Business Structures: Types and Importance
While deciding to start a business in India, choosing the structure of the business is vital. Though there are various business structures available to choose from, choosing the right type of business structure is a decision to make to develop a business with a clear vision and focus. However, there are various factors to be considered before making a business structure including the investment levels, legal requirements, business requirements, scope of the development, future goals, etc. which are critical for the success of any given business. Hence, it is highly critical to choose a business structure that can accommodate the required changes based on the demands.
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The following are the types of business structures that are well known and are adopted by most entrepreneurs.
- Sole Proprietorship
- Partnership Firm
- Joint Venture (JV)
- One Person Company (OPC)
- Limited Liability Company (LLC)
- Private Limited Company (PVT)
- Public Company
It is considered to be the primitive form of the businesses, wherein a single person holds the full ownership of the company and is alone responsible for the happening in the business. Though there are many advantages like single-point decision making, 100% profit to the owner, conversion to other formats of the business, etc. There are many disadvantages associated with the same including (i) restrictions on raining principals for running the business, (ii) will solely be responsible in case of a loss and the debts associated with it, (iii) have to single-handedly face all the legal tussles, if any arising out of the business, etc.
When a group of persons forms a business with the intention of sharing the profit arising out of the business, they must associate themselves to form a firm/company – i.e. partnership firm. The advantages include legal person identity, the loss is shared among the partners in case of a loss, easiness in raising equity, the share of
profits based on the level of contribution i.e. principal-wise of work-wise. However, the disadvantages include (i) lack of trust issues, (ii) debt-sharing, if there is any incurred by any of the partners, (iii) complications during decision making, (iv) difficulties in transferring the shares, etc.
Joint Venture (JV):
JVs are the business formations arising by the collaboration formed by two or more individuals, companies, or corporations, to form a separate business/legal entity for achieving a specific/common purpose related to a particular business interest. JV may be set up with shared resources like properties, human resources, investments, etc. contributed accordingly by the participants. Disadvantages of JV include (i) restrictions in the flexibility, (ii) lack of clear communication on the objectives, (iii) lack of equal involvement, and (iv) differences in the cultures of the JV organizations, etc.
One Person Company (OPC)
It is the alternative to the Sole Proprietorship nature of the business, wherein a single person can form a company. One Person Company is a perfect blend of the features of a company and the freedom of a sole proprietorship. Disadvantages include (i) selecting nominee for perpetual succession, (ii) limitations in ownership, (iii) restrictions on conversion to other forms, etc.
Limited Liability Partnership (LLP):
LLP is mostly applicable for law firms, accounting firms, architecture firms, etc., and other business areas where partnership expertise is preferred to a business. In some instances, a limited liability partnership (or LLP) is the best in the case when you have more business owners not wanting to have an ideal business structure with limited liability. Advantages include perpetual succession, limited liability, can be sued as a legal person, etc. Disadvantages of LLP include (i) sharing of all the profits made in a particular financial year with no option of holding back for the future year, (ii) must have at least 2 members otherwise dissolved, (iii) public disclosure of the records of income, (iv) income taxed as personal income, etc.
Private Limited Company (PVT):
A Private Limited Company (PVT) is a body corporate and is a legal person in the eyes of law formed by two or more persons / legal persons. The PLC has a separate existence from its Owners (commonly known as Shareholders or Members) and comprises a mix of Limited Liability of members and ability to hold assets and operate the business in its own name i.e. perpetual succession. Disadvantages include (i) lack of trust issues, (ii) debt-sharing if there is any incurred by any of the partners, (iii) complications during decision making, (iv) difficulties in transferring the shares, etc.
A public company is a company whose ownership is distributed among the public through shares of stock that are intended to be freely traded on a stock exchange or in over-the-counter markets. Advantages of the public company include the raising of capital, publicly available financial information, decision making based on the sentiments of the investors i.e. public, etc. Disadvantages include (i) government regulations, (ii) reporting standards which is a daunting task, (iii) red-tapism, (iv) huge investment requirements, etc.
IPLF and Company Registration:
Each business structure has its own advantages as well as limitations. Hence, adopting a business structure becomes daunting for entrepreneurs, especially when there is a lean awareness of the advantages, disadvantages, differences, and limitations. Also, one should consider the selection of business structure by (i) measuring financial necessity, (ii) over-taxation system, (iii) costs associated with running the business, and (iv) options for changing business structure; for the long term for a successful business model.
The Government has simplified the mechanisms of registrations of companies and made the process much more user friendly these days. However, it is always better to seek the help of professionals to avoid hassles that occur during the registration process. Our IPLF team comprises highly skilled and trained legal / accounting professionals to assist in registering your businesses as per the needs for protecting your business interests.
Author: Govindhaswamy Srinivasan, a Principal Associate – Patents at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at firstname.lastname@example.org