Starting a Business or a company can be overwhelming as an entrepreneur. There is much to consider, such as choosing a legal structure (LLP/ Sole Proprietorship?), determining your industry niche, and finding adequate sources for funding.

Every business needs two professionals early on: An accountant & a lawyer. An accountant helps review your numbers, prepares all the necessary tax returns and compliance filings. While hiring a lawyer early on may not be apparent, however a good business lawyer will provide crucial assistance in almost every aspect of your business, from copyrights to trademark advice to formal business incorporation, lawsuits, and liability.

At Legalo, we help you connect with the best legal & financial experts to deliver efficient and cost-effective solutions to your business and personal needs.

In this article, we look at various business structures and evaluate each of these structures’ pros and cons. It’s crucial to consider them carefully, as it will affect your businesses’ tax benefits, legal liability, and capital access.

a) Sole Proprietorship

b) Partnership Firms

c) Private Limited Company

e) Nonprofit

Sole Proprietorship

Sole Proprietorship is the business owned and run by an individual owner. This is one of the simplest and most common form of business ownership out there. Individual freelancers or entities are often classified as sole proprietorships.

It’s important to note that proprietorships are NOT incorporated entities. This means there is no distinction between the proprietor and the business, therefore the business does not provide any protection from liability in the event of company being sued.

Let’s evaluate the pros and Cons,

Pros:

• Easy and fewer requirements to start a business.
• Very few legal regulations for a proprietorship firm.
• The proprietor or owner has the total flexibility & the business is entirely dependent on the decisions of the Proprietor.
• All the Profits are subject to the owner.

Cons:

• Business liability lies 100% with the owner & there is no liability protection.
• Ownership transfer of Proprietorship is difficult
• Founder or the owner will not be able to raise equity funds from the public or from external entities such as VCs/ PES in the future under this structure.

Partnership Firm

There are two types of Partnership Firms: General Partnership and Limited Liability partnership. Partnership firms can have two or more owners/Partners.

General Partnership does not require formal incorporation of the business, it can be a verbal agreement or can be implied between the owners based on their percentage initial investment into the company. General partnerships do not offer protection from the liability arising from the company. Owners are potentially responsible for any business debts.

Limited liability partnerships require filing for a certificate of partnership with the state and incorporating the company formally. Limited liability partnership limits the liability of business/company debts on the owners up to their portion of ownership or investment.

Pros:

• Shared resources by partners offer more capital for the business.
• Incorporating the business is relatively easy as compared to a Private Limited Company.
• Fewer legalities and compliance requirements.
• Similar flexibility of a proprietorship firm.

Cons:

• Selling the business is difficult — it requires finding a new partner.
• The partnership ends when any partner decides to terminate.

Private Limited Company

This is one of the most popular forms of business registrations in India.

What makes it popular? Well, the ability to raise equity funds, Limited liability protection to shareholders, and separate legal entity status are reasons for this structure to be the most recommended type of business entity.

A Private limited company requires formal incorporation from its shareholders, and the liability of the members is limited to the number of shares held by them.

Pros:

• Easy to raise capital or funding from external entities by transferring the shares
• Liability of members is limited to respective ownership share.
• Shares are easily transferrable by a shareholder to the other person.
• Perpetual Succession: The Company has uninterrupted existence until its legally dissolved

Cons:

• Total number of shareholders cannot exceed 200
• Prospectus to the public cannot be issued under this registration

Nonprofit Company:

A nonprofit organization is created with the purpose of carrying out a scientific, charitable, literary, or educational benefit. The nonprofit organization is exempt from paying taxes to central and state governments. It can be formed as a corporation or as an unincorporated business form.

Pros:

• Tax-exempt status if it meets the criteria set by the state.
• Funding from Private or public organization's allowed.
• Limited Liability

Cons:

• A nonprofit corporation Cannot distribute any profits to its members.
• A nonprofit organization must follow the guidelines set up for corporations.

Changing Entities:

If your business outgrows its original entity, there are various options available to transform your business’s registration into the newly-desired entity.

Ready to incorporate a new business? Let our experts help you take care of it. Connect with us today!