merits and demerits of each type of structure
|Incorporation||Easiest||Easier than LLP||Easier than company||Comparatively not easy|
|Closure||Easiest||Easier than LLP||Easier than company||Comparatively not easy|
|Liability of Owner||Unlimited||Unlimited||Limited||Limited|
|Annual compliance||Easiest||Easier than LLP||Easier than company||Comparatively not easy|
|Winding up||Ceases on death of proprietor or when proprietor closes the business||ceases when a dissolution deed is written||Winding up only with the concurrence of Ministry of corporate affairs||Winding up only with the concurrence of Ministry of corporate affairs|
|Decisions making||Proprietor can make all decisions||Decision making should be based on partnership deed||Decision making should be based on LLP deed||As decided by majority of directors|
|Profit sharing||Completely by proprietor||Shared by partners in the ration agreed in partnership deed||Shared by partners in the ration agreed in LLP deed||Shareholders get dividend depending on number of shares|
|Raising Capital||Own fund only||Fund from all partners||Fund from all partners||Can issue share to new members and raise capital|
|Transfer of business||Not possible||Amend partnership deed to add or remove partners||Amend LLP deed to add or remove partners||Transfer shares to new members|
It is not compulsory that you should start a company which is registered with ministry of corporate affairs. You should select the form of business depending on your requirement. Starting , closing and compliance is easier in partnership than a limited company. You should go for a limited company if you need limited liability ,perpetual existence and your business demands an incorporated entity. Also Startup India schemes are more for a Company/LLP than a partnership Firm.