Want to start a new business? Great! What’s the next question that comes to your mind? Which suitable business structure to choose of course. In India, you can register your business as Sole proprietorship firm, General partnership firm, Private limited company, Limited liability partnership firm and one person company. There is no perfect business structure. Every structure has its own advantages and disadvantages. One structure might be suitable for one business while the same structure might not be suitable for the other business. Choosing the right business structure is very important as it leads to proper functioning of a firm.
Many firms switch from one structure to another in between but the process of conversion is time-consuming and costly. Before you choose your company structure, there are certain questions that you need to answer to understand your concerns.
- Will you consider expanding your business overseas?
- Where do you see your business in 10-15 years in future?
- Do you have enough funds or do you need to borrow some in the future?
- What is the risk profile of your business?
Choosing a business structure is not an easy task. There are a lot of parameters that you need to go through. Below mentioned are some of the important parameters that you should go through before choosing your company structure.
| Parameters | Sole proprietorship | General partnership | Private company | Limited liability firm | One person firm | |||||
| Who should go for it? | Best suited for small traders and merchants. | Suited for businesses by more than 2 people collect the funds. | Suited for businesses who have high turnover. | Suited for businesses which have fewer investments requirements. | Suited for businesses who want to have 100% control. | |||||
| Minimum capital needed | No limit | No limit | No limit | No limit | No limit | |||||
| Expanding company operations | Less chances of expansion due to limited funds. | Restricted expanding of business. | Heavy investment needed. Need to build credibility among partners and vendors. | Restricted expanding of business | Heavy investment needed. Need to build credibility among partners and vendors. | |||||
| Business overseas | No identification | No identification | Globally identified business structure. | Business structure identified in many countries but only in the growth stage. | Business structure identified in most countries. | |||||
| Growth of employees | Low employee growth. | Low employee growth. | High employee growth. | Partners control so low employee growth. | Low employee growth | |||||
| Business risk protection | Personally responsible. | Partners are responsible. | Limitation on the face value of shares. | Limitation to capital contribution | Limitation to capital contribution. | |||||
| Tax benefits | On depreciation | On depreciation | On depreciation there is a high tax saving. | On depreciation | On depreciation there is a high tax saving. | |||||
| Raising capital | Difficult to take loans from the bank because of no separate legal entity. | Difficult as banks go through partner and business profiles before giving loans | Easy to raise capital both equity and debt. | Difficult as there are few partners. | Easy to take loans from banks but difficult to raise from shares. |
Careful consideration should be given to above mentioned parameters before deciding your business structure.