Pros and Cons of Different Business Entities

Business entities is the structure of a firm in it’s the most basic form. Everything from day-to-day operations to taxes and personal culpability is influenced by the sort of company structure you pick.

India has been designated as one of the world’s fastest-expanding major economies, with its service sector playing a crucial role. India is undergoing a period of tremendous economic emancipation. It is promoting foreign direct investment by making its vast and diversified market more accessible.

As a result of these factors, many corporations are now looking to expand by establishing their own operations in India. It is not easy to start a business, as there are several complications involved and need to be addressed.

BUSINESS REGISTRATION

The registration of a business is required by law. This form of registration allows the general public to see who is running a business. When you register a business, you’re assuring that no one else may use the same structure. You have various alternatives when it comes to registering a business, including:

• Register the company structure and use the name that was given to it when it was created.
• Make an application for a do business as name.
• Register your company’s name as a trademark.

Finding the appropriate business structure is all about striking the perfect balance. How you register and conduct your business, start-up expenses, how you submit your taxes, which taxes you’ll pay, and your level of personal culpability are all determined by the Business entities you choose.

So the next question is, How necessary is it to register a business?

This is dependent on the type of Business entities you pick as well as your location. If you run a sole proprietorship under your legal name, for example, you don’t need to register anyplace.

For many small firms, simply registering your company name with your state and local governments is enough.

Your legal obligations will become evident once you determine the business structure to adopt.

Types Of Business Entities In India

In India, there are distinct forms of business entities. I’ll walk you through each of these common categories to help you understand them better.

• Sole Proprietorship
• Private Limited Company
• Public Limited Company
• Branch Office
• Non-Government Organization (NGO)
• Joint-Venture Company
• Partnership Firm
• One Person Company

Sole Proprietorship

As the name suggests Sole Proprietorship being one of common business entities, has only one owner and is the simplest type of business entity. The sole proprietorship is frequent among freelancers and consultants. Even a one-man retail business, and other service providers comes under this.

There is no need to register with the state, but you may require a municipal company license or permission based on your industry and location. You may discover out by visiting the website of your state.

Upsides of Sole Proprietorship

1. Ease of use : You can start doing business right away if you’re using your legal name.
2. You’re alone in-charge : It is entirely up to you to make decisions.
3. Taxation on a pass-through basis : Any money generated by your firm, also known as a flow-through entity, goes directly to you. It also qualifies you for a 20% tax deduction.
4. Less time spent dealing with the Internal Revenue Service (IRS) : End-of-year balance sheets aren’t necessary, nor is filing an end-of-year financial statement.

Downsides of Sole Proprietorship

1. Legal responsibility : You are personally accountable for all of the business’s obligations and liabilities.  I mean there is no legal separation between you and your business.
2. Financial resources : Investors are less willing to lend to individuals, therefore obtaining a company loan may be challenging.
3. Public opinion : Clients frequently prefer working with registered firms, depending on your industry.

Private Limited Company

In India, a Private Limited Company (PLC) is a privately held small business firm that, once established, is treated as a separate legal entity. It has a minimum of one stakeholder and a maximum of fifty.

Private Limited Companies, unlike Public Limited Companies, are unable to exchange their stock publicly. It can have a minimum of two directors and a maximum of fifteen.

Upsides of Private Limited Company

1. There is no minimum capital requirement : The entire Authorized Share Capital of a Private Limited Company might be as little as Rupees 10,000.
2. Limitation of Liability : If the business runs into financial difficulties for any reason, members’ personal assets will not be utilized to cover the company’s obligations since each person’s responsibility is restricted.
3. Transferring shares is simple and free : A shareholder can transfer his or her shares in a business limited by shares to anybody else.
4. Raising Money : Except for Public Limited Companies, a Private Limited Company is the only type of business in India that may raise capital from Venture Capitalists.

Downsides of Private Limited Company

1. Its articles limit the ability of shares to be transferred.
2. The number of shareholders is always limited to 50.
3. Another drawback of a Private Limited Company is that it is unable to make public prospectuses.
4. Shares cannot be quoted on a stock market.

Public Limited Company

In India, a Public Limited Company (PLC) must have at least three directors, seven shareholders, and an infinite number of stockholders. It has two options: it may be listed on a stock exchange or it can stay unlisted.

Shareholders of a Public Limited Company have the right to freely trade the company’s stock once it is listed on a stock market. Because it is a separate legal entity, retirement, death, or insolvency of stockholders does not affect the company’s existence.

Upsides of Public Limited Company

1. Obtaining funds via issuing stock to the general public : The capacity to raise share capital is the most apparent benefit of being a public limited company, especially if it is listed on a recognized exchange.
2. Increasing the number of shareholders and sharing risk : Offering public shares allows a corporation to distribute the risk of ownership among a wide number of stockholders.
3. Other sources of funding : A public limited business entities will frequently find itself in a stronger position when looking at other potential sources of money, in addition to share capital.
4. Prestigious reputation and self-assurance : Having ‘PLC’ at the end of a firm name can give stature and reputation, whether merited or not.

Downsides of Public Limited Company

1. There will be more regulations : A public limited company’s legal and regulatory obligations are more stringent than those of a private limited business to protect shareholders.
2. Issues of ownership and control : The shareholders in a private limited corporation are usually persons who know the directors or founders.
3. Takeovers are more likely to occur : If a majority of shareholders consent to a proposal, a corporation might become subject to a hostile takeover.
4. The initial financial investment is greater : Unlike Private Limited Companies, a Public Limited Company cannot be started with negligible capital. What I mean is that the company must begin with a minimum of £50,000 in nominal share capital.

Branch Office

Foreign enterprises with manufacturing and trade operations outside of India can open a branch office in India. Manufacturing operations are not permitted in branch offices; however, they may be subcontracted to an Indian manufacturer.

The Reserve Bank of India (RBI) must approve the branch office before it may begin operations. A Branch Office is not permitted to engage in any type of commercial activity.

Upsides of Branch Office

1. Speed : A branch office may be set up pretty fast, though there are certain bureaucratic barriers to overcome.
2. Oversight : Executives have more direct influence over a branch because it is a component of the parent firm and is dependent on it.
3. Cost : Branch offices are often smaller in size, which reduces overhead costs.

Downsides of Branch Office

1. Liability : Branch offices do not insulate a parent firm from responsibility since they are not distinct organizations.
2. Concerns about taxes : Company-wide profits may be subject to taxes in the nation where the branch is situated, depending on the prevailing tax regulations.

Non-Government Organization (NGO)

A citizen-based organization that works independently of the government. It is established to achieve some social purpose, is known as a Non-Governmental Organization (NGO) or Non-profit Company.

These organizations are not in the business of making money; instead, they seek to promote a cause or to carry out development initiatives for the welfare of society.

Upsides of Non-Government Organization (NGO)

1. Exemption from paying taxes : A non-profit organization qualifies for preferential tax treatment, which means it is free from federal, state, and municipal taxes.
2. Limitation of Liability : Personal responsibility is limited in a non-profit organization; members of the non-profit are protected from personal culpability.
3. Grants : A non-profit organization can also accept government and private sector grants, as well as contributions from people.
4. Makes it possible for you to do a good deed : While working in a for-profit firm may just provide a salary for some. Volunteering for a charity allows people to feel as if they are making a positive contribution to society.

Downsides of Non-Government Organization (NGO)

1. Insufficient funds : Donations are the primary source of funding for non-profit organizations. You’re asking people to give out of the goodness of their hearts, whether it’s cash or other assets
2. Pay is low : A non-profit does not compensate you as much as a for-profit firm would
3. Loss of Tax Exemption : A non-profit organization’s tax status can be revoked. It may not be permitted to keep its tax-exempt status if it fails to meet its yearly reporting date
4. Public Inquiry : A non-profit’s finances are open to public scrutiny since it is devoted to the public good.

Joint-Venture Company

A Joint Venture (JV) is one of the business entities that involves foreign and Indian investors cooperating to form a new company. Everything from profit and losses to management duties and maintenance costs is divided equally among the investors.

A JV company also allows the investors to pool their resources to handle the risks associated with the new venture. It also limits the individual exposure by sharing responsibilities.

Upsides of Joint-Venture Company

• The benefit of a joint venture is that the foreign firm may make use of the Indian partner’s well-established contact network, distribution, marketing channels, and financial resources.
• New market access and distribution channels.
• Expanded capacity risk and cost-sharing with partner access to new information and skills. This also includes specialized personnel access to more resources, such as technology and finance.

Downsides of Joint Venture Company

• The venture’s goals aren’t entirely apparent
• There may be a lack of communication between partners
• The participants have varied expectations for the joint venture. The degree of skill and investment isn’t evenly balanced, and the labor and resources aren’t fairly allocated

Partnership Firm

“The relationship between persons who have agreed to share the profits of the company carried on by them or any of them acting for all,” according to the dictionary. In India, a Partnership Firm is a sort of Joint Venture Company.

A partnership firm’s owners are recognized as partners individually and as a business collectively. To start a partnership firm, you’ll need at least two persons. There can be a maximum of ten partners. The partners have limitless liability and are free to split earnings in any proportion they see suitable.

Upsides of Partnership Firm

1. Simple to Begin :One of the simplest types of businesses to start is a partnership. In most circumstances, a partnership deed is the only prerequisite for forming a partnership business.
2. Making a Decision : Any organization’s decision-making process is crucial. Because there is no idea of resolutions in a partnership business, decision-making might be speedier.
3. Funding Sources : A partnership business, as opposed to a sole proprietorship, can readily raise cash. A larger number of partners allow for more viable contributions from all of the partners.
4. Ownership : The operations of each partner’s business are owned and managed by them. Although their jobs may differ, workers in a partnership firm are united for a similar goal.

Downsides of Partnership Firm

1. Liability is limitless : Every partner in a partnership firm is individually accountable for the firm’s losses. Each partner in the partnership firm will be individually accountable as a result of the liability established by one of the partners.
2. Number of partners : Unlike LLP, in the case of a Partnership Firm, you cannot have more than 20 members.
3. There isn’t a central figure in the story : Leadership has the ability to both elevate and ruin a company. Combined ownership eliminates the potential of leadership, and a lack of leadership results in activities that are aimless.
4. Trust : A partnership business can also function without much in the way of structure or rules. As a result, the general population is frequently distrustful.

One Person Company

Since 2013, a One Person Corporation (OPC) has been a newly introduced kind of company in India. Only Indian citizens are authorized to incorporate an OPC. An OPC cannot be incorporated by a foreigner. It can be owned by just one person.

It was created in order to inspire individuals to build their own businesses. This is a form of Private Corporation that may also function as a legal entity on its own. The owner’s liability is restricted.

Upsides of One Person Company

1. A well-organized segment
2. In this case, the member is only responsible for the amount of unpaid subscription money
3. When opposed to a private corporation, banks make it easier to obtain financing
4. Easy to manage

Downsides of One Person Company

1. OPC is not permitted to engage in non-banking financial investment operations, such as the purchase of securities.
2. Under Section 8 of the Companies Act, OPC cannot be established or converted into a company
3. Commercial activities may be unethical as a result of blurred ownership and control lines
4. NRIs are not permitted to integrate One Person Company

IN SHORT…

One of the first and most significant decisions a new business owner makes is to form a legal corporation.

You’ll be able to figure out which of the Business entities is best for your company by consulting this information. Of course, if you want particular assistance for your firm, you should seek the advice of a legal or financial specialist.

It’s all about striking a balance between what’s best for you and your company right now, and you can always update your structure later.

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