The decision to start a new business is actually a good idea. Actually, most of the youngsters of the present era are eager to start their own businesses. After all the difficult conversations, approaches and new ideas, business plans, and so on, the very next question that rises is – what type of entity should we pick to kick-start our business?
Even the Business registration process in India has been simplified as it can be done online from anywhere, but selecting the type of entity is the biggest task.
Most of the established start-ups are registered as private limited companies. The question is – What is so special about a private limited setup? and why do most of the founders prefer Private Limited companies? Why are other types of business setups, such as a partnership firm, One Person Company (OPC), Limited Liability Partnership (LLP), or a sole proprietorship not registered?
Key Takeaways
- The decision to start a new business is actually a good idea.
- Through this article, you can learn about the different types of company registration which is suited for the present era and their pros and cons.
- Being a Public Limited Company, it can be listed on a stock exchange where the shareholders can freely commerce the company’s shares.
- The registration of a partnership firm is not mandatory.
- Choose the types of company that suit your business, as it can influence people’s perception of your business and can create a big effect on your legal exposure and finance resources.
Pros of Business Registration
1. Separate legal entity
One of the most significant advantages of company incorporation is the separate legal entity from its directors. A sole trader is the same legal entity as the company, so if something goes wrong or the business owns the money, the owner is personally liable. With a limited company, the risk remains with the business, and the directors are generally not liable. They do, however, bear some responsibility for the business.
2. Credibility
Additionally, registering your company can aid in building brand recognition. You will gain the benefit of leaving a better impression on prospective business partners or investors once the company registration process is complete. As a result, your profit margin may improve and you’ll have more money to invest in marketing initiatives, which in turn will assist your company’s credibility.
3. Tax benefits
Another reason that businesses often choose to register as corporations are to save money on company taxes. Only salaries/payroll and additional compensation, such as holiday bonuses, are taxed in registered companies. Furthermore, if your company is registered, you can deduct insurance premiums and extra employee benefits, such as subsidized meals or activities, from your taxes.
4. Limited liability
The legal structure for a company or organization in which profit loss does not exceed the amount invested in a registered business is described as limited liability. This means that as a registered company owner, you are not liable for any debts or other liabilities. Depending on the size of your company, all business owners or partners aren’t considered liable for any personal liabilities that may arise.
Cons of Business Registration
1) Lots of Paperwork
It takes a lot of time and effort to register your company as a corporation. All business and financial activities, such as tax returns, board meetings, invoices, and accounting records, must be documented for registered companies. Check again to make sure your company is adhering to all municipal and state bookkeeping laws because each state has its own requirements.
2) Taxes are Doubled
The decision to register your business has an effect on your annual tax returns. In this situation, “double taxation” occurs, which means you must file not one, but two tax returns: one for personal income tax and one for corporation tax. There are also extra fees associated with registering your company and filing both returns, such as legal fees and account fees.
3) Restructuring
If you opt to register your company, you should think about potentially restructuring it. This can include everything from opening new company bank accounts and operations to introducing new business ownership or management to shareholders. When you decide to become a corporation, you must also observe the regulations of the state in which you are registering your business, so check your state regulations before deciding to register your business.
Pros & Cons of Different Types of Companies in India
Through this article, you can learn about the different types of company registration which is suited for the present era and their pros and cons. Following are the main types of business registrations done in India
1) One-Person Company
This is a newly introduced type of company in the year 2013. Registering a One Person Company is only allowed for a resident of India. No foreigner can register this type of business. OPC was mainly introduced to promote individual entrepreneurs and it cannot be registered with partners. It is a type of private company as it can feature as a separate legal entity and the liability of the entrepreneur of OPC is limited.
2) Sole Proprietorship
A is a type of business entity in which a single individual manages the whole business organization. That sole person will be the sole recipient of all profits and all losses of the business. The liability is unlimited in this business and it is suitable where the capital required is limited and the involvement of risk is less or not huge. The business registration of this type of company is done with fewer legal formalities.
3) Public Limited Company
This type of Company should have a minimum of 3 directors, a minimum of 7 shareholders, and can hold an unlimited number of shareholders. Being a Public Limited Company, it can be listed on a stock exchange where the shareholders can freely commerce the company’s shares. The existence of this type of entity is not affected by the retirement, death, or collapse of its shareholders. Registering such type of business can be difficult and time-consuming.
4) Private Limited Company
A Private Limited Company can have a minimum of 2 to a maximum of 15 directors. It is an independent legal entity and held small business entity with a minimum of 1 to a maximum of 50 shareholders. Private Limited Companies cannot trade their shares publicly like it is done in Public Limited Companies.
5) Joint-Venture Company
As the name suggests, a Joint-Venture Company is a new business entity developed through a partnership between Indian and foreign investors. Here, in that type of company, the partners share the profits, losses, operation expenses, and management responsibilities jointly.
The advantages of joint venture companies are that the foreign company can use the contact network, marketing strategies, distribution, and the obtainable fund resources of the Indian partner. A joint venture also provides the partners to jointly handle the risks involved in the business and by sharing the liabilities they can also limit their individual exposure.
6) Partnership Firm
Partnership Firm is a type of Joint-Venture Company where the relationship between the partners is with an agreement on sharing the profits of the business and also the responsibilities of their business. The owners of a partnership firm are separately known as partners and jointly known as a firm. A minimum of two and a maximum number of 10 partners are required to start a Partnership firm. The registration of a partnership firm is not mandatory.
Conclusion
Choose the types of company that suit your business, as it can influence people’s perception of your business and can create a big effect on your legal exposure and finance resources.
Below are a few points that can help you to make the decision to pick an entity, just have a read:
- To start with a new business, it is always best to register as Sole props and general partnerships, and as your business grows and develops, and after gaining more income, consider registering your business as an LLC or corp.
- It is also important to consider all the pros and cons of each business registration process in terms of tax treatment, legal protection, financial options, and government requirements.
- Consult an accountant or business lawyer to get guidance and help register your business.
- If you have a definite business plan and vision and are waiting for funding, then registering as a private limited company in India or LLP can be the best option, as you can add shareholders based on how much money they wish to invest upfront.
- To experiment with a new business or if you are unsure of how the business will take off then it is better to register as an LLP or partnership firm.
FAQs on Company Registration
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