Starting a business is a complicated process and becomes even tougher if you’re not aware of the right legal structure for your business.
Hence, while setting up a business, the first task is to choose the right legal structure for your business. In this blog, we’ll discuss “How to choose the right legal structure for the business in India?”
Earlier there were just three types of business structures In India, namely sole proprietorship, partnership firms and company (both private and public included), however, recently introduced section 8 refers to NGOs and Limited liability partnership (LLP) which refers to a hybrid form of partnership firm and company also emerged a few years ago.
Each structure has its own advantage and disadvantage and it depends upon the needs of each business owner as to which structure suits their business.
These include the level of control you want to exercise over the business, the personal liability you’re willing to take for business debts, your personal tax position, the level of administration you want to do and how you want your business to be perceived.
The following 7 factors would help in understanding how should one choose the legal structure of their business:
The amount of control you wish to have over your business is directly related to the selection of your business structure.
For example, if you wish to have full control over the business then go ahead with sole proprietor and OPC whereas if you’re ok with control over the business being shared then select partnership.
2. Limitation Of Liability:
The choice of legal structure will have an important effect on legal liability. In a few of the legal structures, your personal assets would be protected and in some not.
In the sole proprietor and partnership, there’s no concept of limited liability and personal assets can be claimed whereas, in the company, section 8 companies, LLP, OPC provides limited liability hence personal assets remain safe.
3. Legal Structure Needs:
Each structure has different setup procedures, costs and complexities involved. For example, a sole trader is simple to set up and requires few requirements, a company, on the other hand, has a more complex structure and involves strict reporting requirements hence must be set up by a company like us BBNC or a chartered accountant.
4. Future Expansions:
One’s desire for future expansion and the selection of business structure goes hand in hand.
If the owner of the business wishes to grow worldwide then she/he should select a large-scale business it can be grown easily in form of a franchise. Whereas if the owner wants to stay within a city or state then sole proprietorship or partnership should be selected.
5. Tax Implications:
Whichever legal structure you choose for your business, it will have significant effects on the amount of tax you pay and the kinds of tax that you must pay.
For example, a sole proprietor enjoys tax benefits from being able to claim on a personal tax return and those in section 8 do not pay income tax on profits.
6. Perpetual Succession:
There are few business structures where when the owner expires or retires business terminates like a sole proprietorship. Also, in the rest of the business structure even if the owner is incapable to run the business, then due to the separate legal entity concept business goes on.
Choosing an appropriate legal structure is a very important decision to make for your business. It is therefore important to consult with an experienced business lawyer. In such a way you will ensure that your legal structure will suit your business and personal needs.
7. Administration Requirements:
Business structure such as sole proprietorship has few reporting and administrative requirements but complex legal structures such as a company have difficult paperwork requirements.
Thus, it becomes necessary to ensure that one has the time, people, and ability to abide by the strict requirements that are legally enforceable for each business structure.
Choosing a business structure is a time-consuming, technical and complex task. Thus, one should not rush through the process of business structure selection.
Keep all the above factors in mind while making your decision and if you need any further write to us at Info@BBNC.IN.