The business structure that is chosen influences regular day-to-day operations, taxes and personal liability. In the earlier article, we discussed the types of business structures permitted in India and in this write-up, we would discuss the factors one must consider to choose a business structure that gives the business the right balance of legal protections and benefits.
The right business structure affects the goals of the entity and also affects one’s ability to raise funds, paperwork that needs to be filed and the personal liability of an individual. Choosing wisely may avoid unnecessary conversions in future and may save on tax implications due to the restrictions based on the location or in general. A brief overview of different structures are as follow:
| Business Structure | Ownership | Liability |
|---|---|---|
| Sole Proprietorship | One Person | Unlimited Personal Liability |
| Partnership | Two or more people | Unlimited Personal Liability unless structured as a limited partnership |
| Limited Liability Partnership | Two or more people | Owners are not personally liable |
| Private Limited Company | Two or more people | Director’s are not personally liable |
| Public Limited Company | Seven or more people | Shareholders have limited liability |
| One-Person Company | One Person | Limited Liability |
Factors to weigh before choosing a Business Structure
While one can opt for any of the above business models to start a business, there are certain factors to consider before choosing a business structure. Following are some aspects that must be thought over:
Continuity of Existence
To maintain the legacy of the business, it is very essential how one sees the business concluding, if one wishes to secure the business for the future financial security of its family members, it is important to know the appropriate form of business structure.
Complex Procedures
Enterprises with lesser people for managing their operations must opt for a simple business format. There are different procedures and compliance requirements involved to set up and run a business and it is essential to understand the goals and requirements of the business to choose the best legal structure with the least complexity in its operations.
Liabilities
Choosing a model with limited liabilities will help in taking risks without fear of losing personal assets and simultaneously help the business from any loss and debts that may arise.
Control
It is also essential to decide how much control each individual requires to operate in a business structure. For instance: If the individual requires more control a sole proprietorship or a one-person company will be more suitable for them. It is very essential to be aware of the level of control one wants to have over the business.
Investment Needs
One of the most important factors to consider when choosing a business structure is the investment required for the smooth running of the business. For the business to prosper it is necessary to keep all requirements in accordance with the capacity of the company.
Nature of business
Of all the factors that are weighed before selecting a business structure, perhaps the most important one is the nature of the business you select for your enterprise. The nature of a business refers to the general purpose and existence of a company within the chosen industry. With the nature of a business, we allude without limitation to the following:
- Type of products and/or services being offered by the enterprise;
- The industry or market sector within which the enterprise wishes to operate;
- The general goal and targets to be achieved by the enterprise;
- Other distinctive qualities of the enterprise;
Managerial skills
To ensure effective and efficient management of the activities of the enterprise, the entrepreneur must deploy individuals with the proficient knowledge and ability to fulfil specific management tasks. Management skills are a collection of abilities that include skills such as technical, conceptual, leadership and interpersonal management skills among many others. Individuals with adept managerial skills contribute to the successful and smooth functioning of the enterprise in the long run by making the teams more organized, motivated and efficient.
Government regulations and control
Business entities may require particular licenses and permits to operate in addition to officially registering your business entity. It may be necessary for a business to obtain municipal, state, and central licenses, depending on the type of business and its operations. Furthermore, the business entities must be in compliance with government rules, laws and regulations to avoid any legal implications.
The government may exercise control over the business through a variety of means, including industrial policies and licenses, labour laws, and restrictions on international trade. India has codified business laws, including rules regarding contracts, competition, taxation, and the like. The Indian Contracts Act of 1872, the Companies Act of 2013, the Foreign Exchange Management Act of 1999, and the Income Tax Act of 1961 are a few of the key legislations that govern business(es) in India. Additionally, the central government of India has launched several programs to encourage Indian entrepreneurship and provide financial support for new businesses.
Frequently Asked Questions (FAQs)
1. What is a legal structure?
The legal structure of an organisation recognised in a specific jurisdiction is referred to as its business structure.
The legal form of a company determines what activities it may engage in, such as raising money, assuming responsibility for the company’s responsibilities, and the amount of taxes it owes to taxing authorities.
2. What are the different types of business structures in India?
There are six different types of business structures in India
- Sole Proprietorship
- Partnership
- Limited Liability Partnership
- Private Limited Companies
- Public Limited Companies
- One-Person Companies
3. What are the essential factors to consider when choosing an entity type?
These are the five most important factors to consider when choosing an entity type.
- Continuity of Existence
- Complex Procedures
- Liabilities
- Control
- Investment Needs
4. Why is it important to choose the right business structure?
In many respects, the way you organise your company will have an impact on you.
It will influence, among other things, how much tax you pay, the degree of risk or liability you face with your assets (e.g., your home, personal savings), and your capacity to acquire money from other sources.
As a result, when beginning a firm, choosing the appropriate structure is critical.
Conclusion
Choosing a business structure is greatly dependent on figuring out if you need personal liability protection or not. Businesses that carry any amount of risk need liability protection and an attorney dealing in start-up counselling would be best suited to address this question and explain the risk and implication involved within each structure.
Ahlawat & Associates
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