Well, it is confusing until you know the true meaning of these different business types and understand their suitability for your business. However, the decision as to which business type is right for you is not easy Don’t worry; I will make it simple and easy for you. If you are starting a very small business for family income where only you are going to work, then consider setting up a proprietorship. The name of a proprietorship does not end with Limited or LLP as a proprietorship is not an incorporated form of business and in fact, is a significantly less regulated one.
The proprietorship is very well suitable for a boutique, a coaching center, a food joint, or for freelancers. The immediate advantages are easy formation and minimum compliance; you start it and then take other registrations like GST as per your requirement. However, disadvantages are very significant as you always have less access to capital; people perceive proprietorship as a tiny business. The proprietorship business is a single person entity where the proprietor alone is entitled to the profits and responsibility for the liabilities of the firm.
If you think that your business does not pose any serious risk, and the scale of operations is small, say a profit of Rs 50K per month, then the proprietorship is the best choice. We have the most reasonable pricing to help you set up a proprietorship business.
We just discussed the proprietorship business type that is a great way to do business for a single owner. However, if there are similar circumstances except that the number of owners is more than one, also known as partners, then go for a partnership business. A partnership business brings the same kind of simplicity and disadvantages; the partners share the risk and reward as a proprietor. With the introduction of Limited Liability Partnership (LLP), people have started making LLP instead of a traditional partnership.
Well, we discussed two traditional business types that are quite common and are mostly adopted by family-run businesses or tiny budget startups. Before I take you to the modern business types, let’s understand the difference between incorporated or unincorporated business. A business that you can start without any specific government approval is generally known as an unincorporated entity, such as a proprietorship, partnership, and HUF.
As you can see to create a proprietorship, you do not need any specific registration or license. Similarly, a partnership is also an example of an unincorporated business, that you can start just by entering into a partnership agreement. As such, no prior registration of the partnership firm is necessary; however, there is a provision of registering it in the Partnership Act.
The incorporated business entities are the business types that come into existence after its registration under a specific statute such as an LLP or a Private Limited Company. An LLP or a Company comes into existence only after the registrar of companies issues a Certificate of Incorporation. The incorporation of these entities is done based on the legal provisions as provided under the LLP Act or the Companies Act.
Finally, now we have to understand the difference between an LLP and a company and what you should choose as a business type. Let us first understand the similarities between an LLP and a Private Limited Company. Both of them are incorporated form of business and have a solid legal background, where the details can be verified on the website of the Ministry of Corporate Affairs.
The LLP, as well as the company structures, ensure limited liability to the partners and the shareholder. Limited Liability implies that the owners or shareholders are not personally liable to pay debts of the business. They are only responsible for the unpaid shares of the capital.
Both the forms of the business are prevalent in India; we recommend the LLP form of business to small service providers, consultants, freelancers, and professional service providers who intend to avail of benefits associated with incorporated units. The compliance reporting requirement is relatively less if you compare it with a company. We do not see easy capital raising capabilities in the case of LLP hence do not recommend the LLP Form of business to an expanding business or startups that have a great idea and intend to raise funding in the future.
Most people compare the LLP and Company on the compliance and tax aspects. However, I would be dealing with these here. In brief, I recommend you to refer to our detailed comparison between LLP and a Private Limited Company.
Both of the business types have to maintain a physical registered address, Install a business nameplate, maintain a bank account, do regular accounting. The Income-tax rate for an LLP is 30% on the profits of the LLP, whereas for a company, the Income-tax rate varies from 15% to 30% based on the type of company. For newly incorporated manufacturing companies after 1st October 2019, the Income-tax rate is just 15% and for any other company that is not availing any additional incentive or exemption the income tax rate is 22%. You can see that the Income Tax Rate is higher in the case of the LLP in comparison to a company.
Every year a company must get its books audited by a chartered accountant that is known as an annual statutory audit. However, in the case of the LLP, the statutory audit is not required if the capital invested is up to 25 Lakhs, and the turnover is less than 40 lakhs. The provisions of income tax audit apply in the same manner on both and are required when the turnover exceeds Rs. one crore.
The LLP and Company have to file the annual ROC Returns before their respective due dates. The yearly ROC Returns of the LLP are relatively easy in comparison to the companies. In the annual roc returns of the LLP or the company, the details of any changes in the management and shareholding are reported along with the financial statement of the business.
We at setindiabiz provide end to end roc return services for meeting all the compliance for your business. I tried to put across all the primary considerations that you should analyze at the time of starting a business. We understand that you may have several questions on the best business type for your startup. We are available to answer them.