What structure makes the most sense?

This Post has been Contributed By
CS Amit Todkar
Founder of AT and Associates

Of all the choices you make when starting a business, one of the most important is the type of legal structure you select for your company. Not only will this decision have an impact on how much you pay in taxes, it will affect the amount of paperwork your business is required to do, the personal liability you face and your ability to raise money.          

The Legal structure depends  on the individual circumstances of each business owner. It’s important for business owners to seek expert advice from business professionals when considering the pros and cons of various business entities.

Here’s a quick look at the differences between the most common forms of business entities

Sole Proprietorship
A sole proprietorship is  a business owned and operated by one individual   The shops or stores which you see in your locality-the grocery store, the vegetable store, the sweets shop, the chemist shop, the panwala, the stationary store, etc. comes under sole proprietor. 
Advantages Easy to StartNo registrationNo profit sharingEasy decision makingEasy to wind upNo Corporate taxesDisadvantages Unlimited liabilityRaising fundsLimited LifeLoss in absence
Suitability For the business where capital requirement is small and risk involvement is not heavy this type of firms is suitable.   It is also considered suitable for the production of goods which involve manual skill, e.g. handicrafts, filigree work, jewellery, tailoring, haircutting, etc.
A partnership is a legal relationship formed by the agreement between two or more individuals to carry on a business as co-owners. Each member of such a group is individually known as ‘partner’ and collectively the members are know as “Partnership Firm” Maximum 20 persons can be partners to Partnership Firm except banking business.   These firms are governed by Indian Partnership Act, 1932   Registration of Partnership is not compulsory. But since registration entitled the firm to several benefits, it is considered desirable.  
Advantages Relative easy to startThe ability to raise fundsMore skilled persons Loss sharingNo loss in absenceDisadvantages Unlimited liabilityProfit SharingConflicts Limited LifeTransferability is difficult
Suitability Most suitable for comparatively small business such as Retail and Wholesale Trade, Professional Services, Medium size mercantile houses, Small manufacturing unit. 
The company is a voluntary association of persons to carry on business the members of the company are know as Shareholders and the capital of the company is known as Share Capital.   The Companies are governed by The Companies Act, 2013.   The Company is the artificial person and having characteristics of separate legal entity, perpetual existence, limited liability and transferability of shares.   A private limited company have minimum two shareholders and maximum 200 while a public limited  company have minimum seven and maximum unlimited.   
Advantages Limited LiabilityContinuity of existenceBenefits of larger scale operationsProfessional ManagementSocial benefitSpecial preference in tax benefitsDisadvantages Compulsorily registration is required Control by groupExcessive government controlDelay in policy decisions.
Suitability The company is suitable where the volume of business is quite large and area of operation is wide spared.

CS Amit Todkar is a practicing Company Secretary. He is the founder and owner of ATS and Associates. He is a regular contributor towards the blog with his generous articles on Company Formations, FEMA, Company Laws and Business Laws.

Leave a Reply

Your email address will not be published.