A detailed guide on the 5 Types of Business that any Startup can be

Whether you are an established Startup willing to expand, or a new Startup in making, there is this problem. You will be overwhelmed by legal information that is out there; especially when you are looking for the government support. There are n-number of requirements the government places on businesses and this can be confusing. So, to make this process simpler, we have specified the main features of each structure and analysed which types of business they suit best.

1. Single Person / Sole Proprietorship

If you want to be a single person, who owns the brand, takes it to market, don't want any registration; this one's the easiest way to go. Not many startups want to be sole proprietors, though. The reason is simple-- it is an unorganised sector.

You could have one up and running within 10 days. So, it is suitable for you if you are a small trader or a merchant. But you will have to undergo services and sales tax registrations. It is easy to start, as even if you are just selling online, you are a startup. You would only need a sales tax registration. All you need is a government registration relevant to your business.

But the flip side of the story is that it invites unlimited liability. The company will have no separate existence. Therefore, all debts can only be recovered from the sole proprietor. So, the owner has unlimited liability with regard to all the debts which means high-risk. So, if you plan on running a business that requires a loan or may end up paying penalties, fines or compensation, it’s best you look into registering an OPC.

2. OPC (One Person Company)

The cost of setting up an OPC is very small (Under 10k). An OPC is a big improvement over a sole proprietorship. You have control over the company, but a limited liability. You and the company are two separate entities. So, you are the employee, the director and the shareholder all in one.

As an OPC, you will have to pay 30% tax on profits. Further, you will have to conduct a statutory audit. You will also have to submit annual and IT returns and comply with the various requirements of the MCA

You can only make a company OPC when the revenue is less than ₹2 crores and/or the capital is less than ₹50 lakhs. In case it goes above, you'll have to bring in partners and turn to a private company. Also, until you are an OPC, your startup can't raise equity funding or offering employee stock options.

If you’re looking for a structure with the lowest tax burden, the LLP does offer some better benefits.

3. Partnership

A General Partnership is a business structure in which two or more individuals manage and operate a business. They have a partnership deed that lists out the terms and objectives. Registration is optional in the case of General Partnerships. In a partnership, partners have unlimited liability, which means they are personally liable for the debts of the business. So, it is a viable option for some, such as home businesses that are unlikely to take on any debt.

If you choose not to register your partnership firm, all you need to get started is a partnership deed. It can be ready in just two to four working days. Even registration, for that matter, can be completed in a day once you have the appointment with the registrar.

However, this structure has lost its relevance since the introduction of the LLP.

4. LLP (Limited Liability Partnership)

Most of the startups today are open to LLPs. The reason is simple-- it gives you the best of the benefits of partnership and a private company. It is cheaper than setting a Private Limited Company and requires fewer compliances. Further, its main improvement over General Partnership is that it limits the liabilities of its partners to their contributions to the business. It also offers each partner protection from negligence, misdeeds or incompetence of the other partners.

The cost of starting up an LLP is less than 5k. You don't have to show a paid-up capital and there are no compliance costs. Then, there is no cap over the number of partners. If you’re building a large advertising agency, for example, you need not worry about the number of partners.

The MCA, too, has made given some concessions to the LLP. For example, you only need to perform an audit, if your turnover is greater than Rs. 40 lakhs or paid-up capital is more than Rs. 25 lakhs. Furthermore, whereas all structural changes need to be communicated to the RoC in the case of private limited companies, the requirement is minimal for LLPs.

Also, if your business is earning over Rs. 1 crore in profits, the LLP offers tax benefits. The tax surcharge that applies to companies with profits over Rs 1 crore doesn’t apply to LLPs, nor does Dividend Distribution Tax. Loans to partners are also not taxable as income.

5. Private limited company

Start-ups and growing companies pick this popular business structure because it allows outside funding to be raised easily, limits the liabilities of its shareholders and enables them to offer employee stock options to attract top talent. As these entities must hold board meetings and file annual returns with the Ministry of Corporate Affairs (MCA), they tend to be viewed with more credibility than an LLP or General Partnership.

The cost of establishing a Private limited company is less than 20k (including the compliance cost and professional fee). Most Startups or fast-growing businesses that will require funding from venture capitalists (VCs) need to register as private limited companies. This is because only private limited companies can make them shareholders and offer them a seat on the board of directors. LLPs would require investors to be partners and OPCs cannot accommodate additional directors.

You can also move up the hierarchy. Like, establish as an OPC and then convert to LLP or Private Company. This will save some costs, but the three years' benefit for every startup is from the day of its inception.

You can comment below for any queries.

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