It is essential to select the correct business structure for your startups by analyzing your company's goal and considering state, local, and federal laws. Once you have decided your company's goal, you can choose the right legal business structure to fulfill all your company's requirements. As your business grows from time to time, you can also change your business structure for your new startup business to meet your company's needs. But before choosing the right business structure for your new startup business, first, you have to make an effective business plan for the future to help you in the future. In this article, we discuss the different types of business structures and all the important factors while choosing a business structure.
What are the different types of Business Structures in India?
The types of business structures you select will be based on three primary factors, such as liability, record-keeping, and taxation. Following is the list of different types of business structures in India:
Partnership: In this business structure, there are two or more individuals who agree to share in the business's profits or losses. There are two types of Partnerships; one is general Partnership, where all is shared equally, and the second is Limited Partnership, where only one partner has control of its operation whereas the other partner contributes to end receives part of the profits. This business structure is perfect for any individual who wants to start a business with a business partner, family member, or friends, such as running an agency, a hotel, or a restaurant. A Partnership allows the partners to share all the business's profits and losses and make decisions accordingly with the business plan. But always remember that you will be liable for the decision made and all the actions made by your business partner.
Sole Proprietorship: Sole Proprietorship is the most manageable business entity form. In a Sole Proprietorship, an individual is responsible for all the debts and profits of the company. The cost of a Sole Proprietorship varies, and it depends on various factors. Usually, your early expenses will consist of taxes, office space, state and federal fees, banking fees, equipment needs, and any other professional services your business decides to deal with. Some of the leading examples of these businesses are bookkeepers, babysitters, freelance writers, cleaning service providers, etc.
Limited Liability Company: It is a hybrid structure that allows members or partners, owners to limit their liabilities while enjoying the tax benefits of a Partnership. Under a Limited Liability Company, shareholders are protected from personal liability for the business’s debt if it cannot be proven that they acted unethical, illegal, or irresponsible in carrying out the business activities. Limited Liability Company was formed to offer the liability protection that companies enjoy while allowing earning and losses to pass through the owners as income on their tax returns. While small businesses can be Limited Liability Companies, and some of the large businesses may choose this legal structure.
Corporation: The law concerns a corporation as an entity discrete from its owners. It has its own legal rights, and it can be sue or be sued, own & sell the property, and sell the owner’s rights in the form of stock. The fees for corporation filing varies from state to state and fee category.
Following are various types of corporations:
C-Corporation: Members who own this type of Corporation are taxed as separate entities. For example, Morgan Chase & Co. is a Multinational Investment Bank and Financial Services holding a company that is listed as a C-Corporation. Meanwhile, this Corporation allows an unlimited number of investors, many huge companies such as Apple Inc., Amazon, etc. file for this tax status.
S-Corporation: These Corporations are designed for small businesses and to avoid double taxation, much like Limited Liability Companies (LLCs) or Partnerships. Owners have limited liability protection, and the salary of employees is subject to FICA Tax. Simultaneously, the distribution of extra profits from this Corporation does not suffer further FICA tax liability.
Closed Corporations: Few members usually run these Corporations, are not publicly traded, and benefited from Limited Liability protection. It is sometimes referred to as privately held companies, which have more flexibility than publicly traded companies.
Open Corporations: Open Corporations are presented for trade on a public market. Many famous and big companies, including Ford Motors, Microsoft, and Apple, are open corporations.
B-Corporations: It is also known as Benefit Companies; these corporations are only for-profit entities structured to make a positive impact on society.
Non-Profit Companies: These companies exist to help others in a specific way and benefit from tax exemption. Some examples of Non-Profit Companies are the American Red Cross, Salvation Army, and the American Heart Association. These business structures have one main purpose that is focusing on something other than turning a profit.
5. Cooperative: It is owned by the same individual it serves. It provides various benefits to the company members, which are also known as user-owners, who can vote on the mission of the organization, share profits and direction.
Factors to Count on While Opting for a business structure
Following are some vital factors to consider as you choose the right business structure for your new business:
Flexibility: Check your business plan to review your goals or visions and see which type of business structure is best to achieve your company’s goals. Your entity must support the possibility for growth and change, not hold it back from its potential.
Liability: A company carries the minimum amount of personal liability since the law holds that it is its own entity, which means the customers and creditors can sue the company, but they cannot gain access to any personal assets of the members. A Limited Liability Company provides the same protection but with the tax benefits of a Sole Proprietorship. Partnerships share the liabilities between the partners by their Partnership Agreement.
Complexity: When it comes to the complexity of business structure, then nothing is simple than a Sole Proprietorship. For that, you need to register your name, start doing business, and pay the taxes on it as personal income. But, it can be tough to obtain outside funding. On the other hand, a Partnership requires a duly signed Partnership Agreement to define the roles and responsibilities and profits percentages. Limited Liability Companies and Corporations have several reporting requirements with State and Federal Government.
Taxes: The owner of a Limited Liability Company pays taxes just as a Sole Proprietor does. All the profits are measured as personal income and taxed according to the year-end. In the Partnership Firm, an individual can claim their profits share as personal income. A corporation files its own tax returns every year, paying taxes on profits after expenses, including payroll. In case you pay yourself from the corporation, then you will pay personal tax like Social Security and Medicine.
Capital Investments: If you want to acquire outside funding, such as a bank, venture capitalist, or an investor, you may establish a corporation because corporations make it easy to obtain outside funding than Sole Proprietorship.
License, Regulation, and Permits: If you want to legally register your business, you have to obtain a certain license and permits to operate the business. It is based on the business type and its activities.
Conclusion
Above, we discuss all the essential points that can help you start a new business in India. It requires analyzing the market and prepares a business plan, which takes lots of effort, money, and time. So it very important to make an effective business plan before starting your business. You can also take help from professionals.