When we speak of business structure, we refer to the category under which an organization falls. It gives a business a legal recognition in a given jurisdiction that is characterized by a legal definition falling under a particular type. It is possible to have a legal structure with Pvt Ltd, LLP registration, non-profits or section 8 company, etc.
With many alternatives, it is often difficult for entrepreneurs to choose one, especially when they cannot understand the significant differences, advantages, and disadvantages. Therefore, getting a professional and legal consultation is the best choice.
This blog aims to help entrepreneurs looking to get started and need a sense of direction in registering the right business structure for their dream startup.
The Companies Act is a body corporate for all the businesses registered as Companies. These are the three major types of companies that an individual can register;
a). Private Limited Company
b). One Person Company (OPC)
c). Public Company
2. Sole Proprietorship:
One of the primary forms of all companies is single ownership. It’s a single-owner company arrangement by its titles. Nevertheless, it is crucial to note that sole proprietorship can work as an informal structure and not a legal body.
When a group of individuals aims to operate a profit-based business, they must declare forming a company. The collaboration business has two potential forms of registration;
a). Limited Liability Partnership (LLP)
b). General Partnership Firm
Remember that LLP operates as the body corporate and not the general partnership, meaning that it is given the stature of a business entity.
Envision your Business Better
Depending on how you plan to expand it, the company must have a growth strategy to follow. Now, combine the organization’s size and complexity with your growth strategy to assess the appropriate business structure. For example, if someone wants to operate alone, they can do so with sole ownership. Still, if they’re going to include someone over a partnership in the future, they can do so themselves rather than register a single ownership company.
Know that a lot depends on your company’s structure, and you have to pick it wisely. The corporate structure helps to decide your tax liability, the security of your assets, and even how you run the business.
Gauge the Financial Needs
Most founders look to access a wide range of financing options where bank loans and internal funding from within the family and friends are the first options. But business expansion may need you to explore lending agencies and banking institutions that can provide financing to regulate organizations having as LLP and private limited company registration in India. Moreover, owners may add partners in other systems to produce more capital to handle the fund flows from these internal sources in a certain way.
If you think that you will tend to experience a higher growth rate and need more capital, it is better to opt for private limited company registration. This promotes raising money from Angel investors, VCs, and other organizations. For example, if you join an OPC and look for support, it’s almost painful to do so because OPC provides restricted membership.
Consider Taxation Involved
Taxation becomes the priority once the company begins to stream in the revenue. Any income created by a corporation is taxable, and its structure determines the amount of taxability. If expected, reducing the amount of tax would leave behind a more significant portion of revenue. For example, if the company profits exceed the exemption cap, the sole proprietorship company has a tax burden of 5 to 30 percent. But the other market structure has a flat rate, which means, except for registered SMEs that pay 25 percent of the tax, even one single Rupee is taxed at 30%.
It is necessary to recognize LLP and partnership is viewed reasonably for tax purposes by tax authorities. Nevertheless, the introduction of a Dividend Distribution Tax (DDT) allows company promoters to use the LLP instead of registering businesses. Any profits generated by the organization attracts DDT at a brutal pace of 15%.
Consider the Maintenance Cost
Start by contrasting the operating costs of a similar organizational structure. For example, it is easiest to create sole ownership at the nominal value of registration. While LLP and registration require maintenance to remain compliant, they do not entail any comparatively higher registration costs.
Maintaining compliance is essential for the smooth running of the company, especially for LLP and private companies with the highest demand. LLP registration, for instance, requires the business to file an annual LLP report to work without problems. But if you’re looking for a simple arrangement that’s easy to a small business, choose ownership alone. To dig deeper into each business structure to make the right choice, you would need to know the costs involved. It is best to consult experts to get the exact idea and make the right choice.
Follow the key points listed above to assess your business structure. Sometimes you get confused with choosing the right corporate structure in India, mainly if the structure isn’t permanent.
Today you can register a one-person business and then later go to the register partnership firm. Also, you will later move a partner to an LLP. All this can get very daunting if you don’t have any legal partner to enable you to make an optimal option.