Published Thu, 29 Sep 2022
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
| 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.
