Starting new business can be exiting and at times scary. It is time to take big decisions that may have resonating impact on success of your organization and even the course of your life. Arming yourself with the information you get will help to ensure you make the correct decisions that will set your business up for success.
Luckily for you we are basically the accounting equivalent to Superman minus the pecs and the ability to fly! However, just like superman, we are here to save your day! Assuming your day otherwise would have been ruined without and explainer for what type of entity impacts what in your business, here is an explanation below.
What is the entity type?
A business entity type is the structure of your organization. The type of entity you choose when you found your business determines the amount of taxes you pay, the cost of compliances and your personal legal liability should your company come under legal litigation. The entity type also impacts the share of your profit and the growth potential of your business. Choosing right entity for your business will set your business up for success.
There are many types of business entities in India, but most small businesses run five major types of entities: sole proprietorship, partnership firm, limited liability partnership, one Person Company and private limited company.
What is Sole Proprietorship?
Sole Proprietorship is the most common and simplest form of business entity in India, where you are the only owner of your business. As a sole proprietor of the business you alone take all financial liability and legal responsibility. Starting a sole proprietor ship is very easy as compared to the other business entities and does not require formal paperwork or registration. Sole proprietorship formation happens automatically when you start selling your goods or services. However if you require a Bank Account in name of your Sole Proprietorship, you may have to do some paperwork. Profit and Loss of the Sole Proprietorship are reported under your person Permanent Account Number (PAN). There is no separate PAN for sole proprietorship.
What is Partnership Firm?
A Partnership Firm is a business entity where two or more than two persons come together to start a business. Formation of partnership involves little more paperwork than Sole Proprietorship but overall very easy to start. A Partnership Firm can be formed by simply entering into a Partnership Agreement by the partners and applying Income Tax Permanent Account Number (PAN). As a partnership business all the financial liability and legal responsibility is divided amongst the partners. Though it is not mandatory to register a Partnership Firm with the Registrar of Firms, it is desirable to register. Application for registration of partnership should be made within one year of its formation. The biggest disadvantage of Partnership is that the partners have unlimited liability and all the partners are jointly and severally liable for the liabilities of partnership firm.
What is Limited Liability
Limited Liability Partnership is an alternative business form that gives benefits of limited liability of a company and flexibility of partnership firm at low compliance costs. The biggest advantage of Limited Liability Partnership is that no partner is liable on account of independent or un-authorised actions of other partners, thus individual partners are shielded from joint liability created by other partner’s wrongful business decisions or misconduct. Since LLP contains elements of both Partnership Firm and Company, it is called hybrid between company and partnership.
What is Private Limited Company?
Private Limited Company is a company which is privately held for small businesses. The liability of the members (shareholders) of a Private Limited Company is limited to the amount of shares respectively held by them. There can be minimum 2 and maximum 200 members in a Private Limited Company. Besides members, the Private Limited Company must have minimum 2 directors. The shareholders and directors can be the same persons. All the decisions of Private Limited Company are taken by the Directors and Shareholders in meetings of Directors and Shareholders respectively.
Picking the right type of entity
Choosing right type of entity for your business will set you up for success by giving you the right amount of room to grow while mitigating personal risk. If you need help with the financial side of your small business, Ofin is the perfect partner for you. We can provide you guidance throughout each phase of the life of your business from founding your business to your millionth sale. Contact us to know more about the services we provide.