Which type of business to set up?

It is a common question asked by new entrepreneurs. They ask their mentor, teacher, their peers, friends, professionals or even google on which kind of structure should they set up? Should they go for proprietorship firm or partnership firm? Should they get the firm registered? From where to get the same registered? Should they go for formation of Limited Liability Partnership or a private limited company? And the questions continue so on. So, let us clear all your doubts on this topic at once. Hereunder, some information is shared on every kind of structure along with its pros & cons and compliances of law that are required to be done.

Before starting, please note that labor law compliances are common for every type of organization. So once a business employees 10 or more employees, most of the Acts such as EPF, ESIC, and Factories Act etc. become applicable. Moreover, Prevention of Sexual Harassment of Women at Workplace (POSH) Act is applicable on all types of structures. It does not matter whether 10 employees are there or 1.

  1. Proprietorship Firm: This is the simplest form of structure. If the entrepreneur has to work alone without any supporting hand, then this form is best. However, it is better to take few registrations such as MSME Registration, Shops & Establishment Registration, Food License (in case if food or restaurant related work is involved) and Trademark Registration (if the proprietor wants to set-up his business or any product as a brand).
  • Partnership Firm: It is of course one the oldest forms wherein two or more than two people are involved for doing business. Partnership firm may or may not be registered however it is better to get the registration done. Registration will ensure that the partnership gets identity in the eyes of law. However, one minus point of this structure and the above one is that in case of payment of debts of business, the personal property of partners can also be used. MSME Registration should be done of a partnership firm too.
  • Limited Liability Partnership (LLP): It is governed by Limited Liability Partnership Act, 2008. LLP is a corporate legal entity, meaning thereby its partners are not liable personally if any debt of LLP has to be paid. This is the major difference between a partnership firm and an LLP. Also, there is provision to appoint any 2 or all the partners as designated partners. While on one hand, in case of partnership firm, there is concept of sleeping partner, there is no such concept here. However, partners may choose any 2 amongst themselves or may appoint all of them as DP. DP shall be responsible for overall management of the LLP. Form 11 has to be filed every year before 31st May and Form 8 (Balance Sheet) has to be filed before 30th October. Audit has to be done only if annual turnover exceeds Rs. 40 lakh or if contribution exceeds Rs. 25 lakh.
  • Company: It is advisable to choose this structure only once the business and brand is established because there are a horde of compliances associated with company. We will share the same in detail in next part of this Article. In fact, if Board to change main objects or introduce new directors or increase capital, then also a legal procedure has to be followed. Registrar of Companies is the authority to which all filings are done. Audit of Balance Sheet has to be done by a Chartered Accountant every year.

Government is providing various benefits to MSMEs including soft loans. There dues are also to be paid within 45 days. Considering this, it is better to get your organization registered if it falls under the category.

Bhavya Taneja
Bhavya Taneja
Bhavya Taneja is a Practicing Company Secretary, speaker on various academic and non-academic topics and a writer. She has an experience of 8 years as a professional and 5 years as a faculty of Economics. She has authored a book of quotes called 'Crisp Talkings' and is actively involved in social welfare activities as well.

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