Starting your own business? One of the first questions which might come to your mind is that which legal structure your business should take? In this article we will discuss about different types of entity structures available and how can we decide upon the right business structure. In India we have basically three types of business structures namely Sole proprietorship, Partnership firms and Company (pvt or public), however a new hybrid form of partnership firm and company known as Limited liability (LLP) emerged a few years ago. Each structure has its own pros and cons and it depends upon the individual circumstances of each business owner as to which structure will best suit his business. These include the level of personal liability you are willing to take for business debts, your personal tax position, the level of administration you want to do and how you want your business to be perceived.    Below mentioned factors are crucial and can guide you to decide on the right form of business structure. Liability: When you are looking to minimize your personal liability you can generally rule out sole proprietorships and partnerships firms right away because there is lack of liability protection in these two forms. With these two forms, the business is not regarded as a separate legal entity from you, so your personal assets are part of the business. This means that if the business is sued for whatever reason, your personal assets are at stake. In a partnership form of business, even your personal assets are at stake for anything that your partner may do. In an LLP form, your liability is limited to the extent of your contribution towards LLP, except in case of intentional fraud or wrongful act of omission or commission by the partner. What is at stake for you as an owner is what you have put into the business along with any personal guarantees you have made. In case of a Company, liability is limited to the amount required to be paid up on each share. Both LLP and limited company exists as a separate business entity and this creates a wall between your personal assets and the business. Thus your personal property is protected and this gives you the ability to build business credit, get loans and raise capital.   Taxation: Below are the various tax implications of the DTC. Taxes on Income: Both LLP and Limited Company are taxed at a flat rate of 30% plus Education Cess & Senior and Higher Education Cess. LLPs are liable to pay surcharge at 10% w.e.f FY 2013-14 if the total income exceeds Rs.1 Crore. While companies have to pay surcharge at 5% if the total income exceeds Rs.1 Crore and at 10% % if the total income exceeds Rs.10 Crore  from FY 2013-2014. Minimum Alternative Tax: LLP is liable to pay Alternate Minimum Tax @ 18.5 % + surcharge + Cess with effect from financial year 2011-12 on the adjusted total income if regular income-tax on total income of LLP is less than the Alternate Minimum Tax. Companies are also liable to pay Alternate Minimum Tax at 18.5% + surcharge + Cess on the adjusted total income. Dividend Distribution Tax: LLP is tax efficient than that of limited company as Dividend Distribution Tax (DDT) is not applicable on LLP and Companies are liable to pay DDT @ 16.609 % (i.e. inclusive of surcharge and education cess) on such dividends. Advance tax: Companies are required to pay advance tax in four quarterly installments, whereas, LLPs are required to pay in three installments. When it comes to reporting your taxes, the sole proprietorship gives an easy way out. Since it is not a separate legal entity, you can declare your business income on your personal income tax form. Ownership and control: The forms of Sole Proprietorship and partnership firms limit the number or type of people who can invest in your business. If you’re seeking a large number of investors or international investors, you may opt for LLP and Company. If you desire to maintain a direct relationship between ownership and management of the business then limited liability partnerships (LLPs) are preferable over limited Company. However if the objective is to maintain complete authority, then sole proprietorship form of business is best suited. Having discussed the most important factors to consider while deciding upon the correct business structure, I am putting down some questions below which will further ease your decision making. Q: Are you participating in an industry that is vulnerable to lawsuits? Do you want to protect your personal assets (i.e. home, car, and savings) from lawsuits and judgments against your business? If your industry is vulnerable to lawsuits, you may opt for a business structure like LLP and company where your liability is limited and doesn’t extend to your personal assets. LLP and company form of businesses protect your personal assets from any liability of the business.   Q: When it comes to funding, are you planning on seeking a loan from a bank, or other commercial lender? If you are seeking to raise finance from a bank or an investor to develop the business, your options will be more restricted if you act as a sole trader rather than forming a limited company. In a sole proprietorship form, the owner only is liable to bring in the entire capital. So, if the business needs expansion, it becomes difficult for the owner to arrange that big amount. Bankers, lenders and other investors generally see a limited company more credible, due to stringent compliances and disclosures required for a company.   Q: Do you want to minimize your record keeping, audit and administrative requirements? There is no provision for regular meeting of Board and members for LLPs. Partners can decided when and how to meet decide on delegation of powers etc. However, provision exists that LLP should maintain minute book. However, Quarterly Board of Directors meeting and annual shareholding meeting is mandatory for a limited company. If you want to lower your liability with regards to paperwork and administrative activities, opt for an LLP business structure.   Also Companies are mandatory required to get their accounts audited annually whereas for LLPs only those having turnover more than Rs.40Lacs or Rs.25Lacs contribution in any financial year are required to get their accounts audited annually as per the LLP Act.   To Conclude: Decision about choosing a business structure is technical and complex, but it can have far-reaching consequences for your business. Yet, there’s no quick answer to the question, LLPs and limited companies are preferable. The goals of the business play an important role in the decision making however, identifying the best choice involves balancing a range of factors like nature and objectives of the business, degree of control desired by the owner, amount of capital required and sources of funding, liabilities to be borne, tax implications etc. The table starting on the next page provides a side-by-side detailed comparison of the different types of entities and sets forth characteristics of each.  

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