A Complete Guide to Choosing Your Business Legal Structure -2021

Starting a Business or a company can be overwhelming as an entrepreneur. There is much to consider, such as choosing a legal structure (LLP/ Sole Proprietorship?), determining your industry niche, and finding adequate sources for funding.

Every business needs two professionals early on: An accountant & a lawyer. An accountant helps review your numbers, prepares all the necessary tax returns and compliance filings. While hiring a lawyer early on may not be apparent, however a good business lawyer will provide crucial assistance in almost every aspect of your business, from copyrights to trademark advice to formal business incorporation, lawsuits, and liability.

At Legalo, we help you connect with the best legal & financial experts to deliver efficient and cost-effective solutions to your business and personal needs.

In this article, we look at various business structures and evaluate each of these structures’ pros and cons. It’s crucial to consider them carefully, as it will affect your businesses’ tax benefits, legal liability, and capital access.

a) Sole Proprietorship

b) Partnership Firms

c) Private Limited Company

e) Nonprofit

Sole Proprietorship

Sole Proprietorship is the business owned and run by an individual owner. This is one of the simplest and most common form of business ownership out there. Individual freelancers or entities are often classified as sole proprietorships.

It’s important to note that proprietorships are NOT incorporated entities. This means there is no distinction between the proprietor and the business, therefore the business does not provide any protection from liability in the event of company being sued.

Let’s evaluate the pros and Cons,

Pros:

Cons:

Partnership Firm

There are two types of Partnership Firms: General Partnership and Limited Liability partnership. Partnership firms can have two or more owners/Partners.

General Partnership does not require formal incorporation of the business, it can be a verbal agreement or can be implied between the owners based on their percentage initial investment into the company. General partnerships do not offer protection from the liability arising from the company. Owners are potentially responsible for any business debts.

Limited liability partnerships require filing for a certificate of partnership with the state and incorporating the company formally. Limited liability partnership limits the liability of business/company debts on the owners up to their portion of ownership or investment.

Pros:

Cons:

Private Limited Company

This is one of the most popular forms of business registrations in India.

What makes it popular? Well, the ability to raise equity funds, Limited liability protection to shareholders, and separate legal entity status are reasons for this structure to be the most recommended type of business entity.

A Private limited company requires formal incorporation from its shareholders, and the liability of the members is limited to the number of shares held by them.

Pros:

Cons:

Nonprofit Company:

A nonprofit organisation is created with the purpose of carrying out a scientific, charitable, literary, or educational benefit. The nonprofit organisation is exempt from paying taxes to central and state governments. It can be formed as a corporation or as an unincorporated business form.

Pros:

Cons:

Changing Entities:

If your business outgrows its original entity, there are various options available to transform your business’s registration into the newly-desired entity.

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