Types of Businesses: Which Legal Structure Is Right for Your New Venture

1. Nature Of Business Activity

A direct management style is preferable in small trading businesses and professional services. Therefore these businesses are primarily sole proprietorships.

A partnership is suitable in all cases where a sole proprietorship is, provided the scale of the business is more significant. It helps the business efficiently discharge its operations with two or more partners. A partnership business is advantageous in small-scale manufacturing, financial services, and real estate industries and agencies.

Incorporated business forms, such as Limited Liability Partnerships (LLP) and Companies, are usually suited for larger businesses with external capital requirements.

2. Scale Of Operations

If the scale of operation of a business activity is small, then a sole proprietorship is preferable. A modest scale of business operations would be suited to a partnership or a limited liability partnership. In the case of large-scale operations, a company is advantageous.

3. Capital Requirements

The requirement of external capital in a business is closely related to its scale of operations and the type of business. Enterprises that require sizeable Investments should be organized as companies. Conversely, small capital requirements indicate that a business may be best organized as a sole proprietorship or partnership.

4. Managerial Ability

In a sole proprietorship, if the business requires expertise in multiple functional areas, it would be difficult for one person to manage the business effectively. Further, the size of the business may not permit the engagement of professional management.

It is often the primary motivator to set up the business as a partnership or a company. In these forms of business, there is a division of work among the partners, which allows them to specialize in specific areas, which leads to better outputs and decision-making.

5. Degree Of Control And Management

This factor affects how directly the entrepreneur can affect the business choices of the organization.  

In a sole proprietorship, the ownership management and control our vested in one person. Therefore, the entrepreneur has complete control of the business operations.

In a partnership firm, the partners share the management and control, and their specific rights, duties, and responsibilities are documented in the partnership deed.

In a company, there is a divergence between ownership and management. The management and control of the business are entrusted to the board of directors, who are generally the elected representatives of shareholders. They represent the best interest of the shareholders of the corporation. 

6. Degree Of Risk And Liability

The size of the risk involved in the business and the willingness of the owners to bear it is an essential consideration in selecting a type of business organization.

A sole proprietorship business carries a small amount of risk compared to a partnership or company. It is because a sole proprietor is personally liable for all the death of the business to the extent of his entire property.

 In a partnership, the partners are also individually and jointly responsible for the liabilities of the firm.

Incorporated forms of business, such as companies and LLPs, Enjoy a separate legal entity status and, therefore, limit the extent of risk and liability of the shareholders to the currency amount of the shares held by them.

7. Stability Of Business

Sole proprietorships are inherently not stable as it depends on the decisions of the proprietor. Anything that happens to the proprietor would hamper the course of business. In this perspective, a partnership is more stable. Companies enjoy a perpetual status and are the most stable form of business. They are not affected by who is involved in running the business operations.

8. Flexibility Of Administration

The simplicity of operations determines the flexibility of the administration of a business organization. If the organization’s internal functions do not require a clear distinction of responsibilities, then the business can be more agile in making decisions in terms of administration.

 In this context, a sole proprietorship is flexible in terms of its administration where, as a partnership and a company are forms of business where the administration is not as flexible. It is primarily because the activities are conducted on a larger scale, requiring a rigid structure of operations.

9. Division Of Profit

Profit is the main motivator for any form of private business. An entrepreneur desirous of claiming all the profit would choose to set up his operations in a sole proprietorship form.

If he is willing to share the profits, a partnership form of organization may be preferred. In a company, the profits are distributed among the shareholders in proportion to their shareholding, but the liability of the shareholders is limited.

10. Tax Implications

As an individual, expenses, and incomes are taxed at a Standard rate. In a business, some systems provide tax benefits in terms of expenses. In terms of income, only the profits of the business are taxable. 

For a sole proprietorship or partnership, the tax liability depends on the extent of the profits. However, in the case of Companies or LLPs, many strategies exist to fruitfully minimize the entity’s tax liabilities.