When you search for “How to register a company in India,” the biggest factor that pops-up is deciding the type of entity or structure of the business. Currently, there are many options available, ranging from LLP in India to Hindu United Family (HUF). Which category fits your business depends upon factors such as:
- The workforce within the company
- Goal of the organization
- Investment in the business
While these factors are essential, there is one more aspect to be considered when selecting a business entity. Each category brings some pros and some cons to the table. Knowing those advantages and disadvantages can help you decide which structure will not suit your business and which benefits it the most. To that end, this article explains the pros and cons of some of them.
- Basic definition
- a) A sole proprietorship has just one owner who gets all the profit or bears all the loss.
- b) A partnership is held by two (or more) people who share the benefits among them.
- c) A corporation is owned by shareholders who gain money when the company profits. This is the most complex form of setting a business, but it offers many paybacks in the long run that others don’t.
- Liability Clause:
- a) A corporation has the maximum liability protection because shareholders do not lose their personal assets if the company goes into debt. This is possible because the company is considered as a separate legal entity.
- b) Sole proprietorships and partnerships have more liability. If the company is in debt, it is the legal responsibility of the owner to cover it. This makes the entrepreneur liable to losing personal assets.
- Fund Accessibility:
- a) Partnerships and sole proprietors raise money on their own, which can be done through loans or private funds.
- b) Corporations can sell stock to raise money, which means they tend to collect more funds than most other business forms. That said, it does take more effort and time to gather financial backup by selling stock as compared to finding investors.
- Tax Rates:
- a) Sole proprietors and partnership firms are charged at the same tax slab as regular individuals, which tends to be lower.
- b) Corporations have a higher tax rate, but they enjoy certain benefits such as deducting the salaries of employees and shareholders as a business expense. This considerably reduces the taxable income. Unlike Sole proprietorships, corporates have to file their taxes separately from the shareholders.
A more comprehensive pros Vs. Cons of the common business entities are given below.