Choosing your form of Business Organisation
Many first time entrepreneurs do not have a clear perspective of the issues, legal or otherwise, involved in choosing one or the other form of a business. This often results in avoidable mistakes, which later cost time and money to rectify. Throughout the world, three main types of legal forms are used predominantly to run business organisations:
Sole proprietorship where generally only one person funds the business activities.
Partnerships, where two or more people work together to finance or run a venture.
Corporations / Limited companies where it is possible for many thousands to subscribe for a share in business ownership and, in theory at least, in its governance and direction.
Co-operative is a fourth form of company where the people working in the organization own it. Sole Proprietorship
The vast majority of new businesses set up each year in India choose to do so as sole proprietors. The form has the merit of being relatively formality-free; there are no rules about the records you have to keep. Nor is there a requirement for your accounts to be audited, or for financial information on your business to be filed at the registrar of companies.
As a sole proprietor, there is no legal distinction between you and your business-your business is one of your assets, just as your house or car is. It follows from this that if your business should fail your creditors have a right not only to the assets of the business, but also to your personal assets, subject only to the provisions of the Bankruptcy Act (these allow you to keep only a few absolutely basic essential for yourself and family).
It is possible to avoid the worst of these consequences by ensuring that your private assets are the legal property of your spouse, against whom your creditors have no claim. (You must be solvent when the transfer is made, and that transfer must have been made at least two years prior to your business running into trouble.) However, to be effective such a transfer must be absolute and you can have no say in how your spouse chooses to dispose of his or her new-found wealth.
The capital to get the business going must come from either you or from loans. There is no access to equity capital, which has the attraction of being risk free. In return for these drawbacks you can have the pleasure of being your own boss immediately, subject only to declaring your profits on your tax return. (In practice you would be wise to take professional advice before doing so). Although there is nothing you are required to do legally as a sole proprietor, it is sensible to do the following :
Open separate bank accounts for the business. Do not pay for business expenses from personal accounts. Also, withdraw your personal expenses regularly from the business accounts.
Get your accountant to give you some indication of allowable business expenses.
Take out full insurance cover against possible loss or damage to any equipment-if you have invested in any.
Take out personal injury/illness insurance. Advantages
Easy to set up-you can start the business in a small way, from your home if you want to.
You are the boss. You can run the business at your own pace and in your own way.
Your keep the profits.
You can offset some business expenses against earnings for tax purposes.
No public disclosure of your affairs.
Profit or loss in one trade can be set off against profit and loss in any other business you run. Disadvantage
You are totally responsible for any debts your business incurs. If you go bankrupt, your creditors are entitled to seize and sell your possessions - personal as well as business.