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, investment required, foreign investment, area of operation, ability to take 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 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 case of businesses with more risk, LLP or company would be the ideal choice.
Incorporated businesses like LLP and company have more acceptance than a partnership or a proprietorship. This is because all information regarding partners, directors, etc. are available in the public domain. This gives more acceptance to LLP and company compared to a partnership or proprietorship.
If your business has foreign investors, the best option is company. It is also possible to have foreign investors in an LLP subject to central government approvals.
Proprietorship is taxed as individual income of the proprietor. In a partnership and LLP, tax is deducted at 30.9% after partner’s salary, which is taxed as 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 attract tax at 16% plus surcharges.
In an LLP or company, business will continue irrespective of changes in the owners.