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Best business structure for startup in India: Important details to know

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Companies that choose the business structure at an early stage tends to grow three times faster and better. Therefore, before company registration, it is crucial to decide the best business structure for startup. However, the inefficient formation can often result in a company failing.

The early days of starting up are exciting, refreshing and stressful.

You may lack funds, legal advisors, but you are full of passion and spirit. However, now you have several advisors for free legal consultation from experts.

Types of Business Structure for Startup

  1. Sole Proprietorship
  2. One Person Company
  3. Partnershipf
  4. Limited Liability Partnership
  5. Private Ltd Company

Before deciding the best business structure for startup, you must answer few questions to find out the best business structure for you.

  1. What is the business?
  2. How many are members involved?
  3. How many will engage on a full-time basis?
  4. If anybody is still working in any company, whether a job agreement allows doing business?
  5. What is the fund requirement of a business?
  6. From where will you get the funding?
  7. What is the scale of the operations?

Sole Proprietorship

It is the most popular form of business structure for startup. Firstly, only a single person controls, operates and manages the whole business. Secondly, the owner and the firm are the sole legal entity. Thirdly, all the profits and losses belong to the sole proprietor resulting in unlimited liability. Therefore, to repay the debts of your startup, they can claim your assets.

It is a good option for startups because it is easy and inexpensive to register. Moreover, the owner has direct power over all decisions.

PROS

  1. A simple structure to start easy
  2. Freedom to make decisions
  3. Less legal compliance
  4. High privacy
  5. Easy dismissal
  6. Cost-effective
  7. Complete control over finances

CONS

  1. Unlimited liability
  2. Limited financial sources
  3. Difficult to raise capital from outside
  4. Defined life, enterprise dies with its owner.

One Person Company (OPC)

It is a new business structure launched in India by the Companies Act, 2013. Earlier, it was mandatory to have at least two members to start a private ltd company. However, with the OPC structure, this problem has been fixed. Therefore, you can register an OPC with just one member. Moreover, an OPC can have a maximum of 15 directors.

PROS

  1. Lesser Compliances
  2. Limiting liability of proprietorship company- if the sole proprietors register as an OPC, then their liability will be bound to the company as in a private ltd company.
  3. Legal Reputation and Social Recognition
  4. Easy to get loans from financial sectors
  5. Complete power with a single owner
  6. Easy to manage- no requirements for board meetings
  7. Eternal succession

CONS

  1. Suitable for only small business
  2. Requires an Indian nominee for incorporation (no minor)
  3. High Tax Rates
  4. The company’s name includes OPC.
  5. Not fit for high turnover

Partnership Firm

A partnership is a bond between two or more people who agreed to share the profits and losses of a business carried on by them under the Partnership Act, 1932. Generally, a partnership can have a maximum of 20 partners.

Above all, it is not a separate legal entity.

Therefore, this type is best for the business-like retail trading, professional services, small manufacturing etc.

PROS

  1. Easy to form
  2. More capital contribution since the number of partners is more
  3. Less compliance
  4. The combined skill of all the partners together helps in increasing efficiency.
  5. Easy dismissal
  6. Confidentiality
  7. Flexibility of works
  8. Active guidance

CONS

  1. Unlimited liability
  2. Conflict of interest as control is the same
  3. No eternal continuation
  4. Chance of ill-usage of finances
  5. No clarity
  6. Arising conflicts
  7. Lack of co-operation
  8. Delay in decision making
  9. Lack of public trust

Limited Liability Partnership (LLP)

It is a combination of partnership and company, having a separate legal entity governed by Limited Liability Partnership Act, 2008. However, it has the flexibility of a partnership with limited liability. Therefore, the liability of each partner is limited to their investment in the firm. Above all, compliance is higher for an LLP as related to a partnership but lesser than the limited company.

PROS

  1. Limited liability
  2. No max limit for associates
  3. Continued succession
  4. Less compliance
  5. Better governance form
  6. The audit is needed if turnover exceeds Rs.40 lac/capital contribution caps Rs.25 Lacs
  7. Similar tax benefits as a partnership

CONS

  1. The penalty for non-filing is Rs.100 per day
  2. Less clearness
  3. No shares, only capital contribution
  4. Difficulty in receiving bank funding
  5. Business growth is hard
  6. Dismissal of LLP is a lengthy process

Private Ltd Company

It is the most common form of business structure in India governed by the Companies Act, 2013. Moreover, it has a separate legal entity having continual succession.

However, the minimum number of members should be 2, with a maximum of 200. Most importantly, it is a highly organised business structure and also transparent.

Thus, it has higher compliance compared to others and needs revelations in many steps. Also, most of the investors prefer it.

PROS

  1. Limited liability
  2. Stable entity option
  3. Highly organised, more compliance, more revelations
  4. Growing is easy
  5. Easy to get investments and funding’s
  6. The obligation of rights & other legalities is well verified
  7. Estimation is simple in the matter of Merger & acquisition
  8. No minimum capital requirement

CONS

  1. Raising capital requires more work
  2. Shares are not tradeable
  3. High penalty for non-compliance
  4. Too many revelations
  5. Dismissal time consuming

In conclusion, after analyzing the pros and cons of all the business structures, you can decide the best business structure for startup and get your company registration done.

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