One of the major factors that determine the success of your product is how you put your idea to work. To set up an effective team and function as an organized company, it’s imperative that you stay in the know of different organizational structures and their pros and cons.
In this article, we will explore four major forms of organizations along with their highlights and shortcomings. Based on whether you want to operate all by yourself or you’d like to have partners, here are four broad and common organizational structures.
- Sole Proprietorship
- General Partnership
- Limited Liability Partnership (LLP)
- One Person Company (OPC)
- Private Limited Company
Key factors to consider
Here are the important factors that you must consider before choosing an ideal establishment that fits your business:
→ Autonomous ownership or partnership
→ The risk involved in the nature of your business
→ Your investment: bootstrapping or raising funds through VCs
→ Decision making, control, and flexibility
→ The level of liability and personal assets
→ The cost of registration and legal formalities
→ Legal and technical support and expertise to handle compliance regulations
Keeping these factors on the top of mind, let us look into each of the business types in graphic detail and discover the one that best works for your product firm.
Type #1 – Sole Proprietorship
What is Sole Propertiership?
This refers to the scenario where an individual owns the company and runs a simple business in their own convenient terms. It is one of the most common and simplest forms of business ownership where an independent entrepreneur runs the business for their own benefit. Fully dependant on the proprietor’s decisions, the business starts and ends with them.
This option is best suited for single entrepreneurs, sole traders, and other individuals who are looking to start a business by themselves in a simple way. They can not add partners to their business at any point in time.
When should one consider sole proprietorship?
→ When the nature of your business allows you to run single-handedly
→ When you are starting up with your own savings
→ When your investment is very low
→ When you want to retain the full ownership and control of your business
→ When you do not want the hassles and complex processes of forming a company
Advantages of Sole Propertiership
→ The regulations and procedures are simple and inexpensive.
→ Owners have complete flexibility.
→ All the profits are 100% subject to the proprietor.
→ There is no mandatory registration required.
→ A simple business license is enough to get started.
→ The owner is taxed only once as the business income is also considered as their personal income.
Disadvantages of Sole Propertiership
→ There is no great financial and legal protection for the owner.
→ The sole proprietor is 100% liable for the debts and financial losses.
→ It’s difficult to transfer the business ownership to someone else in the future.
→ The proprietor’s personal resources and assets are also put at risk.
Type #2 – Partnership
What is Partnership?
This refers to the scenario where businesses are co-owned and run by more than one proprietor together. Referred to as partners, these business owners share the complete ownership and accountability of the business right from the responsibilities to liabilities.
There are two types of partnership firms:
- General partnership
- Limited Liability Partnership (LLP)
This is a type of collaboration where each partner is held liable for the financial risks. Just in case if the firm runs out of funds to clear the debts, the personal properties of the partners shall be utilized to repay them.
This is suitable for small business that involves multiple partners. It is similar to the sole proprietorship business except for the number of partners involved. The risks of personal assets and financial assets are the same in both types.
When should one consider General Partnership?
→ When the nature of your business isn’t very risky
→ When your business partners are very trustworthy
→ When you are fine with multiple decision-makers
→ When you run a business as a family or a close circle, where the partners are ready to hold themselves accountable for the losses incurred by the others if any
Advantages of General Partnership
→ When there are multiple partners, you get more capital for your business from shared resources.
→ Similar to Sole Propertiership, the regulations and procedures are simple and hassle-free.
→ Each partner has access and rights to the ownership and profits of the company.
→ Compared to LLP and Private Limited, the establishment costs are less.
Disadvantages of General Partnership
→ As mentioned earlier, the personal assets of every partner are at risk.
→ Regardless of the proportion of investment, every partner is held liable for the debts and losses.
→ Lack of harmony among the partners might collapse the business entirely.
→ Small dividends of profits and lack of autonomy are other shortcomings.
Limited Liability Partnership (LLP)
Just like general partnership firms, LLPs also involve multiple partners operating a business together. The primary difference between General Partnership and a Limited Liability Partnership is that the personal assets and resources of the LLP partners won’t be attached to the firm’s liabilities. Even in the case of one of the partners being legally sued, that doesn’t impact the other partners and their assets legally. As the very name suggests, the liability is limited.
When should one consider a Limited Liability Partnership (LLP)?
→ LLPs are best suited for startups and small businesses run by multiple partners.
→ Anyone who runs businesses with partners can opt for LLP registration.
→ Even small-time freelancers who want to give a proper company structure to their bootstrapping business can choose LLP.
Advantages of Limited Liability Partnership (LLP)
→ The risks of personal assets are relatively less.
→ The LLP can own property in its own name.
→ It is a more stable choice compared to General Partnership.
→ The individual liability of the partners is also very limited, unlike the former two types.
Disadvantages of Limited Liability Partnership (LLP)
→ Getting registered under LLP compliance involves lots of processes, time, and money.
→ Venture capitalists prefer to invest in Private Limited Companies rather than LLPs.
→ In an LLP scenario, there could be multiple partners with varying contributions and legal rights. Thus arriving at a consensus is not a cakewalk, because the decisions might affect each partner in a different way.
→ The legal penalties for non-compliance are sky-high.
Type #3 One-person company
What is One Person Company (OPC)?
It refers to the kind of establishment where the single owner (sole proprietor) is considered as the shareholder of the company. This form of business is best suited for those who want to run a business without any partner but they still want to reap the benefits like limited liabilities.
When should one consider One Person Company (OPC)?
→ When you want to run a business all by yourself but within a corporate framework
→ When you want to be the sole shareholder and Director of the company
→ When you want your company to be considered as a separate entity, unlike sole proprietorship where the business owner and the company are considered one and the same
Advantages of One Person Company
→ Regardless of the debts of the company, the director’s personal assets are always safe.
→ Unlike Sole Propertiership that starts and ends with a single owner, the legal identity of a one-person company can be nominated to another Director.
→ One-person companies have higher credibility in the market among vendors and investors
→ These one-person companies can avail of all the benefits like legal protection, credits, limited liability, bank loans, etc.
Disadvantages of One Person Company
→ Higher tax rates are one of the biggest limitations in One Person Company.
→ The compliance charges and incorporation charges are heavy.
→ Single person handling the entire business processes and making the key decisions can turn disadvantageous too.
→ One-person companies will become inappropriate if your business yields higher returns and makes a huge turnover. In this case, you need to convert it into a Pvt. Ltd. Company.
Type #4 Private Limited Company
What is a Private Limited Company?
It is the most organized model of business commonly used for the incorporation of a proper company structure. This has become the most preferred and popular structure because it limits the liability of the members to their share in the total investment. It requires at least 2 members to act as shareholders and Directors to establish a Private Limited company.
Private Limited Companies need to hold general meetings and board meetings, conduct periodic audits, file and maintain statutory registers and annual returns with the Ministry of Corporate Affairs every year.
When should one consider a Private Limited Company?
→ This business form is best suited for businesses and entrepreneurs who need external sources of funding.
→ A private limited company is an ideal option for medium and large-sized businesses with a high turnover.
→ It is not appropriate for small enterprises or micro-businesses.
Advantages of a Private Limited Company
→ Since the Private Limited Companies are 100% regulatory-compliant, raising investments through venture capitalists and private equity funds becomes easy.
→ It’s relatively easier to get bank loan approvals for Pvt Ltd companies.
→ In case the business faces loss or ends up in debts, the personal assets of the Directors are safe and they shall not be attached.
→ Easy transferability is another big advantage of Private Limited companies.
→ After registration, it’s easy to open a bank account and obtain a payment gateway for Private Limited companies.
Disadvantages of a Private Limited Company
→ The registration and compliance processes are complex and relatively more expensive.
→ Regardless of the nature of the business, a Private Limited company should maintain strict compliance with tax and labor laws.
→ Since there are two Directors, it requires the consent of both the decision-makers for every move and progress.
→ Private Limited companies need to be audited every year and they should also document the taxes paid every year and maintain them as an open record.
If you are still not sure about which business structure to choose, you can seek expert advice from us. We would love to offer you a FREE consultation with our product experts. Our experts are just an email away. Write to us at firstname.lastname@example.org.
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