Choosing a correct business entity is an important decision to make. The business structure you choose will influence factors such as business operating regulations, tax and reporting requirements, licences, permits and start up expenses. Also remember that your business isn’t necessarily locked into one particular structure, it can be changed as your startup evolves.
Sole proprietorship is an entity owned by a single individual. The main disadvantage with this form of a legal structure is that there is no legal distinction between the proprietor’s personal and business assets. In case the business goes bankrupt, almost all personal assets of a sole proprietor can be attached to pay for liabilities of the business.
Partnership Firm is an entity where two or more [maximum 10 (banking) /20 (others)] individuals coming together to start a business venture with pre-decided share of capital and decision-making powers. One important feature of a partnership is that any liabilities incurred by a partner during the course of business are not limited to his/her share in the partnership firm. Other partners may end up having to end up paying for one partner’s mistakes.
Company is a legal entity separate from its promoters and shareholders. The liability of the shareholders restricted to their share in the equity of the company. A company also has to comply with the highest number of statutory compliances thereby increasing the compliance cost. There are two basic different types – public, private – these are classified by freedom on transfer of shareholding.
Limited Liability Partnership (LLP) this is a fusion between a partnership firm and a company. It combines the advantages of liability that is limited to a partner’s share in business with lower compliance costs and flexibility of working of a partnership firm.
Joint Venture (JV) is a new entity created by two or more existing commercial entities, for a specific purpose for finite time, with both existing ventures exercising control over the JV. This is more like a temporary partnership.
Society / Trust / Section 8 Company are entities registered to carry out charitable activities. Typically these are managed by a central council/board. A host of tax exemptions are available for these kinds of entities, subject to certain conditions.