Which is the most suitable form of business for you?

Written by on 5th September 2019

Various forms of business are in existence at present. Which is ideal for you? Some basic facts need to be known before launching your own venture

 Sole proprietorship

The oldest form of business is sole proprietorship, which has been in existence since time immemorial. As only one owner is involved, starting and operating the business is easy. Moreover, there will be no management issues. There is no need to share the profit too.

Sole proprietorship is suitable for small and medium businesses. Only few laws are applicable and there are many tax benefits also.

However, sole proprietorship has many demerits. The main one is that it can attract unlimited liability. The owner cannot make the business grow beyond a point as only one person is involved.

The owner’s property may be attached in case the business fails and there are losses. In other words, the business is connected to the proprietor’s personal assets. Putting it another way, the assets of the business are limited.

Another disadvantage is that the government considers sole proprietorship as an individual and the tax rate will be high. Moreover, the acceptability for sole proprietorship is not very high in other countries.

A major drawback of sole proprietorship is that if the owners passes away or is unable to carry out the business, there would be no one else to shoulder the responsibilities. In fact, in case of death of the proprietor, the heirs may need to present a legal heirship certificate to continue the business. To avoid this situation, the sole proprietor should prepare a will.

 Partnership

Another old form of business, partnership also is easy to start. When two persons are involved, a higher capital is available. In addition, better decision-making is possible. The workload of each partner will be lesser than a sole proprietor. There is also reduced risk in a partnership business. More brains come into play in a partnership. There is more innovation as a result of this. Time is saved as work is shared. The decision-making is of a higher degree of efficiency. Partnership business is a good option if there is harmony between partners.

However, partnership business has many demerits like sole proprietorship. One of the biggest drawbacks of partnership business is that no business secret can be kept. In case one partner leaves, the business may be affected. There is unlimited liability in partnership ventures also. Each of the partners will not have contacts with all the clients.

If a conflict develops between the partners, the business may suffer. A portion of the assets is likely to be lost if one partner leaves the venture or dies.

To tackle such issues, the Government of India has introduced a new partnership method called ‘Limited Liability Partnership’.

 Limited Liability Partnership  

Under this form of business, only the money invested by the partners would be affected. Their other assets will not be harmed in case of a setback. That indeed is the biggest benefit of Limited Liability Partnership (LLP).

LLP is suitable for small businesses, startups and other ventures that are uncertain about their success. The government of India introduced this business form as it is more secure than an ordinary partnership.

An advantage of LLP is that no compulsory audit is required. Similarly, apart from the money invested in the particular business, the other assets of the partners will not be affected.

Another benefit of LLP is that there are fewer complications. Moreover, there would be perpetual succession. Each LLP is eligible for a CIBIL score. Closing the business is easy too.

However, there are some demerits for LLP firms. Even though easy to register, LLP faces the issue of limited capital. One disadvantage is that the penalty for not submitting accounts is high compared to other companies. Similarly, LLP companies cannot go in for an IPO. Other drawbacks include neither foreign capital nor private equity can be accepted.

Difficulties may be posed by the rule that transfer of ownership in LLP companies can be done only with the consent of all partners. There are more demerits. All states in India have not recognized LLP and this type of business is unknown to international operators. This makes attracting angel funds from abroad an uphill task.


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