Selection of business organization depends on factors which include nature of business, objective of such business, scale of operations, degree of control desired by the owner, amount of capital required and sources of funding, volume of risks and liabilities to be borne, tax implications etc. The following points should be noted in this regard:

Objective of the business:

If the owner desires to maintain a direct relationship between ownership and management of the business then limited liability partnerships (LLPs) are preferable. However if the objective is to maintain complete authority, then sole proprietorship form of business is best suited.

Scale of Operations:

It basically implies the geographical area that the owner is targeting to cover to market the product or render services. Sole proprietorship and partnership form of business is only suitable if the startup is planning to run a small scale concern covering a particular area.

Limit of Liability:

A business enterprise can be choosed on the basis of either limited or unlimited liability. From the point of view of risk, if the owner wants to maintain a separate legal entity with limited liability, then Limited Liability Partnerships (LLP) and Limited Liability Company (LLC) are preferable.

Adequacy of Capital:

The form of organization should facilitate the raising of the required amount of capital at a reasonable cost. Moreover, while making a choice, it is to be kept in mind that a balance should be maintained between own funding and funds generated from outsiders. Cost of formation of enterprise also plays an important role in calculating the adequate capital required for the smooth functioning of the business.

Tax Implication:

Tax implication forms a very important factor in the decision making process. For example, unlike Companies, LLPs are not required to pay Corporate Dividend Tax (CDT). Also, all the provisions of Income Tax Act, as applicable in case of partnership firm are applicable in case of LLPs in India.

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