Choosing The Right Business Structure for Your Startup

What is a Business Structure?

Business structure is a structure in which an entity is legally formed and registered. The nature and functions of the entity will solely depend upon its business structure.

Some common business structures are sole proprietorship, partnership and corporate.

Below is the detailed chart of business structure:

Types of Business structure and their advantages and disadvantages:

1.    Sole Proprietorship

Sole proprietorship is the most common form of business structure throughout the world. In proprietorship, a single person runs the business and enjoys all the authority.

Advantages of Sole proprietorship:

• Easy to establish
• Minimum compliances
• Easily operatable
• Tax benefit of an Individual
• Total Control
• Economical
• No sharing in profits

Disadvantages of Sole proprietorship:

• Unlimited liability
• Less capital to do business
• No separate legal entity
• Limited expansion scope
• No large-scale economies
• No sharing in losses
• Limited growth opportunities
• Lack of Business continuity factor

Mostly, sole proprietorship is formed in businesses which operated at a very low level. It is suitable only when low capital is required and where operations are simple and does not require high skilled management.

2.    Partnership

Partnership is considered where there is a requirement of more than person in the business. The business is not on a very large scale and generally operatable with up to 20 partners. In Partnership, partners introduce the capital and shares the profits and losses of business in an agreed percentage.

Advantages of Partnership Firm:

• Easy to establish
• Better decision making
• More availability of capital
• More expertise with more partners
• More Business opportunities
• New perspectives
• Moral support of partners for each other
• Losses are shared
• Borrowing money is easier as compared to proprietorship

Disadvantages of Partnership Firm:

• Unlimited liability
• No separate legal entity
• Maximum partners can be 20 only
• Conflicts and disputes between partners
• Lack on continuity
• Lack of public confidence
• Difficult exiting for partners

Partnership firm is incorporated when there is a need of diverse view and perspective in the business. People with similar interest, qualifications and work domain are generally forms the partnership with each other. In Partnership, the capital is divided creating less burden on an individual, same in the case of losses if any.

3.    Limited Liability Partnership

It is a type of business structure similar to traditional partnership firm but where the liabilities of partners are limited to the extent of firm invested by them in the business.

Advantages of Limited Liability Partnership:

• Easy formation as compared to company
• Less legal compliances
• Separate legal entity
• Limited liability
• No minimum capital requirement
• No maximum partners limit
• Less costly in terms of registration and compliance
• No compulsory audit required

Disadvantages of Limited Liability Partnership:

• No equity investment
• Public disclosure of financials
• High penalties for non-compliances
• Higher tax rate and Less tax benefits as compared to company
• Difficult to chunk in huge funds
• Conflicts and disputes between partners

LLP is preferred by people because it provides the benefit of both the partnership firm and private limited company. No minimum capital is required at the time of formation and having a separate legal entity makes it a desired business structure for small scale businesses.

4.    Private Limited Company

It is a corporate business structure limited by shares. Liability of each member or shareholder is limited to the extent of investment by them. Minimum 2 and maximum 200 members can be there in a private limited company.

Advantages of Private Limited Company:

• Separate legal entity
• Limited liability of members
• Higher borrowing capacity
• Higher public trust
• Easy transferability of shares
• Perpetual succession

Disadvantages of Private Limited Company:

• Higher cost of registration and annual compliance
• Very high non-compliance cost
• Complicated procedures for winding up of company
• Number of members is limited to 200
• Shares cannot be listed
• High maintenance cost
• Public disclosure of information
• Criteria of minimum capital

Private company is the most preferred way of registering a business now a days. Its benefit of having a separate legal entity and high market reputation makes it a desirable business structure. Public trust in private limited company is far more than LLP, partnership and proprietorship.

If you are planning to setup your own business, you can consider the above information about different business structure and can choose the most suitable one based on your requirement and expectations.