Recently my friend who was working working in a MNC, and drawing hefty amount of monthly salary decided to leave his job for starting his own business. He wanted to become an entrepreneur without knowing what the pros and cons of being in this scenario of an unstable/unbalanced lifestyle from a stable lifestyle.
He already had a business idea with him and wanted to launch his startup, but was confused what type of business he should incorporate to launch his Idea.
I am sure many are sailing in the same boat, where they have an idea, but are not sure how to start and what kind of company should they incorporate – This article is essentially targeted to those people!
Luckily the new Government plans to come up with many initiatives to ease the problems faced by entrepreneurs for starting up and doing business in India. However, most of these new initiatives are currently in the process. In this article we will touch upon various forms of company incorporation currently available, and which is best suited for a Business.
Different Types Of Business Incorporations
Every business whether registered or unregistered works under a form and in which form the business is actually running creates a severe impact on the business and its profits.
Choosing a form of business is like choosing a vehicle, where many variants are available, but there is one that is best suited to your needs!
Here is Explanation for each of them
| Form of Business | Meaning | When to Incorporate |
| Sole proprietorship | The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. | However, after introduction of the concept of One Person Company (OPC), it is not recommended to form a proprietorship in India. |
| Partnership | A business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for the debts from the business. Partnerships are easy to form. There is no minimum capital requirement. Only two people are needed to incorporate the partnership. | Partnerships are basically like proprietorship with an only difference that it involves two persons. If you are two or more persons wants to start the business early, you can register partnerships and later on can convert it into private company. |
| LLP: Limited Liability Partnership | Partnerships when given the feature of limited liability, the LIMITED LIABILITY PARTNERSHIPS came into picture. LLP is a separate legal entity and which can be formed in India by minimum of two persons with a motive of earning profit. | LLP enjoys the benefits of private limited company and traditional partnerships, therefore, because of increasing compliances in private limited company, it is recommended for start-ups to incorporate LLP if they are not planning to raise investments in future. |
| One person company (OPC) | OPC can be regarded as a refined form of proprietorship. Only one person is required to form the OPC and enjoys all the benefits of a normal limited liability company. | If you are a single founder and planning to start a business or your are already running a business as a proprietor, then OPC is actually an ideal choice for you. Also, owner can anytime convert OPC at ease. |
| Private Limited company | Private Limited company is the most preferred form of business. Private company can be form by two persons. Private company is the ultimate form of business, because in this form, owners can do any type of complex business transaction as they like. For e.g. they can issue ESOPs, raise capital etc. | If you are two people, willing to start a business, and also plans to raise the funds in future, then private limited company is the best option for you.If you don’t plan to raise funds, but you wants to have a strong foundation, then also private limited company is recommended. |
| Public Limited Company | Public limited Company is the biggest and the most powerful form of business in India.According to the research by entrepreneur.com, Public limited companies gives the trust that you are doing something big and also they have noted that the valuation of business increases by 10 to 15 times. | If you are really planning something big or you have actually running a big business and also you wants to expand it, public limited company is the best option for you. |
We have just given a basic idea about the different forms of business and when to register the same. However, there is no written formula for this, rather it varies on case to case basis and depends on various scenarios the business plans to go through. Still, generally people keep the following points in mind, while choosing their form of business.
Key facts to consider while choosing
1. Legal Existence:
For a startup it is best to first consider whether he wants to start business under a legal entity or under his own name.
2. No. of persons Involved:
The second key fact for choosing a right form is depend upon the no. of persons involved in the initial stage of startup.
3. Capital requirement:
Choosing a right form is also depending upon the initial capital eligibility and future funds availability.
4. Funding requirements:
If in near future, funding is required in the startup, then it has to be planned in the initial stage of business.
5. Restriction on Personal Liability
It has to be decided in the initial stage whether the key persons is liable personally or there should be restriction.
Choosing company as a forms of business
As of now, the first preference for startups is to form a private limited company because in all probability they have to raise funding by diluting their equity in future and in other forms of business like LLP, Proprietorship, Partnership, it is very difficult for a startup to convince its investor to invest.
Although, with the coming of new companies act, One person company is also becoming a popular form of venture for startups as explained by diagram:
You can also check out benefits of incorporating a One Person Company here.
Conclusion
Choosing best form of business as important as the execution of the idea. If your idea needs funding then Proprietorship and partnership cannot not give the right plough back what your business needs. So, before choosing, look over all the aspects that can affect your decision of starting a business.
CAclubindia
