Depending upon various factors, one has to opt for a business organization suitable for his or her business. Along with it, many measures are also obligatory to be undertaken for establishing and maintaining relationships between men, material, and machinery to carry business for earning good profits.
So, are you ready to choose your business organization? Then, lets get started and know what all are the types of business organizations available.
Types of Business Entities
- Sole Proprietorship
- Partnership
- Hindu Undivided Family
- Limited Liability Partnership
- Branch Office
- Co-operative Societies
- Company
Here are 7 types of business entities available for people to start their business with. However, if we talk about Company then, there are various companies like Private Limited, Public Limited which may either be listed or unlisted. In order to choose a suitable form of business entity, one must be very careful as it is the very crucial steps that can either make or your business.
Choose wisely and consult a Company Registration Consultant to go with the appropriate business organization. Now, moving forward with the topic of “Choice of Business Organization”, let us now discuss some of the essential factors which plays an important role in choosing a business organization.
Factors governing different forms of organizations
Here are a set of some necessary factory depending on which, selection of a business organization is done.
- Nature of business activity
The nature plays an important factor on selection of business organization. Consequently, if you are running a small business independently then going for sole proprietorship business would be suitable for you to begin with.
Whereas, choosing a partnership shall be suitable in those cases where sole proprietorship is suitable, provided the business is carried on slightly bigger scale involving one or more partners. Also, if you want to start manufacturing activities on a modest scale, then a partnership would be better.
Talking about companies, it is preferable where the business lines carry on large chain stores, multiple shops, super bazaars, engineering industrial activities with high capital and working capital requirements and software industrial activities.
One newly launched company known to be, One Person Company can opt where a person wishes to start a business binded with legal entity. Moreover, an alternative form of business organization where two or more persons are involved in starting the business organization is the Limited Liability Partnership (LLP).
- Scale of operations
The scale of operations is the second factor affecting the form of business organization. Thereupon, if the scale of business operations is small, sole proprietorship or One Person Company (OPC) form of business organization would be best. Where the scale of business operations is modest then, partnership or limited liability partnership is preferable. In the case of large-scale of operations, the company form is advantageous.
- Capital requirement
The third essential factor affecting the form of business organization is the capital requirement. So, as per your capital requirement, you may choose a form of business organization.
If you are planning to open an enterprise requiring heavy investment like iron and steel plants, large scale infrastructure projects etc then, a company type of organization is preferable. Also, public company can be set up which may be in the form of listed company by raising money from the pubic and being listed on the stock exchanges.
Enterprises needing special investment like retail business store, and personal service enterprises can be best organized as sole proprietorship or partnership.
- Managerial ability
In case of sole proprietorship form of organization, there is limitation to managerial ability as there is only one person operating and running the business individually. Whereas, in case of any types of company or limited liability partnership, there are many people having knowledge in their own field which allows access to good managerial abilities.
- Degree of control and management
Coming to the fifth factor affecting the type of business organization i.e. degree of control and management. If you opt for Sole proprietorship and OPC then you will enjoy full control over the business.
In case of partnership, control and management of business is jointly shared by partners. Also, there are some specific rights, duties and responsibilities documented through incorporating various clauses in partnership deed.
- Degree of risk and liability
If we talk about sole proprietorship form of organization, it carries small amount of risk with it as compared to other forms of organization. However, the sole owner is liable personally for all the debts of the business. Likewise, in partnership form of organization, partners are equally liable and jointly responsible for the liabilities.
Luckily, in this case companies and limited liability partners have a real advantage. As, the creditorscan force payments of their claim only to the limit of the company’s and LLP’s assets.
- Stability of business
The factor “Stability of business” is not visible in case of sole proprietorship although no time limitation is mentioned. As, if the sole owner running the business gets unwell, there is no other person to handle the business. In addition to it, this factor is also not stable if you open a partnership firm as death, insolvency, insanity, retirement, admission, expulsion or withdrawal can disable the stability of the business.
Companies and LLPs have the most stability due to their features or perpetual being an artificial person. Due to every member of the company having a separate existence from that of the company, the stability of business remains stable.
- Flexibility of administration
Where an organization enjoys flexibility, the internal management runs well. Talking about sole proprietorship form of organization, there is higher flexibility as any change in the administration can happen at any point of time just by taking the concern of the sole owner only.
While in the case of a company, the administration is not found to be flexible because of its complex activities. In case there arises any change in the existing line of business, provision, as stated in the Object Clause of MOA of the company, is first checked. All in all, there is a complex procedure to make a change in the company. However, any change can easily be made in case of sole proprietor.
- Division of profit
Division of profit shall not be done in the case of sole proprietorship form or organization as an entrepreneur desires to pocket all the profits of the business. Where one is willing to share profits of the business then one can definitely go for a partnership form of organization.
In a company form of business organization, the profits are distributed among the shareholders in proportion to their shareholding, but the liability of the shareholders is also limited. And the division of profit is decided by the Board, though approved by the shareholders.
- Costs, procedure and government regulation
Every form of business organization has different process to be complied with involving different applicable laws. From this point of view, sole proprietorship is the type of organization which is an easiest form of organization.
- Tax implication
In smaller entities such as sole proprietorship or partnership, the tax liability depends on the extents of profit where the liability of the sole owner is unlimited.
In the case of a company or LLP, the liability of shareholders is limited to the number of shares they bought.
There are different income tax applicable on different taxpayers.
- Geographical mobility
The extent to which the product or service is proposed to be manufactured or made available also plays a vital role in choosing the type of business organization. Where a person deals with local market, or seasonal products or perishable goods, then it is meant to cater to a specific city of locality then sole proprietorship or partnership form of business organization is suitable.
- Transferability of ownership
In case of sole proprietorship, there arises no need to transfer ownership as there is sole owner who enjoys profits and losses incurred in the business.
Partnership is suitable where two or more partners share profits and losses equally.
However, in case of a company, transferability of ownership is possible by transfer of shareholding by any person or group of persons in favour of another person.
- Managerial needs
Where the concern of the business organization is small and caters to local needs only then one person will be enough to handle the business so, sole proprietorship must be chosen. However, if business caters to more areas, then more persons will be needed to look after various business functions. So, the company form of business organizations must be suitable.
- Secrecy
If you want and are capable of handling business alone the, choosing a sole proprietorship would be recommended. As, in case of sole proprietorship, every decision or matters relating to profits or losses shall be with the sole owner of the proprietorship firm.
In case of a company, secrecy to any of the company’s decision is restricted as it is shared with the board of directors as well.
- Independence
Where a person wants to enjoy freedom then going either for sole proprietorship or partnership would be a good option as compared to company. As, in the case of a company and limited liability partnership, one cannot enjoy freedom to decide on something.
Conclusion
This was all about the types of business entities as well as the factors which govern the choice of business organization. Stay tuned to get knowledge of more topic relating to company registration.
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