What Each Business Entity Brings To Your Table

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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
  1. a)   A sole proprietorship has just one owner who gets all the profit or bears all the loss.
  2. b)  A partnership is held by two (or more) people who share the benefits among them.
  3. 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:
  1. 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.
  2. 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:
  1. a)   Partnerships and sole proprietors raise money on their own, which can be done through loans or private funds.
  2. 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:
  1. a)   Sole proprietors and partnership firms are charged at the same tax slab as regular individuals, which tends to be lower.
  2. 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.

Partnership

  1. These are easy to create and maintain
  2. Requires no fees for the creation
  3. Net business losses on personal income taxes of owners can be reported
  1. Debts and other liabilities of the business are covered jointly and personally by owners
  2. Personal income tax has to be paid by owners for all net business profits

Sole Proprietorship

  1. Business and owner are one legal entity.
  2. Easy to create and requires no creation fees.
  3. Business loss can be deducted from personal tax returns
  1. Personal income tax is paid by the owner on business profits.
  2. Liabilities and debts of the business are the responsibility of the owner

Limited Liability Company

  1. Owners are liable for only a small part of debt and judgments of the business
  2. Allocation of business profits and losses are not restricted to ownership interest which means a 15% owner can get 45% of the profits
  3. Have the choice of picking the taxation rules, a partnership or a corporation
  1. These are slightly more costly to create and maintain when compared to a sole proprietorship

Corporation

  1. Limited liability for the business’ debts on owners
  2. Dividing the profit among owners can lower the tax paid by the business.
  1. Expensive to establish and need complicated paperwork
  2. Pay its own taxes separately

Limited Liability Partnership

  1. These are used by firms in law, medical and accounting sector
  2. It protects other partners in case one is liable for malpractice
  3. Each partner has their own loss or gain, reported on their personal income tax
  1. Each partner has personal obligations to fulfill the demands of creditors and lenders
  2. Maybe applicable to only a limited number of professions