In this article Aditya Shrivastava, Content Marketing Manager at iPleaders discusses what are the three most important factors you need to consider before deciding your business model. Read this article to know more.
Indian startup scenario is at a novice stage. While we see numerous ex-professionals using their expertise to come up with new ventures, there is also a significant rise in the number of fresh graduates entering the startup ecosystem.
With informed choices, relaxed policies, and rise in innovation, it is undeniable that the wide range of free content available on the internet has further fostered this growth. With extremely relevant and informative content on the internet, individuals can easily mold their ideas into reality. There are several online courses, blogs, and websites which are specially designed to help budding entrepreneurs and to save them from the risks, procedural difficulties and potential disasters. They are specifically equipped to make the aspiring entrepreneurs understand the basic do’s and don’ts of the business.
If you are about to start your own business, one of the primary questions that you need to consider is what kind of business structure should you adopt. This is important because any future action, right from registration, profit sharing to the division of liability, in case of any mishappening, will be impacted.
India, for a very long time, had only three kinds of business models. Sole proprietorship, partnership and company (public or private). However, exactly a decade ago, India has also seen a new hybrid form of ‘partnership and company’ which is Limited Liability Partnership (LLP). You can read this article to find out more about each of these structures as each one of them has its own pros and cons.
In order to determine which structure will suit your business the best is absolutely dependant on your business and relevant circumstances. There may be some additional factors which you would want to consider before finalizing a decent business model. Here are the top three factors which can help you take a wise decision:
1. What Kind Of Ownership Do You Want?
This is perhaps the most important question you would want to consider. Do you want to be the only owner, or do you want a business with equal participation and distribution of liabilities? Do you want more investors? Do you want to have limited liability? These are some of the basic questions which are based on your business model.
If you plan to have a limit on the number of people who can invest in your business, you can opt for sole proprietorship or partnership. However, if you need more investments and inclusion of international investors, then you are looking for a company or an LLP.
If your confusion is in between Company or LLP, then you might want to consider the level of authority involved between the two. While companies have a fair system of hierarchy, decision-making, LLPs are more direct in maintaining their relationship between the management and the owners. However, if you seek an absolute control over everything, then sole proprietorship is the solution for you.
2. What Kind Of Liability Will You Incur?
If I were to ask you what is that one thing you want to ensure before opening a business, I am sure you would say that you want more gains and lesser or no liabilities.
It is undeniable that most entrepreneurs look at ways to minimize risks and liabilities in the business. If you are on a lookout for the same you might want to cancel sole proprietorship and partnerships out of your list. The liability in these two forms of business are not different from their owners and you might not be able to avail protection from any future catastrophe.
However, in an LLP your liability is limited only to the extent of contribution you have made towards your firm. Company, on the other hand, limits the liability to the extent of the amount required to be paid on each share.
It is recommended to opt for either of these two business models, as both of these have an existence as a separate legal entity thus creating a barrier between your business and your personal property (of course, unless there is non-compliance or fraud). However, these are more credible and enable you to easily access more capital opportunities with minimal risks.
3. What Goes With Tax, Comes Around Or Goes Away?
Both LLP and Company are taxed equally at a rate of 30% on income along with education cess and senior and higher education cess. The LLPs are required to pay an additional surcharge at 10% if the income crosses a slab of 1 Crore. An LLP is also required to pay an Alternative Minimum Tax (AMT) at a rate of 18.5% along with the surcharge and cess on the adjusted total income if the income tax is lesser than AMT.
The companies, however, only pay a surcharge of 5% in case the income exceeds the same bracket. If the income crosses 10 Crores, then the surcharge applicable is 10% on the companies income. In case of a company, the AMT is also fixed at 18.5% along with surcharge and cess on the adjusted total income.
However, apart from these two taxes, an additional Dividend Distribution Tax of 16.609% on dividends is not applicable to LLPs unlike companies. Even the advance tax which is to be paid in 4 quarterly installments by the company are only applicable for 3 quarters in an LLP.
Sole proprietorship is the safest option in case of tax liabilities. You can show the business’s income as yours and easily file it as regular personal income tax.
Apart from these three crucial factors, there are various other factors like securing more funds, administrative requirements, dispute resolution, and other compliance-related framework that can impact your decision-making.
The decision-making mechanism is definitely based on a lot of technicalities. You need to ensure that you are taking wise steps and not relying on free information on the internet. Try to talk to the experts or if you want to be self-sufficient then take up a course which can teach you what’s needed right from the basics.
Remember, there cannot be a quick answer. Take your decision slow, wise and informed. All the best.