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When it comes to choosing “THE BEST LEGAL STRUCTURE” for registering a business-there is no “THIS WILL BE THE BEST.”

A business entity in India can be registered under different formats. You can start your business as a Private limited Company(PLC), One Person Company(OPC), Limited Liability Partnership Firm(LLP), General Partnership Firm or Sole Proprietorship Firm.

Every legal structure has its own pros and cons and what may be ideal for one type of business may not be suitable at all for the other. Choosing the right structure helps businesses operate to their full potential and achieve business objectives.

However eventually as needs keep evolving you can always convert to another entity structure eg. You may consider converting your partnership firm into a PLC but the process of conversion can be complex and involves cost.

There are a few fundamental questions that you should ask yourself. These will help you define your specific business requirements and help you decide the right format for your business and save you from making a wrong choice.

Questions to ask yourself:

  • What is the risk profile of my proposed business?
  • What is my personal risk appetite?
  • Do I have enough funds to sustain my business or I will need external funds and if yes then how am I going to raise?
  • What is the degree of control I want to exercise over my business?
  • Where do I see my business 5-10-15 years down the lane?
  • Do I have the required business skills or I will need to attract professionals?
  • Will I consider conducting business overseas?

Clearly, chalk down answers to each of these questions and you will have clarity on what are your key business concerns.

There are multiple parameters which should be considered while finalizing the type of legal structure:

  • Control Over Operations

If you are someone who wants full control in business decision making, register as a Sole proprietor or go for OPC. On another hand when you take other people on board with you, for instance, you form a partnership firm, the decision-making power gets diluted.

  • Personal Liability

Each business has its own risk profile. The risk appetite of entrepreneurs too varies. If you are operating in a high-risk business field and want to limit your liability register as a company or LLP.

  • Growth In The Long Run

Expansion can be supported only with the introduction of fresh capital, investment in infrastructure, recruiting more employees and procuring other resources. Consider the fund requirement and ease in incorporating new capital. Eg. under PLC structure shares can be issued to investors while an OPC can have only one member and investors can’t be issued shares.

Refer to the below Suitability Score Card and evaluate which entity structure will best suit your proposed business based on multiple attributes:

 

Parameters Private Limited Company One Person Company Limited Liability Partnership General Partnership Proprietorship
Who should opt for this? Ideal for business having high turnover, and need for external funding

Eg. Tech Startup, Export house etc.

Ideal for sole proprietors looking to limit their liability and have 100% control. *Ideal for Service oriented businesses & *Businesses that have low investment needs

Eg. Consultancy firm.

Small businesses where funds and assets are pooled by 2 or more people. Small merchants and traders

Eg. Departmental store, Salon etc

Suitability Index 32/35 28/35 21/35 16/35 11/35
Minimum capital investment No minimum limit No minimum limit No minimum limit No minimum limit No minimum limit
For Raising Capital 5 on 5

Very easy to raise capital – both debt and equity as banks and foreign investors prefer PLC over every other entity types

4 on 5

Only one member so can’t raise funds through issue of shares, however,banks prefer OPCs over non-corporate structures

3 on 5

Difficult to raise capital due to limited number of partners but

preferred by banks

2 on 5

Not very easy as banks look for business and partner profile before granting loans; Issue of shares is not possible.

1 on 5

Treated as an individual, Difficult for banks to lend due to no separate legal entity

For Legal Compliances 2 on 5

Large number of annual compliances involved.Audit is mandatory.

3 on 5

Limited ROC compliance as compared to PLC,

No need for AGM (if 1 director) and holding other meetings

4 on 5

Low compliance needs, Only 2 ROC Annual returns and other Tax returns

5 on 5

Least compliances-no ROC returns, only tax return of firm and audit if applicable

5 on 5

Least -only Individual tax return to be filed,  and audit(if applicable)

For Tax advantages 5 on 5

*Tax Holiday for first 3 years under Startup India

*higher tax savings on depreciation

5 on 5

*Tax Holiday for first 3 years under Startup India

*higher tax savings on depreciation

*No tax on Dividend distribution

3 on 5

No special advantages, same as general partnership

3 on 5

*only claim tax benefit on depreciation.

2 on 5

*only claim tax benefit on depreciation

*Tax levied on all income including business income

For Protection against Business Risk 5 on 5

Limited to face value of shares

5 on 5

Limited to capital contribution

4 on 5

Limited to capital contribution, some personal liabilities may apply

1 on 5

Partners are personally responsible even for conduct of co-partners

0 on 5

Personally liable

For Hiring Employees 5 on 5

* Attract talent with ESOP

(Employee Stock Option Plan)

*Higher employee confidence

3 on 5

No ESOP issue possible; Employee never becomes member

2 on 5

Mainly governed by partners-low scope for employee growth; Only salary for employees

2 on 5

Unorganised -low scope for employee growth

1 on 5

Highly unorganised

-full control in one hand

For overseas business 5 on 5

Corporate structure recognised globally, may have non-Indians on board too.

4 on 5

Corporate structure recognised in most countries

3 on 5

Recognised in many countries; recognition achieved only in growth stage

1 on 5

No recognition

1 on 5

No recognition

For expanding business operations 5 on 5

Ease in financing heavy investment need, building business credibility among vendors and partners

4 on 5

Same as PLC but If annual turnover over 3 preceding years exceed 2cr then OPC needs to convert to PLC or if your capital is more than 50 lakh

2 on 5

Restriction in diversification of business.

2 on 5

Low Vendor confidence, Restriction in diversification of business

1 on 5

Low expansion potential; Limited funds-savings of sole proprietor

If you have a business plan and wish to launch your startup come on board with us and understand all nuances related to incorporation and start your business in a hassle-free way. If you need an expert advice drop your query at enquiries@cleartax.in

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