Success of a business always depends on how one can organise it and pursue it to accomplish the desired goals. A business can be organised in different forms such as Sole Proprietorship, Partnership, Limited Company (One Person Company-OPC, Private Company or Public Limited Company) or Limited Liability Partnership.
While selecting a business organisation, one must have an understanding about the different types of business structures, its merits and demerits, suitability for desired business etc.
In India, there are several forms of business organizations viz, Sole Proprietorship, Partnership Firm, Limited Company and Limited Liability Partnership (LLP).
Basically these organizations are classified into incorporated and unincorporated structures. Company and LLP are the incorporated business organizations and Partnership Firm and Sole Proprietorship are the unincorporated structures. Incorporated business structures are created under respective laws such as Companies Act and LLP Act and will be treated as separate legal entities.
Partnership is created by an agreement between partners and is governed by Partnership Act. It is not mandatory to register a Partnership and even if it is registered under Partnership Act, it does not entitle a corporate entity status. An individual can start a sole proprietorship by opening a bank account with a bank. Sole Proprietorship does not require registration.
Incorporated Business structures have certain advantages over unincorporated business.
A sole proprietorship, also known as a sole trader or simply a proprietorship, is a type of business structure that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits (after tax) and has unlimited responsibility for all losses and debts. All assets and debts of the business in the proprietorship are owned by the proprietor. This means that the owner has no less liability than if they were acting as an individual instead of as a business.
A sole proprietor may use a trade name or business name other than his or her name. In India, there is no specific law for registration of sole proprietorship, but as per the Shop and Establishment Law (State Law), every establishment needs to get registered under the Act, which can be used as limited purpose sole proprietorship registration.
As the name reveals, a sole proprietor ship is operated managed and run by a single individual. The identity of the organistaion is nothing but the individual himself.
However, depends on the nature of business, it is required to obtain registration such as Service Tax, VAT, IEC etc. A sole proprietorship can be registered under MSME Act to avail the benefits and protection.
The proprietorship business carries unlimited business risk as the business proprietor is individually responsible to settle all business liabilities. Proprietor's personal assets are at risk to compensate the business liabilities.
How to start a Sole Proprietorship
Since, no legal registration is required for sole proprietorship business; any individual can start such business any time. Technically this is the position but practice situation is different. No bank will open a current account in the name of the Sole Proprietorship Firm unless he or she produces minimum two registrations under any law. It means Sole Proprietorship as such does not require any registration but for starting a business as proprietorship he need any two registrations.
Benefits of Sole Proprietorship
Sole proprietorship businesses need not be registered under any specific law in India. But for opening account with a bank he needs any two registrations under any law like service tax or VAT etc.
Since sole proprietorship is an individual business, all profits are taxed in the name of individual himself.
Proprietor manages the business as per his will and wish.
Since sole proprietorship is not created by law, no specific compliance or filing is required except for tax compliance and other legal compliance applicable for any business.
It is easy to close a sole proprietorship business. The proprietor can sell all businesses without much difficulty.
Partnership is one of the oldest business structures in India. Partnership is relation of two or more persons who have agreed to share the profits and losses according to their ratio of business run by all or any one of them acting for all. In simple terms, partnership is a contractual relation of two or more persons carrying business to share profit or loss in an agreed ratio.
In India, a partnership is governed by Indian Partnership Act, 1932, and a partnership firm does not have an independent status apart from the partners constituting it. Partnership does no have a legal entity status than of its partners. It has limited identity for the purpose of tax laws. Any two people can start partnership business under an agreement called partnership deed. It is not mandatory to register a partnership deed but it is advisable to register partnership deed but for evidential purpose.
CompanieInn.com can help you to create your Partnership deed and get it registered.
Benefits of Partnership
Easy to form:
Since a partnership is a relation of two or more people, the formation is very simple. It can be created by an agreement among the partners describing terms and conditions.
As per the law, registration is not mandatory to start a partnership. However, registration is advisable for evidence if any dispute arises in future.
Easy to manage as no compliance requirements compared to company or LLP form of business.
Sharing of responsibilities:
Partners can share the responsibility of partnership and the business. They can also share decision making.
Compared to company, tax on profit is less in a partnership. Also, no profit distribution tax is applicable to a partnership firm.
Easy to windup a partnership firm than a company or LLP as partnership is created by an agreement.
Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) is an incorporated business form that combines the features of partnership and the company form of business. The LLP form of organisation was introduced in India in April 2009 through the Limited Liability Partnership Act, 2008. An LLP like organisation structure is available globally. In the US, an LLC has many features of an LLP seen in India. The UK and Singapore also have an LLP form of organisation structure for doing business.
The main demerits of a partnership firm are unlimited liability and all the partners are responsible for the wrong doing of one partner. In an LLP, one partner is not responsible or liable for another partner's misconduct or negligence. All partners have limited liability for each individual's protection within the partnership, similar to that of the shareholders of a limited company. However, unlike the company shareholders, the partners have the right to manage the business directly. An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP's employees or other agents. The management of LLP is defined by the LLP agreement and partners have the freedom to regulate affairs of the LLP.
CompaniesInn.com holds the record of registering the fist LLP in India through the online filing system at www.llp.gov.in on 24-04-2009 (CompaniesInn Consulting LLP, LLPIN AAA-0002)
Benefits of LLP
LLP is the right business structure for doing business as it gives freedom of management and flexibility of ownership. The main benefits of LLP are as given below.
Efficient tax saving business form:
In the eyes of tax laws, LLP is a 'Firm' and hence firm taxation is applicable to LLP. Various taxes levied on a company, like minimum alternative tax, dividend distribution tax and surcharges are not applicable to an LLP. The profit after tax from an LLP's operation will be reflected in the personal income of partners. It is estimated that the approximate tax savings of an LLP will be about 17% compared to that of a company
In companies, the management is vested with its Board of Directors. They are responsible for taking the day-to-day decisions and management of a company. Shareholders have limited powers in the affairs of a company. In an LLP, management is vested with the partners unless specifically maintained in the LLP agreement. It is possible for an LLP to delegate all powers of management to a single person except compliance requirements under the LLP Act, which are the responsibilities of Designated Partners.
Less compliance requirements:
Compared to a company, the legal compliance requirements are lesser for an LLP. For a company, it is mandatory to maintain various registers, minutes, etc., but there is no such requirement for an LLP.
Audit of accounts:
All companies are required to appoint a Chartered Accountant as auditors for auditing accounts, irrespective of the size and operation of the company. In case of an LLP, the audit requirement starts only if the turnover exceeds Rs.40 Lakhs or contribution exceeds Rs.25 Lakhs.
Less cost of maintenance:
Statutory filing fees payable by an LLP is lesser compared to a company. Hence, even small businesses can think of incorporating their firm as running costs are very low.
<>It is possible for a partner in an LLP to resign subject to the terms of LLP agreement. After resignation, usually the partner can take back his share of contribution from the LLP.
LLP is free to take any business decisions subject to the LLP agreement. It can enter into a contract with its partner or relatives of partners and borrow and make loans to outsiders. However, in a company structure, many of these decisions need either the permission of the shareholders or approval of government authorities, for which the process is cumbersome.
No ownership restrictions:
In a private company, the number of shareholders is limited to 50. There is no such restriction in an LLP. An LLP can have any number of partners and thus can secure more capital for its business operations.
By virtue of being a registered entity under government laws, registering your business as an LLP will ensure better legitimacy and greater credibility while dealing with other companies, banks and potential business partners.