To work legally, in India, every business has to register itself. The process of company registration starts by deciding the structure of it. By selecting the proper structure, a company can:
- Meet targets set easily.
- Operate at its highest efficiency.
A Business Structure – the Vital Necessity of it
The structure of a corporation determines two essential factors:
- The filing of Income Tax returns.
- The compliances that have to be adhered to.
To give a clearer picture take this example:
A business registered as a company has to file income tax returns along with annual returns to the Registrar of Companies. On the other hand, a firm registered as a sole proprietorship merely has to file income tax returns. Moreover, a company’s financial books need must be audited once a year which means extra expenses of:
- Tax filing authorities.
Another example of how a business composition can influence the company is:
Some structures like a PLC or LLP have the image of being investor-friendly because they are separate legal entities. It signifies that a business which hopes to get a monetary backup in the future would fare better as a PLC or LLP. If the owner chooses to register as a sole proprietor, he or she may face issues while looking for outside investors.
Essentially, it means consider many factors before electing the business structure because they impact the venture in the long run.
Four Primary Business Structures in India
The options an entrepreneur has when deciding the formation of business are:
One Person Company allots a single individual as the sole-proprietor of a firm. This type of structure is ideal for a company that has just one owner or promoter. It was introduced in 2013.
Limited Liability Partnership has more than one owner. Called partners, there is a restriction on the liability they have to bear. It is equal to the contribution they made. The LLP is a separate legal entity.
Private Limited Company is also a separate legal entity from its creator. The most common type of structure, it has directors and shareholders. The firm considers all of them as employees.
Public Limited Company also has a separate legal existence, and like an LLP, the liability of its members is restricted to their shares. This structure is formed by “a voluntary association of members.”
A Business Structure – How to Select the Right One While Applying a Company Registration Online
To pick the right choice of a business structure, ask the following questions.
- What is the number of owners of the business?
An OPC is ideal when one individual is putting up the total initial capital. An LLP or a Private Ltd. Co. would be better suited for businesses that have 2 or more owners and are also looking for further investment by new entities.
- Does the initial investment affect the structure?
Yes, it can influence the decision. For example, owners who don’t want a substantial investment at the starting can pick:
- A Partnership.
- Sole Proprietorship.
- A Hindu Undivided Family.
Entrepreneurs who are sure to recoup compliance and setup cost can choose:
- Private Limited Company.
- How much liability can be borne?
Structures like PLC and LLP have a clause for restricted liability. It indicates that in case there is a default of loans the members will only repay the amount equal to:
- Their contribution.
- Value of shares held.
In other structures such as partnership, HUF, and sole-proprietor, the liability has no limit. They members or owners have to repay the entire cost which can put personal assets at risk.
- What are the applicable tax rates of the business structures?
For an entity registered as a company or partnership, a flat tax rate of 30% is applicable. For HUF and sole-proprietorship, the slab rates applied are standard.
- Will others be investing in the company?
Any business that hopes to get investments from venture capitalists or other parties should register it as a Private Limited company or LLP. They are measured as trusted entities and therefore easier to get financial backup.
The Process to Registering a New Business