India in the current scenario is witnessing huge growth in entrepreneurship. If we see the statistics then the number of Startups from 3100 in 2014 is expected to reach a figure of 11,500 by 2020. Even the government of India has recognized this move as an instigator of growing the economy and hence, has come up with new measures and methods that will promote entrepreneurship and create a Startup ecosystem that will help the new ventures flourish. But when it comes to registering a company, the business structure in India offers various options but what should be the best format for a person who is starting a new business?
The kind of business structure present in India:
In India if you plan to open a company, you have the following options to make a choice from; obviously each with their own pros and cons, so we will go step by step:
- Sole proprietorship
- Partnership firms and
- Limited Company (Pvt or public)
- In the past few years, a new form or you can say a hybrid form of existing partnership firms and full-fledged Companies has emerged known as the LLP or Limited Liability Partnership.
Here is tabular representation of different types of firms and their key features:
| Key Features | Sole Proprietorship | Partnership | LLP | Company( Private Limited and Public Limited) |
|---|---|---|---|---|
| Partners or Number of Directors | Sole | Minimum of 2 to a maximum of 20 | Minimum 2 and no maximum limit | Minimum 2 (7 for Public) to a maximum of 200 for Private Limited ; no limit for Public Limited |
| Liability | Since there is no difference between personal and business assets thus in case in insolvency everything is at stake of Prop | Since there is no difference between personal and business assets thus in case in insolvency everything is at stake | Liability is restricted to the amount of investment done | Liability of assets is restricted to amount unpaid amount on shares orcommitment(in case of guarantee company) done by the shareholders |
| Income Tax Return | No required in case the income is lesser than the tax limit defined by Income Tax Department of India | Filing is mandatory | Filing is mandatory | Filing is mandatory |
You need to meticulously and deeply study the following factors before making a choice of the legal structure for your business:
- Liability
- Taxation
- Ownership and Control over your business
Let's have an in-depth analysis of each of the above-mentioned points:
Liability -In business the owners usually prefer putting less at stake, then the strike out the option of sole proprietorship and partnership as these two business structure does not consider your personal asset different from the business asset, thus,if your business faces any issues in that case your personal assets are at stake.Coming to the partnership firm, even if the partners commit anything wrong, your personal asset will be at stake.
On the other hand, if you compare the LLP form, whatcome at stake is only the assets that you have contributed to the company. Whereas in the case of a Company, the liability is restricted to the unpaid amount on shares or commitment (in case of Guarantee Company) done by the shareholders. If Shareholders/Members holds fully-paid shares in limited company, they have no further liability to pay any amount even if the company is declared insolvent.
The crux of the matter is that under bot LLP and Company format of business structure, there is a clear line of difference between the business asset and personal asset. Except for any personal guarantee given by the owner in case of LLP firm.
Taxation -If you are starting off a business, it is important that you should understand the taxation system and are clear about the various taxes applicable to different business forms. Here is quick look at it :
| Key Features | Partnership | LLP | Company |
|---|---|---|---|
| Tax on Income | The tax levied in apartnership firm is at 30% + Surcharge @12% if Total Income exceeds Rs. 1 Cr + Edu.cessand Shec @ 3% | Here the tax levied on income is 30%+surcharge at 12% + 3% cess (The surcharge is applicapble if the yearly income of a LLP exceeds Rs.1 crore) | The tax levied on income in a company is at 30% + Surcharge @7% if Total Income exceeds Rs. 1 Cr & 12% if Total Income exceeds Rs. 10 Cr.+ Edu.cess and Shec @ 3% |
| Taxability - MAT | Not Applicable | 18.5%+surcharge @12% if Total Income exceeds Rs. 1 Cr. +3%cess | 18.5%+ Surcharge @7% if Total Income exceeds Rs. 1 Cr & 12% if Total Income exceeds Rs. 10 Cr.+ Edu.cess and Shec @ 3% |
| Divident Distribution Tax | NIL | NIL | Dividend Distribution Tax (DDT) @16.995% on Grossed up Value. |
Note: The Sole Proprietorship companies is an easy way out when we talk about taxation system . Since in this type of business structure, you can declare your business income on personal income form, it is not considered as a separate entity as it is in the case of other forms of business structure.
Ownership and Control:
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Partnership -In this form of business, partners have a joint ownership of all the asset that belong to the firm. It limits the number of partners or people who can make an investment in the firm.
-
Sole Proprietorship -This type of legal structure for business also supports limiting the number of investors in the company. It gives you complete authority over the business.
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LLP or Limited Liability Partnership -Such form of business is preferred when you want to establish a direct relationship between the management and ownership.
Conclusion -The above information would have clarified your doubts about the different forms of business structure that you can choose and which form of business best matches your requirement. The crux of the matter is that deciding the business structure is an amalgamation of different factors like what is the goal of your business and what kind of business it is, the level of control you want, whether you want to have complete control or you want to share it, whether you want investors to invest in your business, the taxation impact on your business etc.
Disclaimer: Statements and opinions expressed in articles are those of the author's personal views.
About the author: Satyendra Kumar Mishra
Satyendra Kumar Mishra is the founder and CEO of EmpressLegal.com which was founded with the singular objective of offerings the highest quality corporate and incorporation services to its clients all over the globe. Since its foundation, EmpressaLegal.com has helped entrepreneurs across India to incorporate their businesses in a fast and secure manner.