How to Choose the Best-Suited Business Structure for Startups?

By Trademark Bazaar - 2nd January 2018

How to Choose the Best-Suited Business Structure for Startups?

Entrepreneurs are very often skeptic about the type of business they should choose for their startup.  Choosing a perfect business structure for the startup is one of the most crucial decisions as to a very large extent the success of the business depends on this decision.  In India there are multiple options available with an entrepreneur to choose from. Following are the various forms business vehicles that can be chosen-

Sole proprietorship- This is the simplest business form under which one can operate a business. A sole person owns the business and is personally responsible for its debts. However, the legal identity of this form company does not exist. 

One Person Company- This form of company is most suitable for a sole entrepreneur looking forward to starting a company. The benefit of One Person Company over sole proprietorship is that the one person company provides a legal identity to the firm. Thus the liability of the sole member is limited to his share only unlike sole proprietorship.

Private Limited Company- In today’s era, this form of the company is the most preferred form of business. Minimum two persons are required to incorporate a private limited company. The various benefits associated with the private limited company are the limited liability of members, raising capital and separate legal entity etc.

Partnership – In case two or more persons desire to manage and operate the business together then they can opt for this type of business. In this form of business, both owners are equally and personally liable for the debts of the business. The various benefits associated with partnerships are that it is easy to form, there is no minimum capital requirement and only two people are needed to incorporate the partnership. 

Limited Liability Partnership- LLP is a form of partnership having some features of the company. The main benefit of forming limited liability partnership over partnership is that the liability of the members of LLP is limited to their share only unlike partnership firm.

These are the brief description of the various options available for company structure of a startup. Now let us see the factors which should be considered before selecting the most suitable type of business vehicle-   

1. Legal Identity- The first factor that must be considered by every startup is that whether he desires to start his venture with a legal identity or not. In case he does not want a legal identity then he can opt for sole proprietorship otherwise the option of one person company or private limited company can be chosen.

2. Liability - When an entrepreneur looks forward to minimizing his personal liability he can generally not consider sole proprietorships and partnerships firms right away because there is lack of liability protection in these two forms. The options of one person company, private limited company can be considered in this case.

3. Number of persons- The number of members of company shall be considered before starting a adequate form of company.

4. Ownership and control - The forms of Sole Proprietorship and partnership firms includes only one or maximum two number.  This limits the number or type of people who can invest in the business. If you’re seeking a large number of investors or international investors, you may opt for LLP and Company.

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