What Structure Should You Choose For Your Start-up?

Yeah. So you have finally decided to start-up your Venture. Congratulations! But have you finalised about What Structure Should You Choose For Your Start-up?

You are going to begin a new journey that requires hard work, non-stop hustle, many sleepless nights, self-motivation, consistency, a lot of risks, and sacrifices. so its important to decide about What Structure Should You Choose For Your Start-up?Startup-structure-how-to-form

And Now that you have decided to start your business, you will have to choose and decide on the legal structure of your business. This is one of the most important choices you will make when forming a new business which is also called business ownership structure or business form. When making your decision about your business structure, there are a few to choose from. However, you should have an understanding of what each term means before making the right decision for your business so that you can zero down on What Structure Should You Choose For Your Start-up?

Sole Proprietorship

It is easiest to form and gives you complete control of your business. Sole proprietorships don’t produce a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities. You are personally responsible for all the debts and liabilities of your business. Sole proprietorships can be the structure to choose for your startup low-risk businesses and owners who want to test their business idea before forming a more formal business.

Partnership

When you have 2 or more people as founders, this structure can be used. There are two common kinds of partnerships which are Registered partnerships (RP) and limited liability partnerships (LLP).

Registered partnerships are simple partnerships, which have been registered under The partnership Act, 1932. It provides a separate legal entity and provides protection to the personal assets and liabillites of the partners. The partners have limited liability and have limited control over the partnershipp, which is documented in a partnership agreement. Profits are passed through to personal tax returns and the general partner without limited liability must also pay self-employment taxes.

Limited liability partnerships are similar to limited partnerships, but give limited liability to every owner. An LLP protects each partner from debts against the partnership, they won’t be responsible for the actions of other partners.

You can also read our other article – How to Fearlessly choose an Incorporation Type for your Start-up.

One Person Company (OPC)

OPCs protect your personal liability such as your personal assets. Examples of your personal assets are your car, house, savings accounts, and so forth. Your personal assets won’t be at risk in case your OPC faces bankruptcy or lawsuits. Profits and losses are subject to corporate taxes.

OPC can be the appropriate structure to choose for your startup where the entrepreneur wants to have a separate legal existence and yet wants to preserve his personal assets from bankruptcy and wants complete control over his business. It can be sold as such, once it achieves a profitable valuation.

Private Limited Company (PLC)

A Private Limited Company (PLC) is a legal entity that’s separate from its owners. PLC can make a profit, be taxed, and can be held legally liable

PLC offer the strongest protection to its owners from personal liability, but the cost to form a PLC is higher than other structures. PLC also require more extensive record-keeping, operational processes, and reporting.

Unlike sole proprietors, partnerships, and LLCs, corporations pay income tax on their profits. In some cases, corporate profits are taxed twice. First, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns. Corporations have a completely independent life separate from its shareholders. If a shareholder leaves the company or sells his or her shares, the PLC can continue doing business relatively undisturbed.

PLC is a good structure to choose for your startup as it has an advantage when it comes to raising capital because they can raise funds through the sale of stock, which can also be a benefit in attracting employees. This is a good choice for medium or higher-risk businesses, businesses that need to raise money, and businesses that plan to “go public” or eventually be sold.

Non Profit Organisations (NGO)

Nonprofit corporations are organized to do charity, education, religious, literary, or scientific work. Because their work benefits the public, nonprofits can receive tax-exempt status, meaning they don’t pay state or federal income taxes on any profits it makes.

Nonprofits must apply to the Income Tax Department to get tax exemption u/s 80G and 12A.

Nonprofit corporations need to follow Companies Act Provisions very similarly to a regular company. They also need to follow special rules about what they do with any profits they earn. For example, they can’t distribute profits to members or political campaigns. Nonprofits are often called Section 8 Company, a reference to the section of the Companies Act 2013.

Note:

Whatever you choose, just be sure that the business structure it’s the right one for you. If you still need clarity or help in choosing your business structure, contact us, We can help you choose and set-up your dream Start-up

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