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How to Select Correct Business?

Starting a business is a journey filled with plans, decisions, and research. Right from finalizing the business idea to choosing the business entity, there are several options to choose from. Also, one of the most critical questions that you face while starting a new business is – How to select the correct business? The options include a sole proprietorship, partnership firm, limited liability partnership, company (public or private or one-person), etc. Further, with each option offering a unique set of pros and cons, decision-making is difficult. Hence, you must choose one that suits your business plan and helps grow your business with ease. In an earlier article, we spoke about factors that you need to consider before selecting a business entity with a focus on private limited companies. Today, we will talk about the pros and cons that each entity offers.

The entities up for comparison today are:

  1. Sole Proprietorship
  2. Partnership
  3. Limited Liability Partnership (LLP)
  4. Private Limited Company
  5. One-Person Company

Let’s begin with looking at the pros and cons offered by these four entities:

How to select correct business – Basics

Type of business entityDescription
Sole Proprietorship
  • It is a form of business in which one person owns all the assets of the business. Further, this is in contrast to partnerships or corporations.
  • You don’t need to follow any legal formalities to create a sole proprietorship. However, you need to procure appropriate licenses and registration of the business name if it differs from the sole proprietorship.
  • It is also the owner’s responsibility to report loss or income from the business along with his/her personal income in the income tax returns.
Partnership
  • You can create a partnership firm post drafting a partnership deed among all the partners. Hence, it is important to have a partnership deed to create a partnership firm.
  • The Indian Partnership Act, 1932, governs all partnership firms in India.
  • Further, you can have a maximum of 20 partners in a firm.
  • Also, the partnership deed details the manner in which the profit and loss are distributed among partners.
Limited Liability Partnership
  • It combines the benefit of limited liability of a company with the flexibility of organizing the internal management of a partnership.
  • Also, the Limited Liabilities Partnership Act, 2008, governs all LLPs in India.
Private Limited CompanyA private limited company has the following characteristics:

  • A restriction on the shareholder’s right to transfer shares.
  • The company must have at least 2 members & 2 directors.
  • Also, the maximum number of shareholders allowed is 200.
  • Further, it cannot invite the public to subscribe to any shares or debentures or any other type of security of the Company.
One-Person Company
  • The Companies Act, 2013, allows the formulation of a one-person company – a company with only 1 member.
  • Further, the member has to designate 1 nominee who becomes the shareholder in the event of the death or incapacity of the original member.

How to select correct business – Comparison

FeatureSole ProprietorshipPartnershipLimited Liability PartnershipPrivate Limited CompanyOne-Person Company
IdentityThe proprietor and the company are ONE legal entity.The partnership firm has no separate legal entity. The firm and the partners are the same.The firm and the partners are separate legal entities.The company and the shareholders are separate legal entities.The company and the director are separate legal entities.
LiabilityThe proprietor has unlimited personal liability.The partners are liable. Further, they have unlimited personal liability.The partners are liable. Further, it is only to the extent of their invested capital.The shareholders are liable. Further, it is only to the extent of their invested capital.The director is liable. Further, it is only to the extent of his invested capital.
Number of membersOne2-20 partnersMinimum 2 partners with no upper limit2-200 membersOne
Statutory Audit
No Statutory
Audit.
Tax Audit needs
to be conducted
if turnover
exceeds *1 Crore
No Statutory
Audit.
Tax Audit needs
to be conducted
if turnover
exceeds *1 Crore
The LLP must
conduct Statutory
audit if the turnover
> INR40 lakh and
capital contribution
> INR25 lakh.
The company
must conduct
Statutory
audit
regardless of
the turnover.
The company must
conduct Statutory
audit regardless of
the turnover.
Initial costsLowestLowHighHighestHighest
SuffixNo suffixNo suffixLLPPrivate Limited(OPC) Private Limited
Holding Board MeetingNANANot required.At least four Board Meetings in a year. Also, the gap between two Board Meetings shall not exceed 120 days.At least Two Board Meetings in a year (One meeting in each half-year). In case only 2 BMs are held, the gap between both of them should be a minimum of 90 days.
Tax Base Rate*As per individual tax slab.30%30%22%22%

*Applicable for AY 2019-20.

* Tax rates exclude cess, surcharge, and any special benefits offered by the government specific to certain industries.

There are many other features that are unique to each business entity. However, for the sake of comparison, these features should give you a clear idea.

Points to help you make the right decision

  • Initial investment – This is an important factor that can help you select the correct business entity. For example, you can start a sole proprietorship with fewer funds as compared to a private limited company.
  • Taxation – Indian tax laws are different for different business entities.
  • Compliances – Every business entity has an Act that governs and regulates its functions. Further, based on the Act, there are certain compliance requirements.
  • Scalability and Fund Raising – The type of business entity also affects its ability to raise funds from investors. A company or LLP has a recognized legal structure allowing them to raise funds easily.

Summing Up

It is critical to assess your business plan and the benefits that each entity offers before making your decision. Once you select the correct business entity, you can focus on growing and developing your business. we hope that this article helped you understand the differences between them. For any queries, please do not hesitate to write to us.

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