"Akhil, which business structure should I choose for my startup?"

Let me answer this question once and for all.

But first, some background to give you clarity.

A startup usually starts with a single person or a few individuals having an idea.

Now, around that idea, a whole business is built.

These same people or person add their own funds to that business, depending on the business requirements.

There's no right or wrong way for this - it all comes down to what you are trying to do.

Business registration forms a big part of this.

Some people do it at the start.

Other people do it after reaching a certain milestone, for example, hitting a certain MRR.

It doesn't matter if it’s one person.

Or a bunch of individuals running the business together.

One thing is needed - they need to decide on the legal form/structure of their business.

Now, there are a number of legal forms that you can give to your business:

(1) Sole Proprietorship

(2) Partnership

(3) One Person Company (OPC)

(4) Limited Liability Partnership (LLP)

(5) Private Limited Company.

The most common one you will see is - a conventional private limited company.

But, it’s not always the right choice and you should definitely explore other options.

Now let me help you how you can make that decision, by giving you the need for each structure.

How's it different from others? And who's it best suited for?

That's what I will answer.

And at the end of this, I will give you the most preferred structure for a scalable startup.

You Have 5 Choices:

(1) Sole Proprietorship

Who it's for:

As the name suggests, it is for a single-person business.

Meaning, there are no partners.

Pros:

It's the easiest and least expensive way to start your business.

Cons:

Your personal assets are at risk if the business faces losses.

The business and the person are one and the same here.

And the owner becomes personally liable for any losses in the business.

There's no limitation on liability - which is commonly one of the most important purposes behind business registration.

Best For:

It's best for small and low-risk businesses.

(2) Partnership

Who it's for:

When two or more persons are involved in running the business.

The maximum number of partners could be 20 in this.

Pros:

Partners contribute capital to run the business and share responsibility.

You also get more heads to think through a decision.

There's no need for formal registration.

A duly executed partnership deed/agreement is enough to establish a general partnership.

Cons:

Partners are personally liable for any losses as well.

Best For:

It's best suited for small and medium-sized businesses.

Partnerships are not that scalable, but you get to work with speed.

The most common areas I see this for are service businesses such as law firms, consulting firms, etc.

(3) Private Limited Company

Who it's for:

It's for scalable startups and businesses.

It's the most preferred option for them.

Pros:

The Ownership and Management are separated.

Ownership lies with shareholders and management lies with directors.

Though usually with a small number of shareholders, the shareholders and directors are one and the same.

This business structure also puts a cap on the liability of shareholders and founders.

They are only responsible for their invested money (share capital).

And if the company can't cover other claims, shareholders won't be held accountable.

Cons:

The disadvantage is - tons of compliances and filings and associated costs.

Management costs rise.

Best For:

Best suited for scalable businesses - with the prospect of fundraising.

(4) Limited Liability Partnership (LLP)

Who it's for:

A fairly new legal form.

It's kind of a mixture of a general partnership and a private limited company.

So anyone trying to partner up with protection can go down this route.

Pros:

It consists of a few partners with limited liability protection.

But only to the extent of their capital contribution.

Cons:

A formal registration process is involved, just like a private limited company.

Some compliance requirement is still required here, but it's less than a private limited company.

Best For:

Best suited for service businesses with the want of added liability protection.

(5) One-Person Company (OPC)

Who it's for:

Similar to sole proprietorship - a single person runs the show.

Pros:

It has liability protection.

And has other features same as a private limited company except there is a single shareholder and director here.

Cons:

Not much downside to it, except it's not that common.

Not sure if you would call it a "con" to begin with.

But a lot of people don't do this.

Best For:

Suitable for businesses, like agencies, with a single owner but wanting liability protection.

That's it.

The most preferred way for scalable startups is actually a private limited company.

The reason for that is simple - because of the need for fundraising.

But for some conventional businesses with no requirement for multiple rounds of equity financing, other options could be explored.

Ultimately, the decision comes down to you.

What do you want? Do you want extra protection? Speed? Want to raise funds? Build the next unicorn?

It all comes down to that.