Factors to weigh before choosing a Legal Structure for Your Business

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.

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 est suited to address this question and explain the risk and implication involved within each structure.

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