How to Select a Business Structure
Updated: Aug 18, 2021
Selecting the correct business structure is very important for the success of any business. This is based on many parameters including your present plan and future plan, number of partners, the investment required, foreign investment, area of operation, ability to take the risk, etc.
Below are some points that will help you to select a business form:
Business Risk and Personal Assets: There is a possibility that a business will generate lower-than-anticipated profits, or that it will generate a loss rather than a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, overall economic climate, and government regulations. If someone does business as a partnership or proprietorship and if he/she incurs loss or if the business creates some liability, then the creditor can recover this from the assets of business owners. However, in the case of a company or LLP, the liability is limited to the extent of their investment and no one can claim more than the committed amount. Therefore, in the case of businesses with more risk, LLP or company would be the ideal choice.
Acceptance: Incorporated businesses like LLP and companies have more acceptance than a partnership or a proprietorship. This is because all information regarding partners, directors, etc. is available in the public domain. This gives more acceptance to LLP and company compared to a partnership or proprietorship.
Investors: If your business has foreign investors, the best option is the company. It is also possible to have foreign investors in an LLP subject to central government approvals.
Tax: Proprietorship is taxed as the individual income of the proprietor. In a partnership and LLP, tax is deducted at 30.9% after the partners salary, which is taxed as the personal income of partners. There is no tax payable on the profit after tax in a partnership or LLP. In a company, the tax rate is 30.9% plus surcharges. Profit distribution also attracts tax at 16% plus surcharges.
Business Succession: In an LLP or company, the business will continue irrespective of changes in the owners.