FORM OF BUSINESS MODEL FOR A STARTUP
Having a great idea and thinking of opening your own business? All necessary funds are arranged and plans are made. But the main question that arises is which form of business organization should you choose for your startup? Whether to go for sole proprietorship or LLP or Partnership or a full- fledged Company? This question bothers every entrepreneur. We will analyze the pros and cons of each business form to help you choose the one most suitable for your business.
Sole proprietorship – It is suitable for small business ideas because it has the most simplified legal structure.
You can start your sole proprietorship firm without any hassle by just registering your company in income tax department and obtaining license for the product you are carrying your business. The profits earned are all yours.
But this form of business involves much risk as all the liability is on you and you have to pay the debt from your personal assets too. There is no way of raising funds in this kind of business form.
Partnership- You are planning to start your business and you have 3 or more people who are interested to work with you. Then the most suitable form which seems will be partnership. Partnership is further of two kinds i.e. Limited liability Partnership ( LLP) or Registered Partnership firm. Registered partnership firm is often chosen because it carries with it various liabilities and risks. Nowadays startups are choosing LLP over the other form of business because it has various benefits. LLP offers you blend of partnership and company therefore it is considered best choice. Below mentioned are pros and cons of LLP.
LLP offers limited liability, offers tax advantages, can accommodate an unlimited number of partners, and is credible in that it is registered with the Ministry of Corporate Affairs (MCA). It is suitable for low budget. Normally startups don’t have much funding so this can be beneficial for such startups. LLP Act, 2008 is also more flexible with legal compliance. You don’t need to comply for so many requirements as in case of companies.
LLP cannot raise funds by issuing share or stock certificates in future. This can be a disadvantage for a growing startup.
Company/ Corporation- Company is a legal entity registered under Companies Act, 2013. If we analyze the long term benefits of company it is most suitable form of business organization. It is altogether an artificial person. But it is not considered suitable for startups which have future risk and less funding. Also, the complicated procedure involved makes it difficult for tech startups to understand it. However there is a new form of company that is recognized under Companies Act, 2013 i.e. One person company which is considered suitable for startups. Below listed are pros and cons of One Person Company.
It has separate personality in eye of law. It has minimum regulations as compared to company. It gives you complete control over the entity. Also, tax benefits are there under Income Tax Act for One Person Company.
The registration process of companies is similar to private limited company which is complex. If the capital goes beyond certain limit then it will ultimately have to be converted into Private limited Company
The choice of form of business depends on the funds available, number of person involved, long term goals and other factors. None of them can be said to be the best. Each one has pros and cons. You need to analyze each of them as per your requirement.