HOW TO CHOOSE PERFECT BUSINESS ENTITY IN INDIA

An Article by CS Pankaj Singla –

Indian economy is one of the fastest growing economies in the world. India is going through a phase of extraordinary economic advancement and liberation and various Government initiatives, foreign direct investment, start up schemes has lured the Indians toward making mark through their own businesses be it a small start up of selling tea or setting up huge manufacturing plants.

But before embarking on to setting up of any business entity in India one must know the type of entity which is best suited for their business module.

Selection of business type, varies from person to persons as per their need and requirement. To choose one from various structures can be a daunting task. But, clarity about the vision and scale of business makes this choice easier for instance you must know the level of control you want, the level of compliance you will be able to follow, the amount of investment you will require and more.

The business structure significantly affects the success path of your business. Even if you could change it later, you must make a wise choice in the first place. You need to visit and revisit many factors that determine the right business structure.

Here are such factors explained:

1. Control:

If you are starting your business and you want total control over the business than in that case you can start :

  • Sole proprietorship in which you will be the only person who deals with all the aspects of Business or

  • OPC (One Person Company) in which you will be  the only shareholder and you can also act as directors in your OPC.

If you want less control than in that case you can start :

  • Partnership Firm in which every partner has control over the affair of the Partnership Firm (Depends upon the Partnership Deed) or

  • Private Limited Company/ Public Limited Companywhere control over the affair of the company depends upon the level of shareholding you hold in that company.

2. Liability:

If we go on the basis for liability than we must know that under Sole Proprietorship Firm and Partnership Firm, liability of the Sole Proprietor and all the partners are unlimited it means any government department may pass an order to attach personal assets to pay off to the Creditors.

Under Private Limited Company or Public Limited Company (Limited by shares) or LLP (Limited Liability Partnership) the liability of its members or the Partners are limitedupto the unpaid value of share, it means Government Department cannot pass an order for attachment of personal assets.

3. Fund Requirement:

Every business requires fund to maintain its functionality. Small amount can be managed by the promoters on its own but when we talk about huge financial requirements for expansion and other business operations, option of loan from Banks or ,any Financial Institutions or Equity funding from private player are available.Loans can be easily availed by Public or Private Company or by LLP as they are registered under special Act and are controlled by government guidelines.

4. Credibility:

If we choose business entity on the basis of credibility than Companies and LLP are more credible structure. As there are proper guideline of government and records of all the Companies and LLPs. There are many certification from Professionals like Company Secretaries, Chartered Accountants, and Cost Accountants regarding their accounts, finance and other document and forms. Further, the financial data and other data are accessible to the Public. Therefore, third party could easily rely on credibility. But Sole Proprietorship Firm and the Partnership Firm has less credibility as there are less control over the affairs of the Sole Proprietorship or Partnership Firm of the Government.

5. Taxes:

There is a defined tax structure for each form of Business.

  • The business income ofSole proprietors are taxed at an individual rate, which may range from 5% to 30% as per their total income.
  • The Business income of Partnership Firm is taxed at a flat rate of 30%but the income of the Partners is taxed separately as per Income Tax Act, 1961
  • The business Income of the LLP is also taxed at rate of 30%.
  • The Business Income of the Company is also taxed at the Rate of 25% or 30%depending upon their turnover also surcharge is also applicable on company.

So one must carefully understand the tax structure before choosing any business entity as it plays a very crucial role.

6. Level of Legal Compliances:If we see level of legal compliance in choosing business entity than Sole Proprietorship has lesser legal compliances in comparison to Partnership or LLP whereas Companies has to comply with numerous regulations.

7. Investor contributions:Business Investment also depend upon the form of Business one has opted which plays an important role in the success of business. Investment is the blood of every business. If we want big investment than Company or LLP is the best format of Business as there are proper guidelines to watch the interest of the Investors.

8. Operational and Incorporation Cost:While considering the selection of business from point of view of cost, sole proprietorship or Partnership is suitable where less finance is available. However in starting LLP or Company incorporation and other operational cost is high.

Choosing the right business format is a tricky task. On basis of above given primary factors for opting any business format, one can make firm decision.

About Author:

Hi, This insightful article was penned down by Mr. Pankaj Singla. Read what he has to say about himself.

Know Me

I am a practicing company secretary by profession and an avid reader and learner by nature.

Corporate management, secretarial services and legal parameters are few domains where my expertise lies.

10 years of experience has taught me the value of time and significance of qualitative work, serving with the same intent and thriving for knowledge to serve better is the determination that keeps me going.

Qualification: ICSI, LLB, B.Com

Specialization: Legal, Contract, Secretarial, Labor Laws, SEBI, RBI

Firm Name: Dr. Pankaj & Associates

Mobile No.: +91-9654495503

Email ID: cspankajsingla@gmail.com

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