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STARTING BUSINESS FAQs

During the life of business, things are bound to change. For example, in the early stages of  business, you may have preferred to keep things simple with an LLP. But as your business and expectations grow, you may need to change your business structure. After all, what may have worked for your business during the first few years of its existence may not be optimal for you now.

If you’re considering changing your company from one business structure to another, there are a few things to keep in mind. The procedures themselves are not necessarily difficult or complex, but will typically involve some legal steps, such as a merger or the dissolution of one entity and the creation of a new one.

There can be significant tax implications involved with these moves, so seek the advice of an expert or tax advisor to determine what’s best for your business.

Choosing a business structure will depend on various factors like:

No. of partners-If you are a single person who owns the entire initial investment required for the business, a  One Person Company would be ideal for you. On the other hand, if your business has two or more owners and is actively seeking investment from other parties- a Limited Liability Partnership (LLP) or Private Limited Company would suit you best.  

Investment required- If you want to spend less initially, it would be wise to go in for a Sole Proprietor, or a HUF or a Partnership. But, if you are sure that you will be able to recover the setup and compliance costs, you can opt for a One Person Company, LLP or a Private Limited Company.

Liability of business- Business structures like sole proprietor, HUF, and partnership firm have unlimited liability. This means, in case of any default in loans, the entire money will be recovered from the members or partners in profit sharing ratio. The risk to personal assets is high in these cases.
Whereas, Companies and LLPs have a limited liability clause. This means that the liability of its members is restricted to the amount of contribution made by them or the value of shares each member holds.

Income Tax Rates-Income tax rates applicable to a sole proprietorship and a HUF are the normal slab rates. In case of a sole proprietorship, the business income is clubbed with the individual’s other income.
But in the case of other entities like partnership and LLP a tax rate of 30% is applicable. While in case of companies, tax rate is 25% s.t. a specified limit of turnover and other conditions.

Investors’ Funding-It is difficult to get investments when your business structure is unregistered. Entities like LLP and Private Limited Company are trusted when it comes to investment.

It is important to choose business structure depending on natures of business, financial condition, future prospects etc. Each business structure has different levels of compliances that need to be met with.

 For example, a sole proprietor has to file only an income tax return. However, a company has to file an income tax return as well as annual returns with the registrar of companies.

A company’s books of accounts are to be mandatorily audited every year. Abiding by these legal compliances requires spending money on auditors, accountants and tax filing experts. Therefore, it is important to select the right business structure when thinking of company registration. An entrepreneur must have a clear idea of the kind of the legal compliances he/she is willing to deal with. While some business structures are relatively investor-friendly than others, investors will always prefer a recognised and legal business structure. For example, an investor may hesitate to give money to a sole proprietor. On the other hand, if a good business idea is backed by a recognised legal structure (like LLP, Company, etc) the investors will be more comfortable making an investment.

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