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Selection of Business Entity for your Start up

Selection of Business Entity for your Start up

Planning to start a business? The selection of business entity for your business start up is a very important decision. The selection of business entity format effects various factors in your business i.e.

  • Cost of setting up
  • Ease of doing business
  • Cost of Regulatory Compliance
  • Entrepreneur’s Focus
  • Government Interface and regulation
  • Ease of closing business

 

Following are the different types of business entity you can choose for starting up your business

Type of Business Entity Advantages Challenges Registrations and Government compliances
Sole Proprietorship – Easy to incorporate

– Only one person required to incorporate

– Individual slab wise taxation in Income Tax

– Minimum government compliance

– Ideal for pure business startup

– Easy to close down

– Partner’s cannot be added maintaining the same status

– Fund raising by external investor is not possible

– Unlimited Liability

Registrations

– GST

– Shop Act

– MSME

 

Compliances

– GST Filing

– Income Tax Filing

Partnership – Easy to incorporate

– Minimum 2 persons are required

– Ideal for family business

– Minimum government compliances

– Easy to close down

– Not considered as separate legal entity

– It is only separate taxable entity in income tax and GST

– External investors avoid this type of business entity

– Income Tax rate higher than Pvt LTd

– Unlimited Liability

– Income tax rate higher than Pvt Ltd (30%)

Registrations

– Registration with registrar of firms

– GST

– Shop Act

– MSME

 

Compliances

– GST Filing

– Income Tax Filing

 

Limited Liability Partnership – Slightly more time and cost required to incorporate

– Minimum 2 persons required

– Tax slab same as partnership firm

– Ideal for family business

– Easy to close down

– Benefit of limited liability

– Considered as separate legal entity

– Income tax rate higher than Pvt Ltd

– Higher government compliances with daily late fees in case of delay

Registrations

– Registration with ROC

– GST

– Shop Act

– MSME

 

Compliances

– GST Filing

– Income Tax Filing

– ROC Filing

Private Limited Company – Ideal for business with potential for external investment

– Benefit of limited liability

– Considered as separate legal entity

– Income tax rate @ 25%

– Costly to  incorporate and manage

– Various government regulation effecting day to day business

– Higher compliances with daily late fees and heavy penalties

– Difficult to close down

Registrations

– Registration with ROC

– GST

– Shop Act

– MSME

 

Compliances

– GST Filing

– Income Tax Filing

– ROC Filing

 

The above pros and cons should be examined before selection of business entity for stating any business. For any business startup, the entrepreneur needs to focus on his business first. The selection of business entity may impact your focus. It may decide whether you want to focus on business or on compliance.

 

Amit Mundhra FCA

The author is a Fellow member of ICAI and in case of any queries he may be contact at amit.mundhra@gmail.com

 

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