Types of Business Structures – All you need to know

When you venture on your new journey as an entrepreneur or founder of a company, most of them are not from the financial or legal background to know the legalities when it comes to starting and registering a business it is important to understand the different business structures.

As a founder, you should be clear about the name and type of your startup company. To incorporate your entity under a specific business type, you should be aware of the technicalities of a different type.

Before determining the business type, have clarity on the type of enterprise you are into, your goals and objectives. It is crucial to consider them correctly, as it will affect your businesses’ tax benefits, capital access and legal liability.

 

Types of business structures in India

There are five main types of companies registration in India:

  1. Sole Proprietorship
  2. Partnership Firms
  3. Private Limited Company
  4. Nonprofit

 

Sole proprietorship

The sole proprietorship is the simplest form of company registration in India. One person controls sole ownership, i.e., a sole proprietor. If you are looking to have full control of your business, this option serves ideal.

It is important to note that proprietorships are NOT incorporated entities. This means there is no difference between the proprietor and the business, therefore the business does not provide any security from liability in the event of a firm being sued.

 

Partnership firm

If you decide to have partners in your business, the most obvious way to go ahead is to register a partnership firm. All you need is a partnership deed which is an agreement between the partners. This agreement will contain all the roles and responsibilities between the partners and how profit will be shared.

General Partnership does not require incorporation of the business, it can be a verbal agreement or can be implied between the partners based on their percentage initial investment into the business. General partnerships do not give protection from the liability emerging from the company. Partners are potentially responsible for any business debts.

 

Limited liability company

Limited Liability Company(LLC) takes benefit of other business structures corporation, partnerships, and sole proprietorship. Limited Liability Company is entitled to flexible business structures, and LLC divides personal and business liabilities. Every founder will have their tax liabilities shared. LLCs are not liable for company debts like other business structures.

 

Private limited company

A Private Limited Company is a type of corporation that can have a minimum of 2 to 200 members.  As the name suggests, it cannot raise the capitals from the public and cannot publicly issue the shares.

A Private limited company needs formal business registration from its shareholders, and the liability of the members is confined to the number of shares owned by them.

 

Importance of choosing the right business structures

It’s crucial to select the business structure carefully as it affects your income tax returns. Each business structure has its implications, and therefore you need to be aware of how to set up a company in India. The company has to file annual returns and income tax return with the organisation registrar.

 

Accounting and bookkeeping need to be audited every year.

The legal complexities need spending money on tax filing experts, and accountants. Considering this point is important to determine the right business structure when deciding to register your company in India.

A founder should have a clear idea of the type of legal compliance one is willing to handle. Some type of business structures is investor-friendly while others are intricate. It is good to speak to a legal and financial expert to get clarity on this subject in the initial stage of business registration

At some point in your business operating journey, it would become a need to associate with the finance and legal team. An accountant who helps analyze your numbers to manage all the necessary tax returns and compliance filings. While hiring a lawyer may not be obvious, however, a good business lawyer will provide significant assistance in almost every phase of your business, from copyrights to trademark advice to business incorporation, lawsuits, and liability.

Talk to experts At Legalo, who help you connect with the best legal & financial experts to deliver efficient and cost-effective solutions to your business and personal needs.

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