Selecting best organisational structure

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Selecting best organisational structure

Category : Entrepreneurs

When you have decided to start a venture and you have the business plan, the next question arises: which organizational structure should you select?

Mainly, following are the forms of organizational structures, each having its own pros and cons.

Sole Proprietorship

Partnership

Limited Liability Partnership

Company (Private and Public)

It is very crucial decision because it determines the power, control, risk and liability of the entrepreneur as well as the division of profits and losses. It also affects legal and compliance related issues.

Following are the most important points for decision making :

  • Nature of Business: Businesses of providing direct services based on professional knowledge or skills (e.g. doctors, lawyers, accountants,  other consultants, restaurants etc.) can be in the form of sole proprietor or partnership. On the other side manufacturing concerns are better organized in corporate format i.e. private or public company.
  • Scale: If you are eyeing large scale business i.e. high volumes, wide spread national and international markets, big number of human resource then corporate format is best suitable for you. Also due to greater level of transparency with compared to other structures, big corporates now a days deal with corporates only.
  • Capital Requirement:  It is also one of the most important factors. In case of requirement of huge capital, corporate format is suitable. A Private Limited Company can be started with Rs. 100,000. There is no minimum capital requirement for Proprietorship and Partnership.

 

The following points should also be taken into consideration We are hereby provide a simple matrix which will help you in your decision making:

 

Sole Proprietorship Partnership Limited Liability Partnership Private Limited Public Limited
Ownership & Profit sharing One Person i.e. owner of the business Partners Designated Partners Shareholders (Share to be given to friends and family only) Shareholders (Shares to be given to public at large)
Control One Person i.e. owner of the business Partners Designated Partners Shareholders and Directors Shareholders and Directors
Liability Unlimited Liability Unlimited Liability Limited Liability Limited Liability (upto the value of shares subscribed) Limited Liability (upto the value of shares subscribed)
Legal Registrations and Compliance level Low Low Medium High High
Income Tax* (excluding surcharge, Cess etc.) 10% to 30% 30% 30% 30% 30%

 

It is also important to know that proprietorship can be converted to partership by simply adding a partner and creating a partnership agreement. Partnership can also be converted to Limited Liability Partnerships (LLPs) or Private Limited Companies, Private Limited Companies can be converted to Public Limited Companies.

We hope that you found above information helpful.

Please post into the ‘comments’ section in case of any questions or queries with regard to the business organization set up.


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