Types of Business Structures in India 01 scaled

Types of Business Structures in India

In  this blog Let’s make an effort to have an understanding of the different kinds of business structures that are accessible in India:

Proprietorship Firm

A proprietorship firm can be established and managed by a single person. Only one person runs the business, and it is ideal for small business owners with low investments. The sole owner will have complete authority over the company, and while they will have access to all of the company’s income, they will also be responsible for bearing all of the company’s losses.  

Partnership Firm

When more than one individual decides to work together in business, they are said to have formed a partnership. The profits that are made by the company are distributed among the partners of the firm in an equal manner. They are also going to be responsible for bearing the firm’s losses. The partnership firm is regulated under the Partnership Act, 1932. It is perfect for small firms that have a low initial investment and are handled by two or more people.

One-person company

If there is just going to be one promoter or owner of the firm, starting it off with an one person company, which only became available in 2013, is the most effective way to do it. It makes it possible for a solo owner to continue his work while also becoming a part of the corporate structure. The Companies Act of 2013 has granted it registration as a company. It is ideal for small businesses who want to raise capital.

Limited Liability Partnership (LLP)

The responsibilities of participants in a limited liability partnership (LLP), which is a separate legal entity, are restricted to the amount that they have agreed to contribute. An LLP is established under the Limited Liability Act, 2008 with the Registrar of Companies (ROC). It possesses characteristics that are shared by both partnership firms and corporations. It is an excellent choice for businesses that are started by partners who seek limited liability and fits that description perfectly.

Private Limited Company

In the eyes of the law, a public limited company (PLC) is treated as an independent legal entity from its founders. The company’s directors are in charge of managing the business operations of the company. The investors in the company are known as shareholders, and they have a stake in the business. A PLC is registered under the Companies Act, 2013 with the ROC. It is an excellent choice for companies of a medium to large size who need to raise funds. 

Public Limited Company

In accordance with the Companies Act of 2013, a company is considered to be a Public Limited Company if it has seven members or more. The board of directors is in charge of managing the company’s day-to-day operations. It has its own independent legal existence, and the members’ responsibility is restricted to the amount of shares they own in the company. It is ideal for medium to big businesses who wish to raise capital from the public.

You can choose the business structure that suits your business needs and accordingly register your business.

Why is it important to choose the right business structure?

Because of its impact on your income tax returns, it is critical to give careful consideration to the organisational structure of your company. When you are registering your company, it is important to keep in mind that different types of business structures have varying degrees of compliance requirements that must be satisfied. For instance, a sole owner is required to file only one form of tax return each year. However, a corporation is required to submit an income tax return in addition to the annual filings that are required to be filed with the Registrar of Companies.

Every year, the financial records of a business need to be subjected to a required audit. Spending money on auditors, accountants, and tax filing specialists is necessary in order to maintain compliance with these legal requirements. When contemplating the registration of a company, it is crucial to get the corporate structure right so as to avoid legal complications. An entrepreneur absolutely needs to have a crystal clear notion of the kinds of legal compliances he or she is willing to cope with before starting a business.

Investors will almost always choose a business structure that is both acknowledged and legal, despite the fact that some business models are more investor-friendly than others. For example, an investor may hesitate to give money to a sole proprietor. On the other hand, investors will feel more at ease placing an investment in a successful business concept that is supported by a well-known legal structure (such as a limited liability partnership, company, etc.).

How do you decide on a company structure before submitting an application for company registration in India?

Let’s take a look at some of the most crucial questions that every entrepreneur needs to ask himself before making a final decision on the type of business structure to use for a company.

How many individuals will be able to call themselves proprietors or partners in your company?

If you are a lone individual who is in possession of the total initial investment necessary for the firm, a One Person Company would be the most suitable business structure for you. On the other hand, if your business has two or more owners and is actively seeking investment from other parties a Limited Liability Partnership (LLP) or Private Limited Company would suit you best.

Should the amount of money you put in at the beginning have any bearing on how your company will be organised?

It is recommended that you establish your business as a sole proprietorship, HUF, or partnership if you wish to start out with fewer financial obligations. However, if you are confident that you will be able to recoup the money spent on formation and regulatory compliance, you can consider forming a One-Person Company, a Limited Liability Partnership (LLP), or a Private Limited Company.

Willingness to take full responsibility for all of the business’s losses

There is no cap on legal responsibility for business entities such as sole proprietorships, HUFs, and partnership firms. This means, in case of any default in loans, the entire money will be recovered from the members or partners in profit sharing ratio. The risk to personal assets is high in these cases.

Companies and limited liability partnerships (LLPs) contain something called a limited liability clause. This indicates that the responsibility of the organization’s members is limited to the amount of contribution made by each individual member or the value of the shares held by each individual member.

Business Income Tax Rates That Are Currently In Effect

The standard slab rates are used for computing the amount of income tax that must be paid by a sole proprietorship and a HUF. In the case of a sole proprietorship, the business income is clubbed with the individual’s other income. On the other hand, the tax rate of thirty percent is applied to other entities such as partnership businesses and companies.

Strategies for obtaining funding from various investors

When the structure of your company is not registered with the appropriate authorities, obtaining funding might be challenging. When it comes to financial transactions and investments, reputable organisations such as LLPs and PLCs are utilised. Be sure to pick the appropriate organisational structure, and get the assistance of a knowledgeable person if you want to register under the right direction.

Related Info

Company Registration in India

Private Limited Company Registration in India

Company Incorporation in India

Sole proprietorship company registration in India

One person company registration in India

 

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