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Registering your business under the right structure is as important as any other business-related activity, from engineering to design to marketing to sales to support. The right business structure allows you to operate with efficiency and meet the business targets and objectives that have been set by different departments of the business. Company registration is also a legal compliance that needs to be done by businesses.

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What are the types business structure?

There are many types of business structure that you can choose from. Here are some of them:

  1. Sole Proprietor – You will be the sole owner of a business. But you can always employ people. You will be responsible for all business decisions.
  2. Hindu Undivided Family (HUF) – The members of a family can start an HUF. The HUF is considered as a separate legal entity.
  3. Partnership Firm – A group of people carry on business together and share profits and losses in a partnership firm. The partners can employee staff but the partners are considered as business owners and not employees.
  4. Private Limited Company (PLC) – A company is a separate legal entity from you. It has shareholders(owners) and directors(who run the business). You will be an employee of the company.

Depending on these factors, you can get your company registered under a business structure that is best suited to you. Here are the popular business structures in India.

Company type Ideal for Tax advantages Legal compliances
Sole Proprietorship Small merchants and traders – Benefit on depreciation – Individual tax returns to be filed

– Audit, if required

General Partnership Small businesses where two or more people are involved – Benefit on depreciation – Business tax returns to be filed

– Audit if applicable

Limited Liability Partnership Service-oriented businesses or businesses that have low investment needs – Benefit on depreciation – Business tax returns to be filed

– ROC returns to be filed

One Person Company Sole owners looking to limit their liability – Tax holiday for first 3 years under Startup India

– Higher benefits on depreciation

– No tax on dividend distribution

– Business returns to be filed

– Limited ROC compliance

Private Limited Company Businesses that have a high turnover – Tax holiday for first 3 years under Startup India

– Higher benefits on depreciation

– Business tax returns to be filed

– ROC returns to be filed

– Mandatory audit

Why is it important to choose the right business structure?

The form of business structure you choose determines the type of Income Tax Return you file. Also, every type of business structure has a different level of compliances required.

For example, a sole proprietor has to file only an income tax return. But a company has to file income tax return, companies annual return and also get a compulsory statutory audit done.

Abiding by so many legal compliances requires spending money on auditor, accountant and a tax filing expert.

Hence, the task of selecting the right kind of business structure will help you to be legally compliant as you will know what is coming your way in terms of legal compliances.

Also, some business structures are more investor-friendly than others. Investors will always have more trust in a group of people who have a recognised and a legal business structure.

For example, an investor may hesitate to give money to a sole proprietor. On the other hand, if a good business idea is backed by a recognised legal structure (like LLP, Company, etc) the investors will be more comfortable in making an investment.

How to choose a business structure?

  1. How many owners will your business have?

If you want to own the entire business and you have entire initial investment required for the business, it is best to go for Sole Proprietor or One Person Company.

On the other hand, if you want your business to have 2 or more owners and also want people to bring in investment it is best to go for HUF, Partnership Firm, Limited Liability Partnership (LLP) or Private Limited Company

  1. What is the money you are ready to spend for setting up your business?

If you want to spend less initially, it would be wise to go in for Sole Proprietor, HUF or Partnership Firm.

But if you are sure that you will be able to recover setup and compliance costs you can go in for One Person Company, LLP or a Private Limited Company

  1. Willingness to bear the entire liability of the business.

Business structures like sole proprietor, HUF, and partnership firm have unlimited liability. This means that in case of any default in loans the entire money will be recovered from you and the members or partners in the ratio of profit sharing.There is a high risk to personal assets in this case.

Companies and LLPs have a limited liability. This means that your liability is restricted only to the amount of contribution made or the value of shares.

  1. Income Tax Rates Applicable to business.

The income tax rate applicable to a sole proprietorship and HUF is the normal slab rates. Also in case of sole proprietorship, the business income is clubbed with the individual’s other income.

But in case of other forms of entities like partnership and company tax rate of 30% is applicable.

Also, any business structure other than sole proprietor has to file a separate tax return.

  1. Plans of getting money from investors.

As mentioned earlier it is difficult to get investment when your business structure is not registered. Entities like LLP and  Private Limited Company are more trusted when it comes to investment.
Make sure you choose the right structure. Seek the help of an expert so that you register under proper guidance. Check out our services that will help you with company registration.

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