How to choose between a proprietorship and a firm for your business?

If you want to start your own business, you need to decide what kind of business structure you want to use. The business structure affects how you run your business, how much tax you pay, and how much risk you take. In India, there are many types of business structures, such as proprietorship, firm, company, limited liability partnership, etc. In this blog, we will talk about two of the most popular business structures in India: proprietorship and firm. We will tell you what they mean, how they are different, and what are their good and bad points.

What is a proprietorship?

A proprietorship is a business where one person owns and runs the business. The owner and the business are the same thing. The owner has full control over the business and is responsible for everything that happens in the business, including its debts and losses.

Some of the main features of a proprietorship in India are:

1. Sole ownership: The owner is the only owner of the business and is responsible for everything that happens in the business.
2. Unlimited liability: The owner is liable for all the debts and losses of the business. This means that the owner’s personal assets, such as property, bank accounts, etc., can be used to pay off the business debts.
3. Simple registration process: A proprietorship does not need any formal registration with the government. However, the owner may need to get some licenses, permits, or registrations depending on the type and location of the business, such as GST registration, shop and establishment license, PAN card, etc.
4. Limited legal recognition: A proprietorship is not a separate legal entity from the owner. This means that the owner and the business are the same in the eyes of the law. The owner cannot make contracts or sue in the name of the business.

Some of the benefits of a proprietorship are:

1. Ease of formation: A proprietorship is easy to start and run, as it does not need any complex legal formalities or paperwork.
2. Low cost: A proprietorship is cheap to set up and maintain, as it does not need any registration fees, annual filings, audits, etc.
3. Full control: The owner has full power and freedom over the business decisions, such as choosing the business name, location, products, services, pricing, etc.
4. Tax benefits: A proprietorship is taxed as an individual, which means that the owner can get various deductions, exemptions, and slabs under the income tax act.

Some of the drawbacks of a proprietorship are:

1. Unlimited risk: The owner takes the entire risk of the business, as there is no difference between the business and personal assets and liabilities. The owner may lose everything in case of business failure or legal problems.
2. Limited resources: A proprietorship has limited access to money, credit, and skilled people, as it depends only on the owner’s personal resources and abilities.
3. Limited growth: A proprietorship has limited chances for growth and diversification, as it cannot get money from outside sources, such as investors, partners, etc. It also faces tough competition from other business structures, such as firms and companies, which have more resources and recognition.
4. Lack of continuity: A proprietorship depends completely on the owner’s life and interest. The business ends in case of the owner’s death, retirement, or bankruptcy.

What is a firm?

A firm is a business where two or more people come together to do a business activity. The people who own the business are called partners, and they share the profits and losses of the business according to the partnership agreement. A partnership agreement is a written or oral contract that tells the terms and conditions of the partnership, such as the name, type, duration, capital, profit-sharing ratio, rights, duties, and responsibilities of the partners.

Some of the main features of a firm in India are:

1. Shared ownership: A firm is owned and run by two or more people who share the profits and losses of the business according to the partnership agreement.
2. Limited liability: The liability of each partner is limited to the amount of their investment in the business. This means that the partners are not personally liable for the debts and losses of the business beyond their capital contribution. However, this does not apply in case of fraud, negligence, or breach of trust by any partner.
3. Complex registration process: A firm is not required to be registered with the government. However, it is better to register the firm with the Registrar of Firms by submitting the partnership deed and the required documents. This will give legal recognition and protection to the firm and the partners.
4. Separate legal entity: A firm is separate from its partners and can make contracts and sue in its name. However, a firm cannot own property or assets in its name, as they belong to the partners.

Some of the benefits of a firm are:

1. Ease of formation: A firm is relatively easy to form and run, as it does not need any strict legal formalities or paperwork. The partners can decide the terms and conditions of the partnership according to their mutual agreement and convenience.
2. More resources: A firm has more access to money, credit, and skilled people, as it combines the resources and abilities of the partners. The partners can also bring in new partners or investors to get more money for the business.
3. More growth: A firm has more chances for growth and diversification, as it can use the expertise, experience, and network of the partners. The partners can also explore new markets, products, services, and opportunities for the business.
4. Tax benefits: A firm is taxed as a separate entity, which means that the firm pays tax on its income, and the partners pay tax on their share of profits. This avoids double taxation and allows the partners to get various deductions, exemptions, and slabs under the income tax act.

Some of the drawbacks of a firm are:

1. Unlimited risk: The partners are jointly and severally liable for the debts and losses of the business. This means that if one partner is unable to pay his or her share of the debt, the other partners have to bear the burden. The partners may also lose their personal assets in case of business failure or legal problems.
2. Limited control: The partners have to share the power and responsibility over the business decisions, such as choosing the business name, location, products, services, pricing, etc. The partners have to consult and agree with each other on every aspect of the business, which may lead to conflicts, delays, or inefficiencies.
3. Lack of continuity: A firm depends on the life and interest of the partners. The business may be dissolved in case of the death, retirement, bankruptcy, or withdrawal of any partner. The partners may also face difficulties in finding a suitable successor or buyer for the business.

How do proprietorship and firm differ?

Proprietorship and firm are two of the most common business structures in India. While both are ways to run a business, there are some important differences between them. The following table shows the main differences between proprietorships and firm in India:

Which business structure is best for you?

Choosing the best business structure for your needs depends on many factors, such as the type, size, scope, risk, and goals of your business. You should also think about the legal, financial, and operational effects of each business structure. Here are some tips to help you decide:

1. If you want to start a small-scale, low-risk, and simple business, such as a grocery store, a beauty salon, or a tuition center, you may choose a proprietorship. This will give you full control, low cost, and tax benefits. But, you should be ready to take the unlimited risk, limited resources, limited growth, and lack of continuity of the business.
2. If you want to start a medium-scale, high-risk, and complex business, such as a consultancy firm, a manufacturing unit, or a software company, you may choose a firm. This will give you more resources, more growth, and tax benefits. But, you should be ready to share the authority, unlimited risk, limited control, and lack of continuity of the business.