Slidedeck provides you with basic information about the four types of business organisations which are Sole Proprietary Concern, Firm, LLP and a Pvt. Ltd. Company.
Will also give you the pros and cons of each so that you can take an informed decision
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Firm? LLP? or Private Limited Company? Choose the right one!
1. Commencing your Business
Decide the ideal form of business organisation
Objective:
What are the various business organization options available
What are the benefits & negatives of each
How to choose which form of business organization works best
Jaydeep S. Halbe
Opinions might be subjective. Legislations / Laws are subject to change.
2. Options Available
If you want to set up your business today, there are a
few options available. They are:
Sole Proprietary Concern
Partnership Firm
Private Limited Company
Limited Liability Partnership
Each of them have different requirements and their
own pros and cons
3. Sole Proprietary Concern
It’s the easiest form of business organization. In this
case, there is no difference between the Individual
and the business. Both of these are the same entity.
All tax, business & statutory registrations are to be done
in the name of the Individual.
Only one Income tax returns for the business and the
individuals is to be filed.
4. Partnership Firm
A partnership firm is a separate legal entity and is
different from the partners of the firm. At least two
people are required to form a Partnership Firm and the
maximum number of partners in the firm can be only
20.
There are two types of firms. Registered & un-registered
firms. Registration is with the local sub-registrar of the
government.
All tax, business & statutory registrations are to be done
in the name of the Partnership Firm.
Income tax returns for the business and the partners of
the firm are to be filed separately.
5. Private Limited Company
The most common form of business organisation today.
The company is a separate legal and there is a
corporate veil between the company and the owners.
The most significant thing here is that the liability of the
owners is limited.
All tax, business & statutory registrations are to be done
in the name of the Private Limited Company.
Income tax returns for the business and the owners of
the company are to be filed separately.
6. Limited Liability Partnership
A LLP is a form of business organization that is mid-way
between a Private Limited company and a partnership
firm. It embraces the ease and low-compliance of a
partnership firm and the limited liability concept of a
Private Limited company.
All tax, business & statutory registrations are to be done
in the name of the LLP.
Income tax returns for the business and the partners of
the company are to be filed separately.
7. What is this LIABILITY? Limited or not..
One of the most important things to be considered before deciding
the form of business organisation is liability. The meaning of the word
is very simple. Any amount of money that you owe to a person is
called liability. The reasons for you owing money to people are
different, they could be:
On account of not fulfilling a contract
On account of a court case that you lost
On account of a penalty / fine / charges levied on you by a
party etc.
Limited Liability means, the amount that you have to pay is limited to
the extent of assets and cash that your business has. If the liability is
more than the assets you have, bankruptcy is declared. Your
personal belongings do not come into the picture.
Unlimited liability means if your assets in the business are insufficient,
your personal assets are also included to pay off the liability.
8. Sole Proprietary Concern
Pros & Cons
Pros Cons
Very easy to set up. Quick way
to commence business.
Liability is unlimited.
Costs of setting up are very low. Not a scalable form of business
organization.
The same PAN, TAN, Service Tax
number that the individual has
can be used by the business.
Payment Gateways and few
others require the business to be
a Company
Tax is based on the slab rate
and hence tax outflow is limited.
Can’t induct a partner / co-
owner into the business.
Governance required to be
done is low.
Till turnover reaches a sizeable
amount, no Audit is required .
9. Partnership Firm - Pros & Cons
Pros Cons
Easy to set up. Quick way to
commence business.
Liability is unlimited.
Costs of setting up are not high. Not a scalable form of business
organization.
Governance required to be
done is low.
Payment Gateways and few
others require the business to be a
Company
Till turnover reaches a sizeable
amount, no Audit is required .
Beyond a certain limit of income,
the rate of tax becomes 30%.
More than 1 person can be
part of the ownership structure
of the business
Unless it’s a registered firm, it can’t
file a suit against anybody.
Profit sharing ratio between
partners can be different from
the Loss Sharing Ratio.
Investors are unwilling to fund a
firm.
10. Private Limited Company
Pros & Cons
Pros Cons
Liability is Limited Governance required to be done is
sizeable.
Costs of setting up are not high. Statutory Audit is required from Day 1.
Scalable form of business organization Corporate rate of tax is 30%.
Payment Gateways and few others
require the business to be a Company
Cost of running a company is sizeable.
Investors are willing to fund on
companies because shares are
relatively easy to transfer and trade.
There are a lot of legal restrictions that
are to be complied with.
A corporate veil separates the actions
of the company from the actions of the
owners.
People may come and people may go,
but the company goes on forever.
It outlasts the founders!
11. Limited Liability Partnership
Pros & Cons
Pros Cons
Liability is Limited Governance required to be done is
sizeable.
Costs of setting up are not high. Payment Gateways and few others
require the business to be a Company
Statutory Audit is NOT required from Day 1. Corporate rate of tax is 30%.
Cost of running a company is NOT high. Investors are willing to fund only
companies because shares are
relatively easy to transfer and trade.
Legal restrictions that are to be complied
with are low.
Not a very Scalable form of business
organization
Some Benefits of a company without the
problems of a company.
12. How to decide?
The decision of which form of business organisation is required,
comes down to a few factors:
What’s the aim for the business. Will it be scaled over time?
Is the line of business such that it’s susceptible to the risk of law
suits / legal claims.
Whether the business needs to be funded in the long run by an
Investor.
Are you looking at bringing a few other people on-board.
If the business is scalable and needs to be funded by an investor and
you are looking at bring a few people on board, choose a form of
business organisation that can accommodate this. The business
organisation needs to be capable of scaling.
Make a choice of form of business organisation that needn’t be
changed or migrated every few years. You don’t want to spend
brain-space on changing form of organisation.
13. When to choose what?
Sole Proprietary Concern:
This is ideal if you’re a freelancer without any employees or
overheads such as rent, advertising etc.
Partnership Firm:
Widely used by professional services firms. No intention to get funded
by an Investor. Nature of business is such that likelihood of external
liability is low.
LLP:
Again, very popular among professional services firms. Here, even if
the business is likely to have external liability like Constructions,
Restaurant Operations etc, it’s fine.
Private Limited Company:
Best when the business needs to be quickly scaled and investors are
to be brought on board. Choose this when the benefits outweigh the
costs and governance issues.
14. Trust some of your doubts with regards to business
organisations are gone!
If you have any more, feel free to contact me:
E-Mail: jay@kenspire.com
Twitter: @Jayhalbe