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BusinessStructureSelectionGuide

BusinessStructureSelectionGuide
INTRODUCTION
Selectionoftheappropriateorganizationstructureforyourbusinessalwaysdependsonmanyfactors suchasthetypeofbusiness,thenumberofpersonsinvolved,whetheryouwantfullcontrolorpreferto shareresponsibilities,capitalrequirements,taxregulationsandbusinessliability. Unlessyourbusinessstructureisverysimple,consultCompaniesInnaboutthelegalaspectsofyour plansandaboutfinancialimplications. TherearethreeCorporateBusinessFormsavailabletoentrepreneursinIndia:

PrivateLimitedCompanies PublicLimitedCompanies LimitedLiabilityPartnerships

PRIVATECOMPANIES
A Private Limited Company is formed with minimum of 2 members and 2 Directors. Maxi mumnumberofmembersinaprivatecompany is restricted to 50. There are restrictions for availing loans and deposits from people other than members and Directors. The name of the companyshallendwiththewordsPrivateLim ited.

PRIVATE COMPANY
Members - Minimum 2 & Maximum 50 Directors - Minimum 2 Name - End with Private Limited Compliances - Minimum

PUBLIC COMPANY
Members - Minimum 7 & Maximum No limit Directors - Minimum 7 & Maximum 12 Name - End with Limited Compliances - All provision of the Act

PUBLICCOMPANY
Public companyisacompanywhichisnotaprivate company. The minimum number of shareholders ands directors required for registering a Public Companyis7and3respectively.Subjecttocompli ance of the Companies Act, there is no restriction as to number of members, issue and transfer of shares and acceptance of deposits. This type of company can not invite public to subscribe shares in the capital of the company. Also acceptance of deposit from the public also strictly regulated. Usually public companies are formed by large business houses. A private company can be con vertedintoapubliccompany.

LIMITEDLIABILITYPARTNERSHIP(LLP)
LLP isanew corporate businessform in India.A Limited Liability Partnershipcombines theadvan tagesofboththeCompanyandPartnershipintoa single form of organization. This business form is goingtobethefutureorganizationstructureavail abletosmallbusiness,startupsandserviceindus tries. AnLLPcanbeformedbytwopartnersand2des ignated partners. There is no restriction for maxi mumnumberofpartnersinLLP

LLP
Partners - Min 2 & Max No Limit Des. Partners - Min 2 & Max No Limit Name - End with LLP Compliances - Least

CORPORATE BUSINESS STRUCTURE PROCESS


Whenmakingadecisionaboutthetypeofbusinesstoform,thereareseveralothercriteriayou needtoevaluate.Analysethefollowingpointscarefullybeforetakingproperdecision.

Legalliability
Towhatextentdoesthebusinessownerneedstobe insulatedfromlegalliability?Majorityofpeopleap proachingCompaniesInnforregistrationofbusiness organistaionprefercorporatestructureofbusinessas liability of members is limited to the share/ contributiontothecompany/LLP.

Interestedtoprotectyourper sonalAssets?
Ifyes,goforCompany/LLPformofbusi nessstructure

PrivateLimited/PublicLimited
Liability of shareholders is limited to the value of shares taken in the company. Thereforethepersonalassetsofsharehold ersarefreefromtheliabilitiesofthecom pany.

LLP
LiabilityofpartnersofaLLPislimitedtohis contribution. Their personal assets are free from the liabilities of LLP. However, if LLP has committed a fraud or a willful miscon duct,theliabilityofLLPandpartnerscommit tedfraudbecomeunlimited.

PerpetualSuccession
BusinessDictionarydefinesperpetualsuccessionascontinuationofanincorporatedfirmsex istence,unaffectedbythedeathofanyofitsowner(s)orthetransferofitssharestoanewen tityorperson.Thisisthemainfeatureofacorporatebusinessformwhetheritisacompanyor LLP.Irrespectiveifthechangeinthemembers,company/LLPwillcontinue. Situation Deathofashare holder/partner PrivateLimited/PublicLimited Company will continue and his shares will be transmitted to his legalheirs. LLP LLP will continue with other part ners. Legal heirs of LLP will get share of profit/contribution of the deceasedpartner.Theyarenotenti tledtobecomeapartneroftheLLP. LLP agreement can provide a clause enabling legal heirs to be comeapartnerofLLP. A partner can transfer his share of profit/loss in an LLP wholly or part. Such transfers shall always governedbyLLPagreement.

Transfer of Shares/Partners interest.

Shares in a company are freely transferable.InPrivatecompanies, transfers can be regulated by arti clesofthecompany.

Tax
PossibilityofTaxingLLPasa partnership. Companies, distribution of profitattracttax. Executive Directors/ DesignatedPartnerscandraw salary in a company which is taxedintheirhand.

Taximplications
Basedon the individual situation and goals of thebusiness owner,whataretheopportunitiestominimizetaxation? Therearemanytaxsavingoptionsavailabletocorporations compared to proprietorship concerns or partnerships. Dou bletaxationisacommondisadvantageoftenassociatedwith incorporationacompanyasthecompanyhastopaytaxon itsprofitandtaxondistributedprofitaswell. IncaseoftaxationofLLPisconcerned,thereisapossibility oftaxationaspartnership.Ifthesituationisthis,thedisad vantagesofdoubletaxationalsogetremoved.

Costofformationandongoingadministration.
CostofformationandongoingadministrationisanothercriteriatodetermineformofBusiness Structure.Thiscostincludescostofrecordkeepingandpaperwork,aswellasthecostsassoci atedwithincorporation. Situation PrivateLimited PublicLimited LLP

Cost of incorpora HigherthanLLP tion Complianceoflaw

Higher than LLP / Cheap PrivateLimited

Audit

RecordKeeping

Less compared to Strict than Private Lees than company PublicLimited Limited as management of LLP is governed by LLPagreement Need to appoint Need to appoint Only apply if turn auditor irrespective auditor irrespective over INR 4000000 or of size of the com of size of the com aboveorcontribution pany pany INR2500000orabove Extensive record Strict and Extensive Statutory records are keepingcomparedto record keeping com basically limited to LLP pared to LLP & Pri books of accounts. vateLimited Others records keep ingaregovernedby LLPagreement

Reputation
VisibilityandBrand,CapabilitytochangewithTimearethetwinmantraofpresentbusiness success.Ascorporateformhavetheadvantageofseparatepersonalityfromitmembers,you willgetmoreacceptancefromyourclients,suppliers,financiersandcustomers.

Flexibility.
Yourgoalistomaximizetheflexibilityoftheownershipstructurebyconsideringtheunique needsofthebusinessaswellasthepersonalneedsoftheownerorowners.Individualneeds are a critical consideration. No two business situations will be the same, particularly when multipleownersareinvolved.Notwopeoplewillhavethesamegoals,concernsorpersonal financialsituations. Situation Changeof ownership Management Private Limited / Public Limited LLP

Capital

Company is most flexible form as Ownershiptransferisgovernedby sharecanbetransferredfreely. LLPagreement.Usually,itrequires consentofallpartners. Company is managed by Directors LLP agreement describes how to bytakingdecisionsinBoardMeet manage LLP. It can also be man ing.CompaniesAct&articlesregu aged like a company subject to latemanagementofacompany agreement. LLP agreement is the basic document regulating man agementofLLP. Capital of a company is sub di CapitalofLLPiscontributionfrom vided into shares. Profit & Voting partner. The contribution can be isbasedonthepercentageofshare cash,tangible,intangibleassetsand holding in the paid up capital of immovable properties etc. Profit thecompany. share need not be based on contri bution. Voting right also governed byLLPagreement

Futureneeds
Whenyourefirststartingoutinbusiness,itsnotuncommontobecaughtupinthemoment. Youreconsumedwithgettingthebusinessoffthegroundandusuallyarentthinkingofwhat thebusinessmightlooklikefiveortenletalonethreeyearsdowntheroad.Whatwillhappen tothebusinessafteryoudie?Whatif,afterafewyears,youdecidetosellyourpartofabusi ness?CorporateformofstructureisthemostsuitableformofBusinessforfuturerequirements as it enables the owners to bring capital, change the ownership, expansion, consolidation, mergerwithotherfirmsetc. Considerabovepointsandselectyourcorporatebusinessstructure.YoucancontactCompa niesInnforanyfurtherclarification. CompaniesInn.comIndiaPrivateLimited
Tel +91 80 25501860, 25501861, 25501862

# 48, 2nd Block | Opp. Kendriya Sadan | Koramangala | Bangalore560 034

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