Which Type of Organization Should Your Start-up Opt for?

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An important step to starting-up is identifying the type of organization that best suits your business. The options are many and the outcomes are even more. Hence it is easy to get confused… But don’t worry we’ve made it easier for you!

Here are the major types of organizations and their pros and cons:

  • Sole Proprietorship Concern

The word “Sole” itself indicates the meaning of the word Sole Proprietorship concern, i.e. Individual/One Person.

Pros Cons
  • Easy legal set-up as compared to other form of business as it involves less process for registration.
  • All control lies in your hands.
  • The tax benefits available are the same as they are for the individual.
  • Simple and easy dissolution as there are no other stringent provisions for closure.
  • Limited resources for the business so less scope to expand
  • No limited liabilities hence you will have to bring in assets or money to pay to the creditors or to the lenders in case of default.
  • The continuity issue may arise upon the death of the owner.

 

  • Partnership Concern (Unlimited Liability)

A Partnership firm has to be registered with Registrar of Firms.

Pros Cons
  • Shared burden. Partnerships give mutual support, companionship, and someone to share start-up problems with.
  • Access to wider skill base, knowledge and complementary experience. For example, a co-founder may have a technical background and the other financial.
  • More effective decision-making.
  • Unlimited Liability
  • Less autonomy; not being able to do your own thing and not always getting your own way.
  • Differences in personal aims and objectives for the firm.
  • Business owners have different views about their own future which may not be compatible and co-founders may differ in how they see the future of the firm
  • Decision making can be slower as you have to win consensus.
  • Collaboration can mean that there is loss of spontaneity.
  • Limited Liability Partnership (LLP)

Limited Liability Partnership is also to be incorporated with Registrar of Companies. As the name suggests LLP are the Partnership Organizations with Limited Liability.

Pros Cons
  • No limit on the amount of owners that can be involved with the business.
  • Limited liability.
  • Flexible – each partner in the business has the ability to decide how much they want to contribute and how much of a partner they truly want to be in the business.
  • An incorporated LLP has perpetual succession.
  • NRI/ Foreign national who want to form an LLP in India then at least one partner should be a resident of India.
  • It takes more days to form, as all the partners’ signatures are required for each and every document which is then to be attached to required e-forms.
  • LLP Act has provided the provisions of offenses and penalties. For default/ non-compliance on procedural matters such as delay in filing of e-forms, one has to pay default fee for every day for which the default continues.
  • Private limited company

Private Limited companies are either limited by the shares (has Liability to the extent of value of the shares held) or the limited by guarantee (Has liability at the time of winding up the Company to extent of amount guaranteed).

This type of Organization has to be registered with the Registrar of Companies. Rules governing these types of organization are given in The Companies Act, 2013.

Pros Cons
  •  Limited liability to the shareholders as the company is a separate legal identity from the owners.
  • An element of prestige is created –perceived to be more trustworthy than sole traders.
  • There is an opportunity to raise funds by issuing shares.
  • Cost of incorporating a company is more than any other forms of organization.
  • Much legal compliance has to be followed.
  • Less privacy as certain business information must be made available for inspection by members of the public, for example the company’s Annual Accounts.
  • Administrative expenses will be higher than a sole trader to ensure compliance with formalities of company law.
  • Professional accountancy services are normally required to assist with the preparation and filing of accounts and tax returns.
  • One Person Company (OPC)

The concept of One Person Company [OPC] is a new form of business, introduced by The Companies Act, 2013 thereby enabling Entrepreneur(s) carrying on the business in the Sole-Proprietor form of business to enter into a Corporate Framework.
One Person Company is a hybrid of Sole-Proprietor and Company form of business, and has been provided with concessional/relaxed requirements under the Act.

Pros Cons
  • An OPC will be required to comply with provisions applicable to private companies. However, OPCs have been provided with a number of exemptions.
  • An OPC gives the advantage of limited liability to entrepreneurs whereby the liability of the member will be limited to the unpaid subscription money. This benefit is not available in case of a sole proprietorship.
  • One Person Company is a Private Limited Structure; this gives suppliers and customers a sense of confidence in the business.
  • An OPC being an incorporated entity will also have the feature of perpetual succession and will make it easier for entrepreneurs to raise capital for business.
  • OPC is suitable only for small business. (maximum paid up share capital of Rs.50 lakhs or turnover of Rs.2 crores)
  • OPC cannot carry out Non – Banking Financial Investment activities.
  • OPC cannot be incorporated or converted into a company under Section 8 of the Act.
  • The concept of One Person Company is not a recognized concept under IT Act and hence such companies will be put in the same tax slab as other private companies for taxation purposes i.e. 30%
  • One person companies need to be registered with the registrar of companies under the Companies Act, 2013. This would entail upfront expenditure on government charges and professional fees which you will have to pay your CA or CS.
  • Recurring compliance costs yearly as it will need to get its accounts audited and will need to file returns every year with the registrar of companies like any other company.

We hope this gives you a better idea of what you should opt for and aids you in your decision making. Tell us what you would like to know on #FinancialFriday next week!

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