My Mothers Tip for Choosing a Business Entity!

When I was young, My Mom picked my Christmas Suites.  When I was 15 years old, I chose to do it myself; My Mom was happy; She gave me some Cash and a sensible tip, She said  ”œChoose what suits you, Don”™t choose something, just because one of your favourite friend is picking it”. This tip is equally good for choosing a business entity. Many a time we end up choosing a business entity simply because a everybody does it; little do we realise that this is more or less a irrevocable decision and needs a strong thought and professional guidance. Let”™s flush this out!

Though I religiously struck to my mom”™s instructions; My Choice of the dress was based on the following considerations

  1. Do I have enough cash?
  2. Will I be able to get my Dress stitched before Christmas? How long is it going to take?
  3. How long do I intend to use the Dress?
  4. Does it have a cost of maintenance?
  5. Who”™s my co-shopper? Does he like/approve my choice?

Choosing a Business Entity is more or less similar to buying a dress. You have to make a choice between four types of Business forms; Proprietorship, General Partnership, Limited Liability Company and Private Limited Company. The first two are the ”œLight weights”. They are easy to incorporate and easy to shut down, cost of incorporating and maintenance are low. The last two are ”œHeavy weights”, they have lot more procedures and have a higher cost of incorporation and maintenance.

Let”™s ask the same Questions again, but this time, to choose your entity:

1. Do I have enough cash?

If you are just out of college and have decided to start your venture alone with just about nothing in hand, choose a Sole Proprietorship concern. This Business Form needs no registration and hence can be started with zero cash. All you will need is a Bank Account to get started ( A current account in the name of your business, not your regular SB Account ). If you are not alone and there are more people joining you in the venture, choose a General Partnership. Drafting and stamping a General Partnership will cost you less that a 1000 bucks and is less complicated. ( For incorporating a PLC with a authorised capital of Rs. 1 Lakh, Your CA could charge you anywhere between Rs. 25, 000 – Rs. 35,000 )

2. How long is it going to take?

Floating a Sole Proprietorship (you alone) or a General Partnership (Less than 10 of you) is instant, on the other hand, incorporating a Limited Liability Partnership or a Private Limited Company will take 60-90 days. So, If you already have a High Value order and the customer is not ready to wait till you form an entity, it makes sense to get started with a Proprietorship or General Partnership and later think about converting it into a better business structure.

3. How long will the business go on?

If you intend to do a seasonal business, like selling crackers for diwali or cakes for Christmas, choose the ”œLight weights”, because you can close them easily. A proprietorship or a Partnership at will is a ideal fit. The ”œ Heavy weights” ( LLP, PLC ) have a lot of associated procedures on shutting down and are hence not advised for short Ventures.

4. What is the cost of Maintenance?

Every Business has a Maintenance Cost in the form of Taxes and Statutory Compliances. A PLC has to be audited mandatorily irrespective of the fact whether you do business or not and hence have a high maintenance cost. ( Your CA could charge you anywhere between 25-30K every year to complete the Tax and Statutory Audits ). The other forms have to be audited on satisfying a few criteria, however you will have a cost of filing monthly and Annual Tax Reports.  Proprietorship is generally the lowest on maintenance.

5. Who is my co-funder? (Bank, VC, Angel)

If your project is self-funded, Get started with a ”œLight Weight”, on the other hand if your project is funded by Banks or VC”™s, they would prefer the PLC because it give them an option to participate passively and also because your financial status is transparent ( because of mandatory audits and filing of public documents ), so if you intend to raise funds from non-personal sources; you will do well to form a LLP or a PLC.

Eventually I realised that I never picked the best Dress, rather I picked what I considered good for me. Honestly, Choosing the Right Business Entity is the same. ”œThere is no One Best Business Form, rather a form which is good for you” Choosing the Business Form will depend on various permutations and combinations which will vary with each individual entrepreneur. Do not decide your Business Structure based on the Tax Rates; (as it is generally done), Remember, every form of business has its own Tax Advantages outside the purview of the Tax Rates. So, Ask yourself the questions above and choose what fits you the most, Put the ”œBusiness First”

The presentation below could further help you:

Tip: Its recommended to call us before you freeze your structure. We will help! Good Luck J

47 Comments
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  2. Author

    […] The most easily manageable form of entity is called a sole proprietorship. This form of ownership requires NO special communication or filings to the Registrar of Companies or Income Tax. As a sole proprietor, you have an exemption to Tax Registrations and Mandatory audit till your revenues cross some specified limits. ( Read more on this ) […]

  3. Author

    […] There is no best fitting Legal Entity. ( My mothers Tip on Choosing the right business entity […]

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