How to Choose the Best Business Structure for Your Startup?

As startups are coming out with a rapid pace across the world, legal entities are shaping up to pump some life in a sluggish economy that is hit by the pandemic. But before you choose the right business structure, it is crucial to know the distinction between them. This blog would help you make a better choice while opting for the right business structure for your business.

Limited Liability Partnership

The LLP Act, 2008 enables business entities to register an LLP and function smoothly. The whole offering the owners with limited liability. Also, under this business structure, it is not possible to charge one partner guilty of another partner’s disregard.

Characteristics of LLP

– It is an independent legal constituent that provides a relatively lower cost of a registration and lesser compliance than its counterpart, private limited structure.

– It safeguards the personal assets of partners, and liability of LLP is solely limited to assets of LLP firm only.

– Initially, there is no need for auditing. But when turnover of business crosses Rs. Forty lacs or capital Rs. Twenty-five lacs, then an audit is compulsory.

– It deploys pass-through taxation. LLP contributes to tax matters as the profits and losses will be redirected to partners’ tax returns. Partners have inadequate or extensive interest in that company when they earn the benefit. Also, loan to associates is not computable. Nonetheless, when owners of any company get any benefits from the company, they are accountable to pay additional tax. The collection comes in the form of DDT where 15% paid by the company.

– No need to pay tax unless when partners withdraw LLP profits.

– Registration costs will be around Rs. 7000 to 8000.

Private limited company

The private limited company is a private entity which limits the owner’s liability for their shares. Its registration only allows 50 shareholders, and they can not trade their shares publicly.

According to section 2(68) private company is classified as;

– With the least amount of paid-up share capital or, in some instances, higher capital than approved capital.

– With two hundred members, they cannot be employees of the company. Ex-employees of the company are not eligible to be members.

– Where the public is not permitted to subscribe to any shares of the company.

– Which forbears acceptance or invitation of deposits from directors or their relatives. Only members can do so.

Characteristics of Pvt. Ltd.Co.

– It offers limited liability to shareholders.

– Shareholders might raise equity funds from this liability.

– It maintains the status of a separate legal unit that attracts minor and intermediate-sized business bodies.

– Submission and annual compliances are easy.

– Expense of registration varies from Rs. 10000 to 11000 up to authorised capital of Rs. 10 lacs according to the new RUN system by GoI.

One-person company

The person who is the sole founder or owner can successfully initiate the company under the one-person company. This business structure is based on provisions stated under the companies act, 2013. Earlier, the companies act, 1956, predetermined that the private limited company should include at least two shareholders and two directors. Nonetheless, the onset of OPC by both the houses of parliament via the companies act, 2013 has encouraged self-employment within permissible premises.

Characteristics of OPC

– It is an easy process as it requires a single entity for OPC registration. Various shareholders, as well as the person registering, can both be the shareholder and the director.

– Person who intends to be the sole controller of business or does not have any trustworthy partner should not choose this registration.

– Expense of registration is Rs. 10000, which is nominal in comparison to other entities.

– There is no board of directors in these types of enterprises. The rights of company operation and ownership remains with one person only.

Partnership firm

It is preferable for the old family business where the business constitution is complex. There is a need of minimum two persons for partnership firm registration online. It can be individual or any other family member on paper. Registration cost will be around Rs. 7000 to 8000 including stamp, government charges, and notary and recruiting registrar of firms.

Characteristics of the partnership firm

– Its registration is not compulsory. But, is is possible to create a partnership deed as per Partnership Act, 1932.

– It requires at least two persons to initiate the partnership.

– No requirements of approval to use the name. But it is good to avoid trademarked names.

– Maximum twenty partners are allowed.

– It is solely dependent on partners. It can be dissolved due to the demise of the partner.

– 30% tax and surcharges and cess will be levied on partnership profits.

– It is not mandatory to conduct annual statutory meetings.

– No recognition as a separate legal entity. Promoters are personally accountable for the partnership’s liability.

– Partners will have unlimited liability and will be responsible for all the responsibilities of the entity.

– Foreigners cannot initiate the partnership.

– It is not transferable.

– it is not vital to file an annual report with RoC. But ITR filing mandatory.

Making a choice for registering a business structure in India

As the details mentioned earlier and the characteristics of various entities would help you make a better decision. It is always recommended to consult the business professional experts prior to making any such decisions. You can mail your compliance queries to support@legalwiz.in or get in touch with the experts directly over a call –  1800 313 4151