Rajat Negi

5 types of Business Structure

Business Structure - 5 types of Business Structure

Before selecting the best business structure for a startup let’s see what is the illusion behind forming a business.

I always question myself that how does a business operate or function.

When a particular set of people goes for a mutual work, they usually work or are a part of a business. To form a business or company on paper is very easy, with a small fee and a legal address of yours. When you read PRIVATE LIMITED or LIMITED besides any company’s name, it means that the company or business has filed the papers to become a legal company or business. In the eyes of the government, a business or company is a legally separate entity and if I just squeeze its name then it will be Pvt. Ltd. or Ltd. 

What if the government wants to punish the business or its owner

5 Types of Business Structure - 5 types of Business Structure

If businesses or business owners are practicing the bad activities, and if it comes in the eyes of the government then they may go into trouble. Government can punish the company by imposing a fine on the business or by suing the business owner.

You should choose the right business structure for your business while starting a business

Each type has its own registration procedure, paperwork requirements, and ease of conducting business, and it is up to the particular circumstances of each business owner to determine which form best suits their needs.

1. Sole Proprietorship

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  • Single Owner.
  • follows the informal structure.
  • regulates in unorganized form of business.
  • In the eyes of the Income Tax department business and business owner, both are the same entity. 

2. General Partnership or Partnership Firm

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  • This may have partners or owners ranging from 0-50.
  • follows the organized form of business.

3. Limited Liability Partnership (LLP)

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  • This may have partners or owners ranging from 2-Infinity.
  • follows the organized form of business & partnership.

4. Private Limited Company

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  • The no. of owners may range from 2-200.
  • operates as a separate legal entity with equity ownership.

5. OPC (One Person Comapny ) Private Limited Company

  • Single Owner
  • operates as a separate legal entity with equity ownership.

Serious things that you need to consider while selecting a business structure

  • Tax Payment to Government – How much tax should I pay or my company pays to the government. Each type has a different schema or different % for tax.
  • Personal Liability – How much percentage of your personal liability is involved in the business.
  • Paperwork – What type of licenses and legal documents are required to form the business in the eyes of law.
  • Raise Funds – How easily can your business raise funds for its expansion.

No. of members

  • Proprietorship firm and OPC: only one member
  • Pvt. Ltd. Company, General Partnership, and LLP: requires at least two members

Perpetual Existence

A Separate Legal entity from its owner

  • Pvt. Ltd Company, OPC, and LLP: These are separate entities from their owners and the company can function without the owners.

Advantage: Company can be transferred to the coming generation. A man can transfer the company from his name to his son’s name.

  • Sole Proprietorship and General Partnership: owner’s demise or withdrawal of owner shuts the company. The company also comes to its end.

Disadvantage: Company can’t be transferred to anyone.

Ownership transfer flexibility

  • In Sole proprietorship and partnership: Owner(s) are personally liable.

For example: if the company has taken a loan from a bank for its expansion then the same bank has legal rights on the assets of the business owner such as real estate, etc.

  • In Pvt. Ltd., OPC & LLP:

No personal liability of the owner is involved.

Pvt. Ltd. Company – Owner is liable for unpaid share value.

LLP – Liability is limited to the capital amount agreed.

Hence the personal risk is highest in proprietorship and partnership 

Authority level in business decisions

  • Sole proprietorship: Because the owner is the only one who makes decisions, it’s easier to run and manage the firm without too much influence.
  • Partnership and LLP: Because numerous partners are involved, decision-making authority is spread, and all choices may be made according to the partnership agreement.
  • In Company: The MOA (Memorandum of Association) and AOA (Articles of Association) provide the board of directors the authority to make decisions for the firm.

As a result, if shareholder approval is necessary, the OPC has the upper hand in decision-making. and the fact that there is just one shareholder adds to the flexibility.

Tax liability of a business or business owner

  • When tax rates are applied, the tax burden of a proprietorship is the lowest.
  • The costs of an LLP or a partnership are considerable since they are taxed at a 30% rate.
  • Companies and OPCs are taxed modestly based on their turnover. Domestic enterprises having a gross revenue of Rs.250 crores pay a corporation tax rate of 25%. 

Ownership transfer flexibility

  • In Sole proprietorship: transfer of ownership is not allowed
  • In LLP/Partnership: necessitates the permission of the majority of partners ( as per partnership deed).
  • In Company: rights are in the hand of shareholders.

Pre-Post registration compliance and maintenance costs

There are several post-registration compliances that must be met once the registration procedure is completed. They are divided into two distinct portions.

  • For a specific event
  • For annual 
Proprietorship:
In comparison to any other type of business, a single proprietorship requires the least amount of compliance. It only necessitates the submission of income tax, GST, and other related documents if they are appropriate.
 
Partnership Firm:

It has a lower level of compliance just like a sole proprietorship. In addition to completing your income tax return, you must also file additional tax returns. It is required to keep track of event-based compliance.

The occurrences are documented and reported to the firm’s registrar. This includes

  • Change in name or place or business activity of the firm
  • change in partner or name or address of the partner.
  • opening or closing of branches.
  • any changes in the agreement.

Limited Liability Partnership:

follows the same compliance requirements as the partnerships from but with few additions. 

  • Income Tax returns and other tax returns
  • Event-based compliance
  • filing of annual return with Municipal of Corporate affairs
  • filing of KYC of DIN holder with MCA, the director is responsible for timely filing of DIN KYC. 

Private Limited Company:

It has a higher percentage of compliance than any other type. It has a maximum maintenance cost as well.

One Person Company:

It has a number of advantages, as the Companies Act has allowed OPC several exemptions. Other than that, compliance is nearly the same, with a few exceptions.
There is no need for an AGM because it is a one-man show. Furthermore, just two minimum business meetings are required by OPC each year.

Want to raise funds for your startup?

Raising cash for a sole proprietorship and a partnership corporation might be difficult. This is due to the fact that it does not have its own legal status. Investors prefer to put their money into corporations over unincorporated businesses. A limited liability partnership (LLP) is a modest company structure. Banks and financial organizations are willing to lend it money. An investor is joined as a partner in an LLP to invest money in the form of capital in order to obtain funds in the form of capital. If you plan to raise money after the firm is formed, a private limited company is the best option. The fact that it has its own legal department lends it greater credibility in the marketplace. Private limited corporations can easily obtain a loan from any bank or financial institution. It can also raise funds by selling shares to its close friends. Furthermore, the money from stock is less expensive because no interest is required.

Want to avail of government schemes and benefits for your startup?

Businesses can take advantage of a wide range of government programs. However, only a few types of corporate structures are eligible to participate in the program.

  • Startup India Scheme: This plan can only be registered by a private limited company, a partnership business, or a limited liability partnership formed in India.
  • Pradhan Mantri Mudra Yojana: Small enterprises that are corporations, such as sole proprietorships and partnerships, are eligible to register and get advantages.

Final Words

Small enterprises that are not corporations, such as sole proprietorships and partnerships, are eligible to register and get advantages. Business is like an infant baby, don’t expect anything from it before 999 days. I wish all the best to you and your baby business.

I hope, I gave you some insights about the business structure and delivered it in the best possible way. 

If you have any queries related to the same then do leave a comment, I will respond to it. 

DO SHARE THIS ARTICLE with your friends or family who are going to start their own business.  You can tweet out your thoughts by tagging me @rajatinr on Twitter.

To your entrepreneurial Success

-Rajat Negi, Logging Out 1f917 - 5 types of Business Structure

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Rajat Negi

Compound Investor (Who loves to talk to stock)
Digital Marketer (Who loves to make brands)

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