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    How to Select Right Business Structure for Business in India?

    Published Thu, 15 Oct 2020 | Updated Wed, 17 Mar 2021

    Selecting the right business structure is important while starting a business as it impacts business compliances, tax efficiency and operational matters in long run.
    Though the business owner always has an option to convert one form of business structure to another if so required, however, it is always advisable to make a wiser choice at the first place to avoid complexities involved in the conversion of the business structure at a later stage.
    We have summarized major considerations, which a business owner should consider while choosing a business structure:
     

    1. Residential Status

     
    There are various legal forms available to do business in India. Business owners should consider their residential status while deciding the business structure. Available business options for resident and non-resident individuals and companies are given below
     

    Resident Individuals and companies Non-Resident Individuals and companies
    Sole Proprietorship firm Limited Liability Partnership
    Partnership firm Private Limited Company
    One Person Company Public Limited Company
    Private Limited Company Section 8 Company
    Public Limited Company Branch Office
    Section 8 Company Project Office
      Liaison Office

     
     
    2. Control over business: Intended control over business is an important factor while choosing proposed business structure. In case one intends to exercise all the control over their business by themselves, then sole proprietorship or one person company is an ideal form of business. A simple classification of various business structures based on number of owners is as provided below:

     

    Single Owner Multiple Owner
    Sole Proprietorship Partnership Firm
    One Person Company Limited Liability Partnership
      Private Company
      Public Company

     

    3. Personal liability of owners: Every business owner prefers protecting their personal risk while carrying on a business. The following table shows personal liability of owner under various business structures:

    Type of business entity Personal liability of owners
    Sole proprietorship Business risk is borne entirely by the sole proprietor
    One person company Personal assets of the sole owner is protected
    Partnership Firm Business risk gets divided among all the partners
    Limited Liability partnership Personal assets of the partners are protected
    Private Limited Company Personal assets of the directors are protected
    Public Limited Company Personal assets of the directors are protected

     

    4. Ability to Raise or Borrow Money: A business cannot meet its financial obligations all by itself and thus, it needs to either raise money from public by issuing securities or borrow money from banks and financial institutions. Banks and other financial institutions are generally reluctant to lend money to sole-proprietorship, one person company, partnership firm and limited liability partnership and prefer to lend money to corporates (including private and public companies). In addition, private companies, though cannot raise money directly from public by issuing securities unlike public companies, can also get business funding through private equity like venture capital, angel investment, etc.

    5. Applicable regulatory compliance: The regulatory compliance applicable on a company is the highest, followed by an LLP. In case of sole proprietorship and partnership firm, there is very less regulatory compliance as such.

    6. Applicable taxes: There is a defined tax structure for each form of business structure. Some structures being separate legal entities are taxed directly such as companies, limited liability partnership and partnership firm while income of a sole proprietorship firm is taxable as per the income tax slab.

     
    Know more about applicable tax rates in India
     
     
    Brief comparison of different business entities in India

    Type of business entity Suitable for Limited Liability protection Regulatory compliance Tax Rates*
    Sole proprietorship Sole promoters
    •  
    Very low As per tax slab
    Partnership Firm Small businesses with 2 or more partners
    •  
    •  
    Flat 30%
    One person company Sole promoters
    •  
    •  
    Different tax rates 15%/22%/25%/30%
    Limited Liability partnership Small businesses with 2 or more partners
    •  
    •  
    Flat 30%
    Private Limited Company Start-ups and growing companies
    •  
    •  
    Different tax rates 15%/22%/25%/30%
    Public Limited Company Start-ups and growing companies
    •  
    Higher than private limited Different tax rates 15%/22%/25%/30%
    Section 8 company Companies with charitable objectives
    •  
    •  
    Exempt if charitable activities and necessary registrations are taken.

     
    *Surcharge and cess is also levied on tax rate as applicable.
     
    Read more here for detailed comparison of various business entities

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