One has to follow a long to-do list to set up a new business entity. As you gain control over the business part, we would like to shed some light on one crucial aspect i.e. selecting the right business structure.
Selecting the right structure from various forms can be an intimidating task for anyone. But the clarity about the goal and scale of business ease out the process to a considerable extend. You must ascertain the threshold of control you wish to have or the level of compliances you want to fulfill.
How to Get Correct Hands on the Right Business Structure?
The business structure could be a decisive element in ensuring the success of the organization. Indeed, you have the liberty to change it later if something goes wrong, but that might leave your business in standby mode for months. One has to consider and examined countless factors before getting hands on the right business structure. The section below would explain to you the same.
Factors for Selecting Right Business Structure
Liability Threshold & Personal Risk
Owners would want to safeguard their risk under financial[1] pressure. The right business structure could limit exposure to such risks. In the case of partnerships, the partner shares the responsibility to confront risk individually.
Meanwhile, the business models like LLP provide comprehensive protection to the owner’s liability with a few exceptions. Furthermore, one can also opt for a One Person Company if he/she wishes to mitigate the personal risk to a larger extend.
Goal and Resource Flexibility
Do you want the business structure that strikes the right balance between the risk and benefits? Perhaps you need to do your math accordingly on account of business goals and resources. Make sure that the structure is resilient enough to best align with your needs or else you might alter it later that of course would consume a lot of time and money.
Tax Obligation
A tax obligation for an LLP owner is more or less equal to the sole proprietor. The income generated from the business is considered personal income and taxed accordingly.
As a small business owner, you do not wish to confront double taxation in the early stages. The LLP structure prevents that mishap and allows the owner to reap more income. Individuals in a partnership claim their respective profits as a personal income.
A corporation addresses their tax liability each year, paying taxes on profits after deducting the expenses and payroll. If you pay yourself from the company, you will be liable to pay personal taxes such as for medicare and social security, on your personal return.
Business Models
A sole proprietorship is one of the most widely used business models in India. Most startups preferred to go with this business structure due to ease of formation and better control. All you need to register your name to get started with such a business model.
You don’t even need to pay separate taxes on the income earned from the business. But it has some downsides as well. Sole proprietorship lacks the ability to procure fund unlike private or public limited companies. The investors and mainstream banks are likely to prefer public and private limited entity because of their limited exposure to risks.
In Partnership business models, each partner works on their respective set of responsibilities and roles. Meanwhile, the corporations are under the obligation to share their internal affairs with state and central government
Capital Investment
If you wish to obtain funds from an outside entity, such as an investor, bank, or venture capitalist, you must opt for an authentic business model such as private limited company. Unlike sole proprietorships, Corporations don’t necessarily encounter any complication while raising funds from an outside source.
Also, bigger companies have the liberty to escalate funds by selling shares of stock; whereas, sole proprietors can only raise funds via their personal accounts or by taking on partners. An LLP can encounter identical issues, although, as its own entity, it is not always required for the owner to utilize their personal assets or credit.
Control & Management
If you wish sole control over the business and its activities, an LLP or a sole proprietorship might be the most suitable option for you. The partnership business model also offers this advantage to some extent.
A company is founded to have BODs that make the crucial decision that steers the company. A single person can manage the company, especially at its initial stage, but as it thrives, more and more manpower is required to control its activities.
Licenses, Permits, & Regulations
Apart from getting legal registration for the business, you may require to obtain specific permits and licenses to operate. Depending on the type of activities and business nature, it may require to be licensed at the local, state, and central levels.
States imposed distinctive requirements for different business models. Based on where you establish, there could be different prerequisites at the municipal level as well. As you opt for your structure, understand the requirement of the state and industry you are operating.
There is no such thing as “generalized structure”, so it’s up to the business to be watchful of what applies to them. Liability, tax structure, and industry regulations are the few key parameters that one has to take into account before opting for a business structure.
Conclusion
Choosing the right business structure could be a perplexing task if you aren’t aware of legal obligations and growth prospects about the same. There is no such thing as a “perfect structure” that offers everything other than disadvantages.
So, be watchful while considering your options. The factors above would let you simplify the selection process. In case if you feel uneasy or confused at any of the instances then don’t feel alone as our experts can help out to get rid of such a situation. All you need to connect with the CorpBiz professional and share your concern.
Read our article: Legal Consideration for Multiple Businesses under One Company
