We at parpella often come across our clients confused about the form of business to choose. We thought to have a brief write-up on the points to consider while choosing a suitable business structure. The most common types of business forms popular in India are as follows.

Sole proprietorship

This is typically the simplest type of business, with only a single person responsible for all the entity’s profits and losses. If you intend to work alone, this may be the best option for you. This type of business can be especially appealing because income and expenses are included on your personal income tax record. Your profits and losses are recorded on the income tax return form and the amount is transferred to your personal tax return. Losses you suffer in the business can offset income earned from other sources. With this type of business, you also have complete ownership and make all the decisions. You may also be interested in learning on Internal Auditing and Management Consultancy in Kerala

The disadvantage of a sole proprietorship is that you are liable, personally, for your entity’s liabilities. This means that your personal assets could be placed at risk to satisfy a business debt or settle a legal claim filed against you.

Partnership Firms

A partnership can be an ideal choice if your business is going to be owned and operated by multiple people. This type of business comes in two forms: general partnership and limited liability partnerships. With a general partnership, the partners assume responsibility for the debts. With a limited liability partnership, The partners of the LLP is having limited liability which means partners are not liable to pay the debts of the company from their personal assets. No partner is responsible for any other partner misbehaves or misconduct.

Unless you intend to have multiple passive investors, the limited liability partnership may not best the best type of business to start as a new business owner because of the administrative complexities and required filings. If you expect to have two or more partners who are actively involved in the business, a general partnership is easier. They are typically more expensive to start because more extensive accounting and legal services are required.

Companies or corporate entities

This type of business entity limits owner’s liability to their shareholdings. A Company is a separate legal entity apart from its owners/ shareholders and the company is responsible for the management of its assets and liabilities. Companies in India are registered with the Registrar of companies (ROC) under Companies Act 2013 and anyone can check the details of the company through Ministry of Corporate Affairs (MCA).

Any owner or member can have a full participatory role in the operation of the business. There is also flexibility with the distribution of profits.

How to choose the suitable form of Business

Growth prospects

Of all the factors affecting the decision, the growth prospects of a proposed entity is to be given the foremost importance. The better the growth prospects and future possibilities, better to go for a company form of business since in the journey you might need new investors who prefers to invest in a company rather than other forms of business and a company has a better standing among the general public.

Flexibility

Your goal when selecting a type of business is to identify the one that allows for maximum flexibility with the ownership structure i.e. easy entry and exit of owners. You need to consider the goals, concerns, needs and financial situations of each owner. In making alterations in the ownership, the company form is the best available option since the share transfer is comparatively easy compared to the admission or resignation of a partner and the sole proprietorship does not have an option for ownership change since the business and the person are one and the same.

Liability

Another factor you need to consider when forming your business is the extent to which you need to be protected from liability. You need to examine the potential liability of your organization and decide if you can personally afford the risk. If you cannot, a partnership or sole proprietorship is likely not the best type of business to start. For example for a risky and large scale business like construction/ manufacture, it is better to choose company since there are several inherent risks involved which may lead to personal liabilities.

Complexity

You will need to establish the level of complexity you want to take on with your business. Sole proprietorships are the simplest option and incorporating your business can become highly complex, with the tax and corporate reporting requirements.

Taxes

You will also need to consider the tax implications for the organization and what the opportunities are for minimizing taxation. There are more tax options for companies than partnerships or sole proprietorships. Further the corporate tax rates are the lowest in the current scenario.

Control

You need to determine the amount of control you want over the business. If you need to have complete control, an One Person Company or sole proprietorship may be the best choice. While a single person can control a company, as the business grows, it will become a board-directed entity.

Capital investment

If you plan to seek outside funding for your business, you may want to establish a company. Companies can secure additional funding and sell stock as opposed to sole proprietorships, which can only obtain funding through their personal bank accounts or by taking on partners.

Hope you got a brief understanding about choosing the suitable form for starting your business. If you have any further queries, we’re happy to assist. You may reach us on +91 90740 42503 or drop a mail on enquiry@parpella.com and our executives shall reach out to you. Contact your Business and Company Registration Consultant in Kerala today.