A guide to choosing the right business structure when you register a company


As an aspiring business owner, the first and most critical decision you have to take is choosing the right business structure for your company. In India, there are formal and informal business structures. When you opt to register a company, it falls in the formal structure. When you opt for firms, it falls under the informal category. Each business structure has its own set of pros and cons. The points below define the basics of each structure and will help you make an informed decision.

Informal Business Structures

Sole Proprietorship Firm

The most basic type of informal business structure is a sole proprietorship firm. In this business, there is only one person who owns the entire business operations. All decisions are on the said person, and they have an unlimited liability towards their business. It is the most suitable option for small business owners, where the focus is on sustaining and not on scaling. It is informal because you don’t need to go through any registration process to start a business as a sole proprietor. At most, you need a GST registration. 

Partnership Firms

These can be of two types, registered and unregistered. It depends on the owners whether they want to register a partnership firm or not. A partnership firm is much like a sole proprietor firm. The major difference is the fact that here at least two owners are required to start a partnership firm business. Further, a partnership agreement is a must to govern all the actions of the business. Since the partnership firm is not a legal entity, its income isn’t taxed separately. The income of owners is taxed on an individual basis. Lastly, the most important factor to remember is that the liability of partners in this business structure is unlimited. There are chances that you will be liable for the actions of any other partner. This form of business model is also more common among small business owners. 

Formal Business Structures

One Person Company

This is a type of private limited company. An OPC needs to be incorporated into the ministry of corporate affairs portal. You can say that this is a more formal version of a sole proprietorship firm. In this PLC, there is only one shareholder, who takes all decisions related to the company. Further, it is more beneficial than a proprietorship firm, because the liability of the owner is limited to the extent of their share capital. However, one con compared to a firm is that there are no registration costs for opening a firm. Yet, when you want to register a company, you need to bear the governmental costs for registration or incorporation. Lastly, the OPC has lesser annual compliance requirements than a PLC. 

Limited Liability Partnership

Recently gaining the most popularity, a limited liability partnership is a hybrid form of business between partnership firms and private limited companies. It has the best of the features of both. For example, it is mandatory to register LLP on the portal of the Ministry of corporate affairs. This makes LLPs ‘body corporates similar to PLC. As a result of this, LLPs have perpetual ownership and limited personal liability of partners – the key characteristics of a private limited company. Further, while considering taxation, LLPs are looked upon as Partnership Firms and hence, the income of the LLP is not taxed separately only the partners are taxed. The most important point is an LLP can have unlimited members as its partners as there is no upper limit cap on the number of members.  

Private Limited Companies

One of the most popular business structures in India is a Private Limited Company. There are numerous schemes and benefits available to newly established companies to encourage the startup ecosystem in India. A PLC has a separate legal existence and perpetual ownership. This allows ease in the transferability of ownership amongst shareholders. Further, there is a limitation of personal liability in PLCs. PLCs can also raise funds in the form of equity by various methods, such as venture capital firms or angel investors. The only downside to incorporating a PLC is the fact that PLC’s income is taxed separately, and the compliance requirements for PLCs are very stringent. Most people go for incorporating a private limited company when they think they need or might need funding from a third party in the future.  

Public Companies

Public companies share all features of a private company, except for the style of ownership. In A public company, the ownership is not of a private group of individuals or companies. In fact, the ownership is open to the general public. Any individual or entity can buy the shares and securities of a public company and become its owner. Usually, large-scale enterprises are public companies. A private company can convert itself into a public company by way of initial public offering. These are also known as listed companies. 

Get Advice from Certified Professionals

Choosing the right business structure might seem trivial to you before you start your business. It plays a very crucial road down the line when the business starts growing. The most important factors that you need to keep in mind while creating your business are: 

a. Number of Members; 

b. Capital and Funding Requirements;  

c. Taxation and other compliance requirements;  

d. Nature of a business;  

e. Transferability of ownership;  

f. Extent of Personal Liability. 

If you are looking for company registration online in India, you can take help from certified professionals, who will complete the process without you having to step out of your room! 

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