BEST BUSINESS STRUCTURE FOR STARTUPS

BEST BUSINESS STRUCTURE FOR STARTUPS

When it comes to selecting a business structure, there are a variety of options available. The best business structure simply means the legal structure that is best suited for a particular company based on its goals. Start-up founders can be overwhelmed by the amount of options available in front of them to choose from. However, this decision should not be taken lightly without expertise from sound counsel. It is important for business owners to seek expert advice from professionals when considering the advantages and disadvantages of different business structures. The type of business structure one chooses depends on three primary factors: liability, taxation, and record-keeping. The most suitable business structures have been outlined below for a better understanding before choosing one of them.

• SOLE PROPRIETORSHIP: This business structure basically means that you are the business. It is one of the most commonly used structures as it is easy to form and provides complete managerial control to the owner. The business owner has to bear all the liabilities and financial obligations single-handedly, but he does not have to answer someone for any steps taken by him. There is no separate registration process for sole proprietorship hence making it easier to establish and operate. A government registration is all that is needed for adapting this business structure. However, sole proprietorship has its own cons. The process can get disrupted during tax time or if a lawsuit is filed against the company.

•  PARTNERSHIP: A partnership is a business structure in which two or more people manage and operate a business as per the rules and regulations mentioned in the partnership deed. The low cost, ease of setting up, and minimal compliance make it a viable option for most individuals. It provides an extra set of hands with additional knowledge to make it much easier. However, the unlimited liabilities and divided profits of the partners are primary reasons to not opt for this Business Structure. These issues can cause potential conflicts between the partners which might not prove to be beneficial for the company.

• LIMITED LIABILITIES PARTNERSHIP (LLP): This business structure provides a more flexible, legal, and formalized framework to the business. The most advantageous factor is that it protects the partners from any personal liability or negligence and incompetence of other partners. An LLP is much cheaper when compared to a Private Limited Company, as it involves low compliance costs and no paid-up capital.

The LLPs do not have to hold annual meetings or record minutes as it has an unlimited number of members to provide flexibility during equity financing. But there might be situations where the LLP has limited members, and if the members choose to leave the partnership after the contract has expired, the remaining partner might have to dissolve it even if he does not want to. The public disclosure of the financial records acts as another huge disadvantage of opting for this business structure. Since the income of the partners is personal, they might not wish to make it public by submitting it to Companies House. Hence, it is always advisable to consult a lawyer before taking any decision.

• PRIVATE LIMITED COMPANY: Most startups and growing companies opt for this business structure as it has limited liabilities for the shareholders and makes external funding smoother. This business structure has to hold board meetings and file returns annually with the Ministry of Corporate Affairs (MCA), they are assumed to be a more credible option than LLPs or Partnerships. However, a Private Limited Company cannot have more than 50 shareholders and limits the transferability of shares. They cannot issue prospectus to the public which in turn reduces public confidence in this business structure.

• CORPORATION: A corporation is a legal structure that is created to conduct business. The key advantage of this business structure is that it helps in avoiding Personal Liability. Corporations are of two kinds- Corporations and S Corporations. C Corporations are presumed to be the best suited for startups as they charge taxes on corporate profits, and the company does not have any profits at the beginning of its venture, whereas, S Corporations are a great choice for liability protection too. An S corporation separates the personal assets from the company’s debts and offers some tax benefits. In totality, corporations attract a good amount of investors because of their ability to issue stock. However, the incorporation process can be extremely expensive and time-consuming because of a number of corporate formalities required by the law. In certain cases, the corporation itself is taxed for any profits earned, thereby making S Corporations a better option because of their tax benefits.

To know more about, Cost of forming a partnership and company in India, see the video below-

It is suggested that a businessman should sit and analyze the various business structures available with the help of a business professional lawyer as per the financial goals of the company. There are several criteria that should be evaluated before reaching a final decision. They are:

• LEGAL LIABILITY: What lengths are the business owner ready to go to is of great importance in measuring his legal liabilities. They need to consider whether the business lends itself to potential liability and if it does, they need to consider if they can personally afford the risk of liability. If they can’t, sole proprietorship or partnership is the most suited business structure.

• TAX IMPLICATIONS: As per the goals of the business owner, he has to look out for opportunities to minimize taxation. There are more tax options available for corporations than partnerships and sole proprietorships. S Corporations help in reducing personal tax liability during the early stages of the company. Hence, in case of taxation liabilities corporations are the best-suited business structure for any startup company.
• FLEXIBILITY: One of the most important factors to be considered is the flexibility of the business. In a partnership or any multiple owners’ business structure, none of them will have the same ideas, opinions, or personal financial situations. The maximization of flexibility has to be considered in a business to grow smoothly.

• COST OF FORMATION AND ADMINISTRATION: Tax benefits in a corporation may not offer other benefits in saving costs. The administration process is extremely time consuming and involves costs relating to paperwork and record-keeping. Costs related to formation in incorporation can be another reason for business owners to choose business structures like sole proprietorship and partnership.

Keeping in mind these prerequisites, getting advice from a knowledgeable expert about the ideal structure would be a wise decision as it can make a huge difference later on.

To know more about, what is better among Private limited company and Limited Liability Partnership, see the video below -

BY:-

Ridhika Kapoor