Things to consider while starting a New business

Which one suits you the most?

Brainstorming the idea for a business is a difficult task but deciding the appropriate form of organisation to shape your business idea is just next in the row. Choosing the right form and structure of organisation for a business is crucial as it has long term implications. It requires careful, thorough thinking and analysis to determine the number and nature of future obligations and compliances. Factors like owner's liability, taxation, control, applicable laws, compliances, life span etc., should be collectively considered to make a sound judgment. To help you analyse and decide better, in this text, we have tried to cover the various forms of organisation and their suitability that one can opt for his business.

SOLE-PROPRIETORSHIP FIRM

To start with, let's discuss the simplest form of business which is the sole proprietorship firm. If you desire to start and operate your business single-handedly, this form is the best for you. 

It is the most suitable when one is looking for an organisation that allows and offers-

* Sole authority and personal supervision over the business

* Easy and economical business set-up.

* Fewer government regulations

* Lesser tax burden and compliances as the proprietor is liable to pay tax once only that too on his personal income as per the different slab rates.

* No profit-sharing

Less fit due to the following reasons-

* Limited funds 

* Liability is personal and unlimited

* Limitation of continuity and management

* No loss is shared 

In India, its registration is not mandatory, but it is advisable to get it done to avail of all the benefits given by the government. Some acts like the Shops and Commercial Establishments Act, Micro, Small and Medium Enterprises Development Act, 2006, Intellectual Property laws may require a sole proprietorship firm to get registered. All in all, a sole proprietorship firm is best for those who desire to start a small business with the full authority of their own and lesser compliances and tax liabilities. Businesses that provide only personal services, like retail shops, tailoring services, professional services, etc., should opt for this. 

PARTNERSHIP FIRMS

Next on the list is a Partnership Firm which the Indian Partnership Act, 1932 govern. To overcome all the constraints faced in the sole proprietorship firm, one can opt for this type of business form. Partners can pool their resources together and overcome the problem of capital.

One demerit it has is related to the taxation aspect. It is taxed at a flat rate of 30% and cannot benefit from the slab rates like individuals and HUF. Also, there is a limit of a maximum of 100 partners (as per the Companies Act, 2013 in a partnership firm. But the Central Government has prescribed maximum number of partners in a firm to be 50 by the rules issued in 2014 limiting the number of partners to 50 only, which can become a constraint if a point comes where the partnership requires more funds and the partners don't have it. This can limit its expansion. One more limitation is that the liability of the partners is unlimited. 

Its formation is very simple as it is created with merely drafting a partnership deed among the partners, and its registration is not compulsory but yet advisable. A registered partnership, of course, has the edge over an unregistered one as it cannot sue any third party for the enforcement of any right arising from the contract. This form is suitable for starting a business on a small scale where few agreements and debts are entered into.   

LLP (LIMITED LIABILITY PARTNERSHIP)

If you are confused to choose one between a company and a partnership firm, choose an LLP. LLP is a very convenient form of business to start with as it offers the benefits of both a partnership firm and a company. Unlike a general partnership firm, the partners can be unlimited in number and have limited liability. Compared to a company, it has lower compliance costs. Its structure is less complicated, and MCA also gives relaxation to it from time to time. 

An LLP requires to get its account audited only if the partner's contribution exceeds Rs 25 Lakhs or the turnover exceeds Rs 40 Lakhs. Partners have the flexibility to decide the terms and conditions governing their partnership as per their choice. Only two partners are enough to start an LLP with the condition of at least one partner being a resident in India. 

As we say, everything has its pros and cons; LLPs also have some downsides related to compliances. LLPs are regularly required to submit some forms and comply with the governing laws, and if it fails to do so, heavy penalties get attracted. In India, people often ignore the compliances, so an LLP is not an attractive option for a compliance ignorant person. And it is not easy for a non-compliant LLP to wind up. For winding up an LLP, it is necessary to become fully compliant first by filing annual returns and statements of accounts with the registrar.

HINDU UNDIVIDED FAMILY BUSINESS

This form of business organisation can only be found in India. It is created by the operation of law and has no separate act to rule it. Provisions of the Hindu Law governs it. A vast difference between a HUF and others is that a person becomes a member of the HUF only by birth or by marrying a male member of the family. There is no requirement for any consent or agreement by the members to admit a member to the HUF.

The person who manages all the works and leads the HUF is called KARTA of the HUF. He has the final say in all the decisions taken by the HUF and has unlimited liability. The liability of all the other members is limited to the extent of their shares. A minor can also be admitted as a member of it. If the members want to dissolve the HUF, it can only be done with every member's consent.

This form is suitable for those with a joint family with a business the members run jointly with mutual compatibility and affection.  

The taxability of a HUF is the same as an individual, so it enjoys the benefits of slab rates that an individual does. A deed is entered into and registered by the members; after that, the HUF can obtain a PAN and open a bank account in its name. 

COMPANIES

Forming a company is the most appropriate choice to start a business on a massive scale with many investors to invest in.  

Unlike partnership firms, a company can have an unlimited number of members (public companies). A company has many advantages and peculiarities like better market reach, limited liability, etc., but the number of compliances is beyond number compared to others. There are various types of companies that one can start, but each has different features that help us choose. Here, we have briefly talked about the three most common types and their peculiarities.

* Private company:

 In the case of a private company, a minimum of two directors and two members are required. Share transferability and acceptance of public deposits are restricted. It cannot list its shares on any stock exchange, so there is no public trading. Earlier, it was prescribed that a private company can only be incorporated with a minimum paid-up share capital of Rupees One Lakh, but now this provision has been done away with. 

* Public company:

 A public company can be started with a minimum of 3 directors and seven members. One of the essential features of a public company that distinguishes it from others is the unlimited number of members, and the transferability of shares is not restricted. Unlike private limited companies, public companies are not outrightly prohibited from receiving public deposits. It can also list its shares on the stock exchange, and people can trade its shares. Like a private company, public companies were also required to have a minimum paid-up share capital of Rupees 5 lakhs, but now it is no more required. 

ONE PERSON COMPANY-

In India, this company emerged as a new type of company with the Companies Act, 2013. Small entrepreneurs can start their business in the style of a company without complying with n number of compliances. An OPC is a company incorporated by only one member. But it is mandatory to appoint a nominee for the member so that in case if the member becomes incompetent in any way, then the nominee takes the place of the member. Only an Indian citizen who is a natural person and a resident in India can be the member or the nominee of an OPC. 

A question that often arises is that why a person should choose OPC over sole proprietorship?

The answer to this question is related to the liability aspect in both forms. A sole proprietor's liability is unlimited, whereas, in the case of a member of OPC, the member's liability is limited. 

An OPC is a very beneficial revolution for the small entrepreneurs as the benefits a company gets; an OPC receives almost all of them. It is very privileged because it has very few compliances.

To know a few, here is a list-

* No annual general meeting

* Only one director is enough to incorporate an OPC

* Annual report needs not be signed by a company secretary in practice

* Less number of board meetings are required (No board meeting required if the board has only one member)

From the above, we can conclude that no form is perfect for every type of business. When weighing the pros and cons of the form of entity and selecting the best, it must be kept in mind that these factors do not exist in isolation and have to be taken into account collectively as they are interdependent.