When you start a new business, the only thing you start with is an idea and may be a sketch of a plan. A few months down the line, when you start the real work, the first thing that you need to sort out is how to structure your business. To help you sort out your problem, I am listing down some of the important factors that decide which legal form of business you should choose. But before you actually make that decision, you should be clear about the short term and long term goals of your business.
Choosing the Right Business Structure
Objective of Business
The aims and objective of your business impact your choice of organization structure or form of ownership. If you want to provide single type of services to your clients, e.g. training, restaurant, niche consultancy, etc., you can have a sole proprietorship of the firm.
On the other hand, if you have a diverse range of products and services, where you will need help of other people, you will do well to choose partnership form of organization.
Profit and Risk Sharing
In a sole proprietorship firm, the risks as well as profits are your own. In a partnership firm they are shared by you and your partners. In the case of a company all the investors are sharing your profits as well as being responsible for your liabilities, depending on the type of company. So here you need to take a call as to what you want to do. But profit sharing should not be considered in isolation. Other factors like capital requirements, skill requirements, operational strength, etc. should also be taken into account simultaneously.
For a small or medium scale organization, where the operations are low scale, proprietorship or partnership firms are the norm. If you are into large scale operations like departmental stores, hotels, hospitals, etc., you should choose company (public, private or limited) form of organization.
Ease of Management
If the number of people involved in your business is less, typically 5 to 50, they generally have similar work profiles, and you want to have direct control over them, you should go for sole proprietorship or partnership structure of business.
But if you have a large number of people with diverse skills and portfolio, you should opt for company form of business organization.
If you need very little money to start and can manage in future as well with your personal resources, you can go for proprietorship firm. If you need to take help of a few of your acquaintances to pool in resources, you can think of forming partnerships with them. But if your business is capital intensive and you will need to raise lots of funds for expansion in future, form a company.
In case of proprietorship or partnership firms, government liabilities and legalities are simple and straightforward. But for companies they are quite complex. So take that into consideration as well when deciding on the type of business structure for your business.
We have discussed many factors you need to take into account while deciding the type of structure for your business. Consider the merits and demerits of each form carefully before coming to a final decision.