Before starting any business it is important to choose its legal structure or Legal Requirements Are Needed to Start a Business. The choice you make about what type of business structure is appropriate for your company will affect how much you pay in taxes, the level of risk or liability to your personal assets (your house, your personal savings), and even your ability to raise money. The business structure in India consists of Sole Proprietorship, Partnership, Limited Liability Partnership, Private Limited Companies, Public companies. In this blog will explain the basics of common business structures, but we cannot tell you which structure you should choose.
Simplest business structure is the sole proprietorship in India. It is a type of an unincorporated entity that is owned by one individual only. All profit and loss associated with this business will be borne by the owner and all the debts in the business will belong to the owner alone as there is no other member in such structure. Your business is a sole proprietorship if you don’t create a separate legal entity for it. This is true whether you operate it in your own name, or under a trade name. sole business, the capital has to be invested by the person who starts the business. The full responsibility of its organization and management lies on him and he can do it according to his interest. On the contrary, if he has any kind of loss in business due to business errors, then he is bound to be fully responsible for all the losses. The nature and size of sole trade depends on the position of the trader himself.
Advantages of Sole proprietorship
- Easy process
- Inexpensive process
- Few government regulations
- Tax advantage
Disadvantages of Sole proprietorship
- Unlimited liability of the owner
- Limitations on capital raising
A Partnership is registered under Partnership Act, 1932. It is an association of two or more persons, in which, of their own free will, they share private wealth, property, labour and skill collectively in order to legally carry on, own ownership and obtain the collective benefit of a business. Before starting the business the firm is to be registered and the agreement is to be made between the partners which is called a partnership deed.According to the Companies Act, the maximum number of partnerships is limited to 10 for banking business and 20 for other business.
Advantages of Partnership
- Easy to get started.
- Less formal with fewer legal obligations.
- Sharing the burden.
- Better decision making.
- More partners, more capital.
Disadvantages of Partnership
- Unlimited liability.
- Profits must be shared.
- More difficult decision making.
Private Limited Company
Section 2 (68) of the Companies Act, 2013 defines private companies. According to him, private companies are those companies whose articles of association limit the transferability of shares and prevent people at large from subscribing to them. This is the basic criterion that differentiates private companies from public companies. This is the most common structure. It can be a public or private limited company it depends upon the scale of operation. A Private Limited Company as a business structure, is a legal entity that it is separate and distinct from the shareholders who are the founders and therefore the responsibility of managing the company can be delegated to the persons known as directors.
Advantages of private limited company
- No minimum capital.
- Separate legal entity.
- Limited liability.
- FDI allowed.
Disadvantages of private limited company
- It cannot issue prospectus to public.
- It restrict the transfer ability of shares by its articles.
- The number of shareholders in any case cannot exceed 50.
- In stock exchange shares cannot be quoted.
Limited Liability Partnership
Limited Liability Partnership is registered under Limited Liability Partnership Act, 2008.It is a separate legal entity.Limited Liability Partnership, popularly known as LLP.The rights and duties of the partners are governed by the agreement which is made between them.This is particularly suited to accountants, solicitors, architects, consultants, surveyors and other fields of expertise where a partnership is preferred to a limited company.Within an LLP the earnings of the members is normally seen as personal income.
Advantages of Limited Liability Partnership
- No requirement of minimum contribution.
- Lower registration cost.
- No limits on owners of the company.
Disadvantages of Limited Liability Partnership
- Penalty for non-compliance.
- Inability to have equity investment.
- Higher income tax rate.
Public company refers to a company that is listed on a recognized stock exchange and its securities are traded publicly.they are freely traded on a stock exchange or in over the counter markets. “Public” emphasizes their reporting and trading on the public markets. Public companies are formed within the legal systems of particular state. Ownership of a public company is distributed among general public shareholders. Shareholders have a claim to part of the company’s assets and profits.
Advantages of Public company
- Raising capital through public issue of shares.
- Growth and expansion opportunities.
- Transferability of shares.
Disadvantages of Public company
- Increased government control.
- Slower decision making time.
- No secrecy.
Some factors are important to understand before starting choose a legal structure for your business- control, limitation of liability, cost and complexity of formation and legal structure, tax implications, continuity of existence. If you need assistance or expert advice, please contact companysuggestion.com. We have a group of legal professionals and experts who may help you.