Smart and Successful Business Organization Selection in Setting Up of Business

Business organization selection is the most important step when starting a business. Choosing the right structure prevents time wasted in managing and reorganization.

Smart Business Organization Selection in Setting Up of Business

Business Organization Selection is a critical decision influenced by several factors. The nature of the activity, capital requirements, and degree of independence play a significant role in determining the most suitable business structure. There is no universal formula for Business Organization Selection, as each structure has its own advantages and limitations. Additionally, tax implications are a crucial consideration, as they directly impact profitability and compliance requirements. Carefully evaluating these factors ensures that the chosen Business Organization Selection aligns with long-term goals and operational needs.

Sole Proprietorship Partnership Firm  HUF  Co-Operative Society  Limited Liability Partnership 

Private Company  Public Company   One Person Company

Business Organization Selection: Starting a Sole Proprietorship

In Business Organization Selection, a sole proprietorship is a simple and widely chosen business form where one person owns all the assets. Selecting the right business structure is crucial, and a sole proprietorship stands out for its minimal legal formalities—requiring only the appropriate business license and name registration if different from the owner’s name. The owner reports income or loss from the business along with their personal income tax return, making it a straightforward option for entrepreneurs.

Features of Sole Proprietorship

Unlimited Liability: Just as a partnership, a sole proprietorship has no separate existence. Therefore, creditors can recover all debts only from the sole proprietor. The owner faces unlimited liability for all the debts, which should heavily discourage any risk-taking. As a result, this form of business is suited only for small businesses. If one plans on running a business that requires a loan or may end up paying penalties, fines or compensation, it is best to look into registering an OPC.

Easy to Start: In Business Organization Selection, a sole proprietorship is one of the simplest forms of business to establish. There is no separate registration procedure for proprietorships—one only needs a government registration relevant to the business. For instance, if selling goods online, a proprietor would require only a sales tax registration. This ease of setup makes a sole proprietorship a convenient choice in Business Organization Selection for individuals looking to start a business quickly.

Partnership Firm

When two or more people come together and pool funds to start a business, it is known as a partnership firm. The primary aim of partnership firms is to earn profit. Partnership firms are created by drafting a partnership deed among the partners. Partnership firms in India are, governed by the Indian Partnership Act, 1932.

Section 464 of the Companies Act, 2013 empowers the Central Government to prescribe maximum number of partners in a firm but the number of partners so prescribed cannot be more than 100.

The Central Government has prescribed maximum number of partners in a firm to be 50 vide Rule 10 of the Companies (Miscellaneous) Rules, 2014.

• Unlimited Liability: The partners in the business are liable for all of its debts. This means that if, for whatever reason, a partner is unable to repay a bank loan or is liable to pay a fine, this can be recovered from his or her personal possessions
• Easy to Start: If a partnership firm is not registered, one can begin operations with just a partnership deed.
• Relatively Inexpensive: Starting a partnership is cheaper than starting an LLP or a company, and it remains inexpensive in the long term due to its minimal compliance requirements.

In the process of Business Organization Selection, a Hindu Undivided Family (HUF) stands out as a distinctive business structure formed by members of a Hindu family. As part of selecting the right business organization, a HUF offers unique benefits, including separate taxation from its members, allowing for potential tax savings by consolidating family assets under a single entity. It possesses its own Permanent Account Number (PAN) and files tax returns independently, making it a strategic choice for families seeking efficient wealth management while leveraging unique tax advantages.

Features of Hindu Undivided Family (HUF)

There should be atleast two male members in the family to form a HUF. They should inherit the ancestral property. All of the members enjoy this property and have an equal share in that property. Thus, any child taking birth in that family becomes a member of the HUF. There is no requirement for an agreement to become a member.

Limited Liability Partnership (LLP)

In Business Organization Selection, a Limited Liability Partnership (LLP) stands out as a structure that combines the benefits of limited liability, like a company, while allowing its members to manage operations through a mutually agreed arrangement. This flexibility makes LLPs a preferred choice for entrepreneurs seeking a balance between control and liability protection.

LLP is relatively a cheaper approach to incorporate as compared to a Private Limited Company and requires less compliance.

Features of Limited Liability Partnership

• Suitable for Non-Scalable Businesses: If one is running a business that is unlikely to require equity funding, may register an LLP as it combines several benefits of the private limited company and general partnership
• Reduced Compliance Requirements: Minimal Compliance: LLPs enjoy MCA concessions, requiring audits only if turnover exceeds ₹40 lakh or contributions surpass ₹25 lakh. Unlike private limited companies, LLPs have fewer reporting obligations to the RoC.
• Number of Partners: There is no limit to the number of partners there may be in an LLP.

A cooperative organization consists of individuals, usually with limited means, who voluntarily join to achieve a common economic goal. They form a democratically controlled organization, make equitable contributions to the required capital, and accept a fair share of the risks and benefits of the undertaking.

Features of Co-operative Society 

A society unites individuals by mutual consent to deliberate, determine, and act jointly for a common purpose. People usually register societies to promote charitable activities like education, art, religion, culture, music, sports, etc.

Section 8 Company 

A Section 8 company promotes commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, or similar objectives. The company must use any profits or income generated solely for promoting its objectives. Additionally, it does not pay dividends to its members. The government registers Section 8 Companies under the Companies Act, 2013.

• It promotes commerce, art, science, sports, education, research, social welfare, religion, charity, environmental protection, or similar objectives.
• The company applies the profits, if any, in promoting its objects.
• It prohibits the payment of dividends to its members. 
• The company can incorporate its name without using the words “Limited” or “Private Limited,” as applicable.
• The company does not require any minimum paid-up capital.
• Flexibility of Administration.
  
  

One person forms an OPC as its sole member. The shareholder appoints a nominee who takes over as a shareholder if the original stakeholder dies or becomes incapacitated. In addition, a single promoter exercises full control over the company while limiting liability to their business contributions. Meanwhile, the sole director and shareholder control and manage the company, while the nominee only acquires power when the original member becomes unable to enter into a contract. As a result, the OPC cannot raise equity funding or offer employee stock options. Therefore, the structure of an OPC limits its capacity for certain growth and financial opportunities, making it more suitable for small businesses or solo entrepreneurs.

Features of One Person Company 

• For Solo Entrepreneurs: The OPC improves upon the sole proprietorship firm by limiting liability, making it ideal for solo entrepreneurs. Furthermore, given that there must be a nominee, it enabled perpetual existence of the OPC. 
• Low Compliance Requirements: The Central Government has given various exemptions to OPC. These include exemption from holding the Annual General Meeting of the company. A single director can sign the financial statement and Board’s report. Additionally, the company does not need to include a Cash Flow Statement as part of its financial statement.
• Minimal Tax Advantages: The OPC, like the private limited company, has some industry-specific advantages. However, businesses must pay taxes at a flat rate on profits. Consequently, this simplifies the tax process and provides predictability for the business, making it easier for the owner to manage finances. Nevertheless, the flat rate tax may not be as advantageous for businesses with fluctuating profits or those expecting rapid growth.

A Private Limited Company (Pvt Ltd) legally registers as an entity with limited liability and a separate legal identity. As part of the business organization selection process, this structure is ideal for entrepreneurs seeking credibility, fundraising options, and liability protection. A Pvt Ltd company restricts share transfers, ensuring control remains with the owners while offering better business stability. Its structured framework makes it a preferred choice for startups and growing businesses looking for investment opportunities while maintaining operational flexibility.

• The right of shareholders to transfer shares is restricted.

• Minimum number of 2 members in company. 
• The company limits the number of shareholders to 200.
• The law prohibits inviting the public to subscribe to any shares, debentures, or any type of security.

Public Company 

In Business Organization Selection, a Public Company is a preferred entity for businesses seeking to raise capital by issuing shares to the public. As part of the selection process, a Public Company is ideal for large-scale enterprises focused on investment and expansion. It requires a minimum of seven shareholders and three directors while adhering to stricter regulatory compliance. With greater transparency and enhanced credibility, a Public Company offers businesses long-term growth opportunities and access to public funding.

Feature of a public company

• The law does not restrict shareholders’ right to transfer shares.
• Minimum 7 members 
• The law permits inviting the public to subscribe to any shares, debentures, or any type of security.