How To Determine Different Legal Forms For Your Business
Determining which types of legal forms will be needed is the most primitive decisions to make when you start a business. Hence, it is not enough that you have a brilliant idea and the required skill set for starting a business. You must also know which would be and remain appropriate for you business.
For this, you must be acquainted with the local, state and central laws and regulations surrounding the legal formalities for the same. Most often the biggest mistake which an entrepreneur does is not doing a proper research on the different legal forms available and its pros and cons. Your choice of business structure can have a great impact on the way you do business. The legal formation of a company impacts its taxation structure, business liabilities, and business ownership.
Through this blog you will understand the various legal forms available and the determinants which can help you decide the suitable one for your business.
Legal Forms of Organisation
In India, the most popular legal forms available are:
- Sole Proprietorship: Single authority
- Limited Liability Company: Hybrid between a corporation and a partnership. Owners can participate in business decisions and also ensure the protection of their personal assets in case of any losses in the business.
- Partnership: Two or more partners sharing profits and liabilities equally
- Limited Company: Two or partners with lesser liability and more organisational Essentially has a minimum of one limited partner and one general partner.
- Corporation: This is the most complex of all legal forms and involves a lot of legal formalities. The business has its own separate legal entity and the owners are shareholders of the company differentiated by the percentage of shares they hold. Shareholders can either nominate a board of directors or sign an agreement to manage the operations of the business.
Deciding a legal form from options mentioned above which an entrepreneur can consider when trying to establish their business can be a confusing task and often requires extensive expert advice and counsel. So how can you decide which is the best solution for your business?
Determinants on which the legal form for your business depends
Let us help you with few pointers which can help you decide which is best for your business.
#1. Business Liability
This is the first and often the most crucial determinant you need to consider. How much of a liability do you wish to hold over the business? While a corporation comes with the least liability, a sole proprietorship holds the maximum. This ideally means in the case of business failure, your creditors and customers can prosecute your firm but can’t get hold of your personal assets as compensation. The same protection can be expected of an LLC whereas a partnership company shares the liability between the partners which is dictated by the terms of the partnership agreement.
#2. Taxation Structure
When you start a business, it is very important to understand how to save taxes. What is more important is to avoid double taxes. While in an LLC and a sole proprietorship, you would be paying taxes from your personal income and helps in avoid getting taxed both as an individual and as a company, the same can’t be said about a private Ltd company and a corporation. In these, you would be filing your taxes separately as a company and in case you pay yourself from the company, you would be paying personal taxes as well. Paying business income tax and then a personal tax on the earned profits might not seem a good option for many start-ups.
#3. Organisational Complexity
The simplest form of business operations can be achieved through a sole proprietorship, and hence many start ups feel comfortable with this legal form over the others. The structure and legal paperwork required in establishing a corporation or a limited company are slightly lengthier and tedious as compared to a sole proprietorship. But if you want to expand your business in the future and might want to opt for globalization, then you might have to look out for a corporation or a limited liability company which works as a separate legal entity.
#4 Ownership and Control
This is another aspect which would influence your decision in choosing a particular legal forms over the others. If you want to have full ownership and control over your business and its profits, an ideal solution would be a sole proprietorship business. A partnership business would divide your ownership and control with your partner(s) but would still function as dictated by the terms of the partnership agreement. In a corporation, however, you would need a board of directors to govern and manage the company as a whole. The ownership, in this case, would be vastly divided.
#5 Investments and Funding Requirements
For a business to run, you require funds and a flow of cash. It is a simple process if you can manage this cash flow on your own. However, if your business requires external funding and you want to look out for angel investors, venture capitalists and banks for loans and funding, then it is safer to establish a corporation. A sole proprietor has to rely on his personal funding and an LLC will also face a lot of challenges while trying to fund the business. One more important factor to consider is the need to take out cash from the business on a regular basis.
#6 Legal Formalities and Compliance
You need to take into account the local legal formalities, state and national legal compliance while establishing your business in a particular legal form. Understand what rules and regulations hold for your business and the amount of legal paperwork that is expected in the establishment procedure. While some might want to settle for a sole proprietorship because it doesn’t involve a lot of legal formalities, some others might still prefer a tedious process to have flexibility, ease of operation and ease of expansion on a later stage.
The kind of business form you want to opt for purely depends on your business needs and vision. There is nothing right or wrong about a particular legal form. While you might be ready to let go certain determinants, some others might weigh heavy on your decision.
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