22,May 21

How to select right business structure?

An NRI contemplating to start a new business venture in India, may house the business in sole Proprietorships, Partnerships, LLPs, Private Limited Companies, etc. The key guiding factors that would need to be evaluated prior to deciding on the business structure would be follows:-

1. Nature of Business - The primary factor influencing the type of business structure would be the nature of business propose to operate. Certain businesses are not allowed to operate in a Partnership Firm and Proprietorship model for an NRI.

2. Involvement of Business Partners - The primary consideration is whether the business would require the involvement of other parties / partners in terms of financial or technical contributions to the business. In case if such involvement is not required, sole proprietorships, one person companies can be considered.

3. Ease of formation and administration- Refers to the procedures involved in setting up as well as the annual compliances of a business entity in India. Sole proprietorship business and partnership firms are the simplest form of business structure when it comes to setting up whereas, setting up a Company and LLPs would involve more procedures and approvals. Also, the annual compliances vary from one entity to the other depending upon the governing law. For eg. Companies usually have higher compliance requirements as compared to other structures.

4.Control- Indicates the degree of control that is required to be exercised on the day to day business operations. In case of sole proprietorships, ownership and management is one and the same, whereas in partnership firms such liability is shared among partners and in case of companies, the ownership and management (vested with board of directors) are separated.

5. Liability- Indicates how far the promoter would be personally responsible for the liabilities of the business. In case of sole proprietorships / firms, the promoters are personally liable for the debts of the business whereas such liability is limited in the case of a private company or LLP’s.

6. Tax Rates- Taxes represent a source of fund outflow for businesses. The local tax laws tax each entity structure differently. For e.g. In the case of proprietorships, the income is taxed as per slab rates applicable to individuals, whereas in case of Companies and Firms, a flat rate is applicable.

The NRI would be required to evaluate each factor prior to deciding on a business structure for a proposed project. 

Disclaimer: The views / the analysis contained therein do not constitute a legal opinion and is not intended to be an advice. Readers of this document are advised to seek their own professional advice before taking any course of action or decision, based on this document.

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