Decide an appropriate business form for your start-up venture2 min read . Updated: 22 Oct 2018, 10:15 AM IST
Fully understand the business structure and liability before choosing a suitable business form
Apart from the robust business idea, an appropriate form of the business is equally important for a start-up. The decision to choose the appropriate form should be based on what works best for you. Read more about the different forms of businesses.
Proprietorship: This is the most common form of business, where a single individual owns, finances, manages and controls the entire business. If you intend to manage and keep control of the business entirely in your hand, a proprietorship model works for you. It is easier to establish and operate as the individual holds all the key decision making powers. However, you may hire employees to carry out the day-to-day activities. But such business model works where the scope and requirement of funds is limited. In such a business form, the liability of the owner is unlimited and in case of failure of the business, owner might have to pay the creditors from his personal savings and assets.
Partnership firm: Another common form of business is partnership firm, where two or more persons agree to setup a business together and also agree to share the profits and losses. In case you have conceptualised your start-up idea with the help of your siblings or friends, a partnership model could be a business form you can consider. It is easy to form; besides that the partners are free to mutually decide their role, shares, work and other aspect related to business. However, liability of each partner is unlimited in proportion to their respective share holdings. This means that in case of winding up or insolvency of the firm, if the assets and property of the firm are insufficient to pay back the debts, the creditors can recover their dues from the personal property of the individual partners in proportion to their share holding. Also, none of the partners can transfer the shares in the firm to any other person (except to the existing partners) without the unanimous consent of all other partners.
Limited Liability Partnership (LLP): LLP is relatively a newer form of business structure that offers flexibility of a partnership and limits the liability of its partners to the extent of capital employed in the business. Similar to a partnership firm, partners of an LLP are free to manage the business on the basis of a mutual agreement. The LLP is governed by the provisions of the Limited Liability Partnership Act 2008.
Private limited company (PLC): PLC is a voluntary association of people (known as members) to carry out a business. It is suitable in case you need large amount of funds to setup the business. Under a PLC, liability of members is limited. Compared to a partnership firm where there can be a maximum 100 partners depending upon the nature of the business, in PLC there can be 200 members. The shares allotted to its members are not freely transferable between them. Hence, a PLC is preferred by those who wish to restrict their liability but want control over their business within a limited circle and maintain its privacy.
Other forms of businesses include co-operative society or a business owned by Hindu Undivided Family (HUF), and also public limited company. These business forms have their own restriction and are not open to everyone.