Choice Of Business Entity

The most important decision before starting a business is to decide the form of ownership or business entity. The different business entities can be broadly divided into Corporate and Non Corporate Entities. The Corporate entities comprise of Private Limited Company, Public Limited Company and Limited Liability Partnerships. Whereas, the Non Corporate entities include Sole Proprietorship, Hindu Undivided Family and Partnership Firms. The basic difference between the corporate and the non-corporate form of organization is that while a non-corporate form of business may be started without registration, corporate bodies cannot be set up without registration under the laws which govern their functioning.

NON-CORPORATE FORM OF BUSINESS ENTERPRISES

• Sole proprietorship: A Sole proprietorship is a business which is owned, managed and controlled by a single person. In this choice of business entity, the sole proprietor normally uses his own capital, skill and intelligence to carry out the business activities. The sole proprietor exercises full control over the affairs of the business. The Sole Proprietor is entitled to receive all the profits and gains of the business and also assumes all the risk of ownership. Being alone the Sole Proprietor can maintain complete secrecy in conducting affairs of the business. This choice of entity is particularly suitable for businesses which are small in size and where risk and capital involved aren't much.
• Hindu Undivided Family: In this form of business entity, the business is generally managed by the senior member of the family called the Karta or the manager. ‘Karta' is basically the senior most male member of the family. The joint Hindu family firm comes into existence by the operation of Hindu Law and not by any contract.
• Partnership Firm: Section 4 of the Partnership Act, 1932, defines partnership as “The relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. Partnership is basically an association of persons who come together with a motive of making profit. The liability of the partners in case of partnership firm can be extended to their personal assets for recovery of any dues.

CORPORATE FORM OF BUSINESS ENTERPRISES

• Company: A company is a legal entity formed by a group of individuals to engage in a business. The people who form the company are known as promoters. A company is a separate legal entity and hence continues even if the promoters of the company may come and go. A company being a separate legal entity can enter into contacts and own property in its name. This type of organization is characterized by the fact that the ownership and management of the company are separate. The capital of the company is provided by a group of people called shareholders who entrust the management of the company in the hands of persons known as the Board of directors. The liability of the company is not the liability of its members. Depending upon the purpose different type of companies can be incorporated like Private Company, Public Company, Section 8 Company, Nidhi Company etc.
• Limited Liability Partnership (LLP): LLP is an alternative business vehicle that gives the benefits of limited liability of a company and flexibility of a partnership firm. LLP is a hybrid of a company and a partnership firm. Just like a company, a LLP is a also a separate legal entity which can enter into contacts and own property in its own name. Further, unlike a traditional partnership firm the liability of the partners of the LLP is limited.

FORMING A CHOICE BETWEEN CORPORATE AND NON-CORPORATE FORM OF BUSINESS

Making a choice between Corporate and Non- Corporate form of business depends upon the end objectives of the businessman. If an individual is willing to start a business with minimum investment and does not wants to spend much on compliance then the best option is to form a Sole proprietorship firm. In case two or more individuals want to enter into a business and wants to keep the compliance cost at minimum they can choose a traditional partnership firm. If a group of persons wants to start a business and seek investment in their business the best option is to form a Company where they can easily sell their shares to the investors. Another benefit of selecting Corporate form of Business such as Company and LLP is the fact the members or designated partners are only liable to the extent of money invested by them for the money that is due, this benefit is not available in a Sole Proprietorship firm and Partnership firm where if business assets are not enough the dues can be recovered by auctioning their personal property.

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