By Nikitha B, Assistant Article @ Gaurav Jain & Associates
In this planet we have many choices to earn income for which few business incomes are taxable and few are non-taxable. During a plan of start-up, one thinks which is best suitable based on the budget, costing and knowledge of such market to do business. For setting up any sustainable business, the best thing is to consult a professional and discuss to get the suitable idea for investments with recent amendments and any changes applicable to choose the right form of business based on the available sources of funds for good returns along with the welfare of our society.
In India following are the types of Business entities available for establishment:
Sole Proprietorship
Partnership
Company
Branch Office
Hindu Undivided Family
Limited Liability Partnership
Co-operative Societies.
Further, when it comes to a “Company” there are multiple options to form it .i.e.
One Person Company
Private Limited Company
Public Limited Company
Guarantee Company
Subsidiary Company
Statutory Company
Insurance Company
Unlimited Company
After knowing the available options for Setting up a Business , Finally it comes to choice for decision making, For taking decision there few following factors need to be considered i.e.:
Nature of Business
This is an important factor, which will directly have the impact on the choice of business.
Businesses dealing with direct service that depends upon personal knowledge or skill of
the owners are generally organized as proprietary concerns.
Example: Small retailers, beauty parlours, hairdressing saloons, tailors, restaurants, etc.,
and professional services, like, doctors, lawyers, etc.
Scale of Business
The second factor that affects the choice of business is the scale of operations. If
the scale of operations of business activities is small, sole proprietorship or OPC is suitable; if this scale of operations is neither too small nor too large then partnership is preferably best suited ; whereas, in case of large scale of operations, forming the company is advisable.
Capital Requirement i.e. Money factor:
Capital is one of the foremost important factors affecting the choice of a Business.
Requirement of capital/money depends upon type of business and scale of operations.
The capital Requirements are of 2 types:
1. Initial capital required to start a business,
2. Running capital requirements to meet modernization, expansion, and diversification
plans.
Managerial Ability
Managerial ability depends on sometimes who will be authorized for delivering specialized skills for business. During such case a sole proprietor lacks expertise in all functional areas of business, whereas In partnership there is division of work among the partners, which allows the partners to specialize in specific areas, leading for better outputs and decision making and Incase the requirements of the business is complex in nature and require professional management at various levels, then suitable choice will be a company.
Degree of Control and Management
A person who is willing to have direct control over the business can opt for proprietorship. If one wants joint ownership then partnership is available where control of business is jointly shared by each partners and they also share equal say in the decision making unless they have divided their responsibility amongst themselves.
On the other hand at extreme level end if the person is not interested in direct personal control, it would be desirable to opt for company as where there is separation of ownership and management in Company being artificial individual person.
Degree of Risk & Liability
The willingness of owners to bear risk associated with its business and its liability is also an important factor. A sole proprietary business carries small amount of risk when it is compared to partnership or Company. In Sole Proprietor Small unlimited personal liability may be associated whereas in Partnership moderate risk may arise where partners are individually and jointly responsible for the liabilities of the partnership firm and lastly, Being Company having large limited liability of owners, a large number of shareholders share the risk in case of public company (in private company as per limited shareholders will share)
Stability
Sole Proprietorship businesses are not stable as it is a one man show. His/her absence may impact the business adversely. Partnerships are also unstable, since they are terminated by the death, insolvency, insanity, or withdrawal of one of the partners. In Companies on the other hand enjoy perpetual succession. The life of the company will not be depended upon the life of its members. Members may come, members may go, but the company goes on forever being an artificial individual person recognized by law.
Flexibility of Administration
Sole Proprietorship business will be more flexible than any other forms of Organization whereas, In Partnership flexibility depends upon the co-ordination between partners and In case of company, administration is not that flexible because its activities are conducted on a large scale and they have rigid structures.
Distribution of Profit
If a person wants to receive all the profits of his/her business and also bears all the risks, then Sole Proprietorship business is the option. But, if he/she is willing to share the profits, partnership would be preferred. In case of Companies, distribution of profits is in the form of dividends. Hence, Shareholders receive dividend in proportion of their shareholding. Dividend is approved by shareholders only if it is proposed by the Board of Directors.
Costs, procedure, and government regulation
The Sole proprietorships are the easiest and minimal amount to get started and run the business whereas, Partnerships are also quite simple to be initiated and even a written document is not necessary in case of partnership, neither registration is compulsory. The procedure for dissolution of partnership is also, relatively simple. Proprietorships and partnerships are subject to little regulation and control by the Government. Company on the extreme end is more complicated to form as it is be created by law, dissolved by law, and is operated under the expressed provisions of the law.
Tax Implication
Tax implication plays an important factor to determine the form of organization. Following are the different applicable rates of taxation in different forms of business.
Example: Partnership Income is taxable @30% of total income. The profits distributed to
partners are not taxable. Whereas, on the other hand, in case of Companies; Income of the company is taxable 22% from 30% for existing companies, and to 15% from 25% for new manufacturing companies of total income. (changes in tax rates are subject to new tax slabs as and when applicable)
Geographical Mobility
If the business entity wants to operate in local market with a seasonal product or
perishable goods, or cater to a specific city or locality, then sole proprietorship or
partnership form of business will be suitable. If it is willing to market its product or
services all over the country & world a company form of organisation will be preferable.
Transferability of Ownership
In case of Sole Proprietorship, ownership lies in the hands of Proprietor and not transferable whereas, In case of Partnership, a new partner can be introduced or share can be sold to another person at the discretion of other partners. Shares of a Company are transferable property i.e. In case of Public Company they are freely transferable and in case of Private Company they are transferable under restriction.
Managerial Needs
If a business operation is at one particular place without multiple branches then it can be managed by one person, therefore sole proprietor will be a good option. If the business operates at large scale at various places more managers will be needed, Therefore, forming a Company will be best suited.
Secrecy
Business secrecy is an essential core factor for every business. It refers to keeping the future plans, technical competencies, business strategies, etc. In the case of sole proprietorship business, the proprietor can easily keep plans to himself/herself since management and control are in one person hands, as there is no need to disclose any information to others whereas, Business secrets in case of Companies are very crucial issue as it sues to legal disclosures & transparency requirements.
Independence
The company is subject to strict government regulations. So, if the entrepreneur wants to have a freedom in business with little governmental interference, he/she has to go for either sole proprietorship or partnership.
Hope this article is informative, helpful and appreciable. Do let us know by sharing your comments and views in the below comment box and like icon.
Comments