Which Legal Structure Suits the Business? Company, Partnership, or Proprietary Concern?

From all the things that you have to consider while starting your own business, one of the most important ones is deciding your legal business structure. It impacts the taxes you will pay, the amount of paperwork involved, your liability in the entity, your decision making power, and the money you will make.

Here’s how you can decide which legal business structure is best suitable for you. Evaluate the following things carefully and make an informed decision.

Forms of Business Organisations

1. Company

A Company is a legal entity that is composed of a team of people, known as members wherein the liability of the members or shareholders is limited to their shareholding in the Company. The process of how to form a company is straight-forward as companies are governed by the Company Act, 2013 (as well as its rules and notification) along with the rules and regulations stated in the Memorandum and Articles of Association of the Company. Below are the types of companies:

• A private limited company restricts shareholders from transferring their shares. The number of shareholders is limited to 200. It cannot invite the public to subscribe debentures and shares. Additionally, there is no minimum paid-up capital requirement to start the company.
• A public limited company requires minimum 7 shareholders, but there is no upper limit for this number. There is no restriction on share transfer. Liability of shareholders is dependent on their shares in the company. Inviting the public to subscribe to its shares is allowed. A public limited company has no minimum paid-up capital requirement.
• In limited liability partnership, at least two designated partners are required and one of them should be necessarily an Indian resident. Further, liability of partners is equivalent to their contribution.

2. Partnership

Partnership firm is formed by two or more people who want to do business and earn profits. It requires a written agreement containing responsibility, profit share, and capital investment of each partner. Every partner shares an unlimited liability and profit share is according to the agreed-upon ratio.

3. Proprietary concern

Proprietary concern or sole proprietorship is one of the oldest and easiest form of legal business structures in India. A single person manages the business who also acquires the profits and losses. However, the liability of the owner is unlimited. There are minimum legal formalities, and generally, the capital investment is from the owner only.

What Is Business To You?

While selecting a legal business structure, these questions will help you narrow down your personal preferences and considerations.

1. How many people will handle the business with you?
2. What will be the personal business responsibilities of these people?
3. Are you willing to pay dividend distribution tax or DDT?
4. Do you prefer giving employees shares of the business?
5. Do you have time to deal with the responsibilities of a complicated business structure?
6. Do you want a legal structure that doesn’t hold you liable for your partners’ wrongdoings?
7. Do you want to become the sole decision-maker in the business or do you want to involve other people?
8. Are you willing to separate your personal assets from the company assets?

Answering these questions will help you further evaluate what type of business structure you can handle and efficiently manage. It is essential to address personal boundaries, limitations, and considerations of business before registering for any legal business structure. This is to avoid facing issues in the later stages.

Additionally, one thing that matters more than anything else here is to analyze the personal goals of your business.

For instance, if you feel you want to be the sole decision maker of the business, then entering a partnership will not give you full decision-making power. Your partners will have equal say in important decisions of the company, which may be, in some instances, not in your favour.

Analyse Basics of the Business

Once you have analyzed your personal business considerations, examine and consider following factors.

1. Complexity

If you are entering a startup, there is nothing easier than a sole-proprietorship. You have an idea and you know how to execute it. So, you simply register an entity with your name and start your business. In the process, you show your profits and losses. But, sole-proprietorship can pose challenges if you want to raise funding.

2. Flexibility

When we talked about goals earlier, it was because of flexibility. You need to have a clear idea of your company’s future goals. This will ensure that your legal structure is not too rigid to provide you flexibility. For example, LLPs don’t support growth as much as other legal business structures.

3. Liability

In some business structures, the customers and debtors of the company can’t acquire the owners’ personal assets to clear liability. However, in other structures, they can. So, you need to choose the business liability accordingly.

4. Control

As already discussed, if you need to have full control of the business, then there is no better option than sole proprietorship. It is because partnership and other structures will have multiple members involved in the decision-making process.

5. Investment

If you are a startup and you need funding from angel investors and venture capitalists, LLP and sole-proprietorship may not be the best legal business structures for you. Raising funding via sole proprietorship can only be accomplished on personal account or from personal credit. Another option is to involve a partner.

6. Permits and Regulations

Apart from all the rules and regulations, permits and regulations of specific industries are different in different states. Checking the process first and then examining if you can go through the process of registration, legalities, acquiring state permits, and still following regulations, is an essential factor to consider.

7. Taxes

Business owners with legal structure as sole proprietorship have to pay taxes in their personal income. LLP and partnership also involve paying taxes in the similar fashion. However, private limited companies have dividend distribution tax (DDT) too.

Compliance Structure for The Forms of Business Organisations

1. Company

• Get approval from the Registrar of Companies (ROC) for the name of the company
• Submit the Articles of Association and Memorandum of Association to ROC, which will contain objectives and scope of the company and rules and regulations.
• You also need additional documents such as compliance declaration, registered office proof, details of manager/director, ROC’s letter confirming name availability, ID proofs of the members, etc.

2. Partnership

• Decide the name and get approval on the same.
• Form a partnership deed, which includes firm address and name, business nature, business commencement date, partnership period, capital ratio, and profit ratio.
• You need additional documents such as a copy of the partnership deed, ownership proof, PAN card, address proof, ID proofs of partners, etc.
• For registration of your partnership deed, you need to submit an application along with the fees to the registrar of firms.

3. Proprietary concern

• Decide the name and get approval on the same.
• Bank account details.
• Proof of a registered office.
• Fill e-application in case of registering as an SME.
• Acquire Shop and Establishment Act License.
• GST registration, which can be done via the GST portal.
• You need additional documents such as ID proof, address proof, etc.

Download the Types of Business Entity Formation Checklist by deAsra to remember and collect all the necessary documents for a company, partnership, and proprietary concern formation.

Pros and Cons of Company, Partnership, and Proprietary Concern

Make an Informed Decision

Deciding the legal structure for your business involves considering multiple factors. It includes your personal goals, company goals, number of partners, business industry, state rules, other compliance requirements, and many other such things. To gain more information on how to decide the correct form of business organisation, contact deAsra. We can help you select the right legal structure and assist you in other business formalities.