Gone are those days when one chooses to work for a company until their last breath. These days entrepreneurial avenue is what people want to explore.

“All humans are entrepreneurs not because they should start companies but because the will to create is encoded in human DNA.” —Reid Hoffman, LinkedIn co-founder.

A new startup is the fruit of immense research, planning and decision-making. An entrepreneur has to be right only once to build a successful business venture. There are no thumb rules for a successful business, but the following points need to be considered when one decides to start-up:

  1. Legal liability
  2. Cost of formation and administration
  3. Level of competition
  4. Profitability
  5. Tax implications
  6. Goals and resources
  7. Flexibility

One of the most important decisions a budding entrepreneur makes is the form of organization s/he chooses for the startup. This is a determining factor applicability of tax policy, the quantum of personal liability and the ability to raise money for the project.

Types of business entities

Sole Proprietorship

It is the least complex form of business in India. Under this form of business a single person owns and runs the business, and undertakes the personal liability. The time needed to set it up is a maximum of 15 days.

Partnership Firms

Persons entering into a partnership are called partners and partnership firm is the collective term used for them. It is a business carried on by all of them or any of them acting for all. This form of business entity is governed by the Indian Partnership Act; 1932. Moreover, the easy formation is one of its key benefits.

Limited Liability Partnership

The growing popularity of this form of business is due to its hybrid structure. Imagine a business organization having the flexibility of partnership firm and a limited liability feature of the company… the dream for any entrepreneur.

Private Limited Company

Private limited Company is an option for the new start-ups which require a lot of external funding…i.e. start ups requiring a fair amount of investment, as it is easy to raise money by issuing equity shares. A private limited company has all the advantages of partnership namely flexibility, a greater capital combination of different and diversified abilities, etc., and at the same time it has the advantages of limited liability, greater stability and legal entity.

Public Limited Company

A public Limited company is a voluntary association of members which is incorporated and, therefore has a separate legal existence and the liability of whose members is limited. Furthermore, this form of business has the most cumbersome compliance and restrictions under the Companies Act and various other laws governing the corporations.

Let us now analyze the important aspects relating to various business forms which will help us to understand the pros and cons of every form of business organization.

Form of Business Organization

Compliance

Tax Benefits

Advantage

Disadvantage

Sole Proprietorship

GST registration (in case turnover exceeds 20 Lakh )

Obtaining a PAN card for Trade License from the local municipal authority.

Obtain IEC certificate (in case of business of import and/or export of goods and services)

Applicability of provisions of Profession Tax.

 

 

Proprietorship owners don’t have to file the tax compliance separately No ROC compliance

Difficulty to raise funds

 

Partnership firm

GST registration (in case turnover exceeds 20 Lakh).

Applicability of provisions of Profession Tax

Registration of partnership firm under Indian Partnership Act; 1932 (optional)

Applicability of Income tax provisions.

 

Flat rate of Income tax @ 30%.

Carry forward of losses.

Tax deduction for remuneration and interest paid to partners is allowed subject to specified limits under Income tax Act.

Deductions allowed under Chapter IV A (Specific cases)

Easy to form (no elaborate legal activities). Registration not essential. Liability of partners is unlimited.

Limited Liability Partnership

GST registration (in case turnover exceeds 20 Lakh).

Applicability of provisions of Profession Tax

Registration of partnership firm under Indian Partnership Act; 1932 (optional)

Applicability of Income tax provisions.

Applicability of provisions of Companies Act

 

Tax treatment same as Partnership Firms:

Flat rate of Income tax @ 30%.

Carry forward of losses.

Tax deduction for remuneration and interest paid to partners is allowed subject to specified limits under Income tax Act.

Deductions allowed under Chapter IV A (Specific cases)

Dual advantage of having features of a partnership firm as well as a company. Difficult to get angel and VC funds.

Private Limited Company

GST registration (in case turnover exceeds 20 Lakh).

Applicability of provisions of

Profession Tax.

Income tax provisions.

Companies Act.

Various labour laws and Shops and establishment Act.

 

 

 

Indian Private Limited Company is considered a tax resident.

Flat Tax rate of 30% on the total income and surcharge of 5% if the income exceeds 10 Million plus 3% Education Cess & Secondary and Higher Education Cess on the total of income tax and surcharge.

Deductions allowed under Chapter IV A (Specific cases)

Carry forward of losses

Limited liability and ease of raising funds. Greater disclosure and administration requirements, and therefore operation costs are generally higher.

Public Limited Company

GST registration (in case turnover exceeds 20 Lakh).

Applicability of provisions of Profession Tax.

Income tax provisions.

Applicability of provisions of Companies Act.

Various labour laws and Shops and establishment Act.

 

Tax treatment almost similar to Private Limited Company;

Indian Public Limited Company is considered a tax resident.

Flat Tax rate of 30% on the total income and surcharge of 5% if the income exceeds 10 Million plus 3% Education cess & Secondary and Higher Education Cess on the total of income tax and surcharge.

Deductions allowed under Chapter IVA (Specific cases)

Carry forward of losses

Share holders can sell/transfer shares easily.

Comparatively greater amount of restrictions and compliance under law.

Public disclosure of financial affairs is necessary.

 

Firstly, choosing a right form of organisation is one of an essential factor for the success of the business. It is like planting the right tree to reap the benefits of the desired fruits. In addition to this, the type of entity also depends on a lot upon the projections, funding needs and a businessman’s appetite for risk. Finally, everyone can tell us about the risks but only an entrepreneur can see the rewards. However, it is good to see before you jump.

Think Big, play smart.

Also Read: Thinking of Investing Outside India? It’s Easier than You Think

Photo credits- Shutterstock.com

 

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