1. Commencing your Business Decide the ideal form of business organisation Objective: What are the various business organization options available What are the benefits & negatives of each How to choose which form of business organization works best Jaydeep S. Halbe Opinions might be subjective. Legislations / Laws are subject to change.

2. Options Available If you want to set up your business today, there are a few options available. They are: Sole Proprietary Concern Partnership Firm Private Limited Company Limited Liability Partnership Each of them have different requirements and their own pros and cons

3. Sole Proprietary Concern Its the easiest form of business organization. In this case, there is no difference between the Individual and the business. Both of these are the same entity. All tax, business & statutory registrations are to be done in the name of the Individual. Only one Income tax returns for the business and the individuals is to be filed.

4. Partnership Firm A partnership firm is a separate legal entity and is different from the partners of the firm. At least two people are required to form a Partnership Firm and the maximum number of partners in the firm can be only 20. There are two types of firms. Registered & un-registered firms. Registration is with the local sub-registrar of the government. All tax, business & statutory registrations are to be done in the name of the Partnership Firm. Income tax returns for the business and the partners of the firm are to be filed separately.

5. Private Limited Company The most common form of business organisation today. The company is a separate legal and there is a corporate veil between the company and the owners. The most significant thing here is that the liability of the owners is limited. All tax, business & statutory registrations are to be done in the name of the Private Limited Company. Income tax returns for the business and the owners of the company are to be filed separately.

6. Limited Liability Partnership A LLP is a form of business organization that is mid-way between a Private Limited company and a partnership firm. It embraces the ease and low-compliance of a partnership firm and the limited liability concept of a Private Limited company. All tax, business & statutory registrations are to be done in the name of the LLP. Income tax returns for the business and the partners of the company are to be filed separately.

7. What is this LIABILITY? Limited or not.. One of the most important things to be considered before deciding the form of business organisation is liability. The meaning of the word is very simple. Any amount of money that you owe to a person is called liability. The reasons for you owing money to people are different, they could be: On account of not fulfilling a contract On account of a court case that you lost On account of a penalty / fine / charges levied on you by a party etc. Limited Liability means, the amount that you have to pay is limited to the extent of assets and cash that your business has. If the liability is more than the assets you have, bankruptcy is declared. Your personal belongings do not come into the picture. Unlimited liability means if your assets in the business are insufficient, your personal assets are also included to pay off the liability.

8. Sole Proprietary Concern Pros & Cons Pros Cons Very easy to set up. Quick way to commence business. Liability is unlimited. Costs of setting up are very low. Not a scalable form of business organization. The same PAN, TAN, Service Tax number that the individual has can be used by the business. Payment Gateways and few others require the business to be a Company Tax is based on the slab rate and hence tax outflow is limited. Cant induct a partner / co- owner into the business. Governance required to be done is low. Till turnover reaches a sizeable amount, no Audit is required .

9. Partnership Firm - Pros & Cons Pros Cons Easy to set up. Quick way to commence business. Liability is unlimited. Costs of setting up are not high. Not a scalable form of business organization. Governance required to be done is low. Payment Gateways and few others require the business to be a Company Till turnover reaches a sizeable amount, no Audit is required . Beyond a certain limit of income, the rate of tax becomes 30%. More than 1 person can be part of the ownership structure of the business Unless its a registered firm, it cant file a suit against anybody. Profit sharing ratio between partners can be different from the Loss Sharing Ratio. Investors are unwilling to fund a firm.

10. Private Limited Company Pros & Cons Pros Cons Liability is Limited Governance required to be done is sizeable. Costs of setting up are not high. Statutory Audit is required from Day 1. Scalable form of business organization Corporate rate of tax is 30%. Payment Gateways and few others require the business to be a Company Cost of running a company is sizeable. Investors are willing to fund on companies because shares are relatively easy to transfer and trade. There are a lot of legal restrictions that are to be complied with. A corporate veil separates the actions of the company from the actions of the owners. People may come and people may go, but the company goes on forever. It outlasts the founders!

11. Limited Liability Partnership Pros & Cons Pros Cons Liability is Limited Governance required to be done is sizeable. Costs of setting up are not high. Payment Gateways and few others require the business to be a Company Statutory Audit is NOT required from Day 1. Corporate rate of tax is 30%. Cost of running a company is NOT high. Investors are willing to fund only companies because shares are relatively easy to transfer and trade. Legal restrictions that are to be complied with are low. Not a very Scalable form of business organization Some Benefits of a company without the problems of a company.

12. How to decide? The decision of which form of business organisation is required, comes down to a few factors: Whats the aim for the business. Will it be scaled over time? Is the line of business such that its susceptible to the risk of law suits / legal claims. Whether the business needs to be funded in the long run by an Investor. Are you looking at bringing a few other people on-board. If the business is scalable and needs to be funded by an investor and you are looking at bring a few people on board, choose a form of business organisation that can accommodate this. The business organisation needs to be capable of scaling. Make a choice of form of business organisation that neednt be changed or migrated every few years. You dont want to spend brain-space on changing form of organisation.

13. When to choose what? Sole Proprietary Concern: This is ideal if youre a freelancer without any employees or overheads such as rent, advertising etc. Partnership Firm: Widely used by professional services firms. No intention to get funded by an Investor. Nature of business is such that likelihood of external liability is low. LLP: Again, very popular among professional services firms. Here, even if the business is likely to have external liability like Constructions, Restaurant Operations etc, its fine. Private Limited Company: Best when the business needs to be quickly scaled and investors are to be brought on board. Choose this when the benefits outweigh the costs and governance issues.

14. Trust some of your doubts with regards to business organisations are gone! If you have any more, feel free to contact me: E-Mail: jay@kenspire.com Twitter: @Jayhalbe