At OrangeScape, every Friday, we have a company wide meeting called “G2G — Good to Great” where we gather together as different Special Interest groups (SIGs). SIGs range from Entrepreneurship and Leadership to TED Talks, Math(Probability and Statistics) and Book club, etc. People can join the groups that they are most interested in. I am from the group on “Entrepreneurship” which is led by Suresh Sambandam. This article is an excerpt of what we have discussed in the previous meeting. It covers the types of businesses, liability and how a private limited works.
Types of businesses
1. Sole Proprietorship
One person owns and manages the company. Profit is taxed as personal income.
Two or more people own and manage the company. Profit is taxed as personal income.
3. Private Limited
People who run the company and own the company are different. Profit is taxed as company’s income. Limited basically implies that liability is limited.
When you are doing business, you buy goods like computers, equipments or raw materials from a third party vendor worth say 10 Lakhs. Due to natural disaster goods got damaged and you are not able to pay the vendor. What happens next? Who is responsible for paying the debt?
In sole proprietorship and partnership model your personal assets are exposed as liabilities. At worst, you are supposed to sell your assets and pay the debt.
In private limited model, you only lose your share. Liability is limited only to the company’s assets and your shares.
How private limited works
Capital — Money used to form a company.
Working Capital — Money used to run the company. for example, buying goods, paying salary.
Basically there are two types of public companies. Unlisted and Listed.
Unlisted public companies cannot ask the public to invest in their company. Only friends and known people can become shareholders.
The public can become shareholders legally in Listed public companies. Although they can become shareholders, they cannot influence any decisions in the board as the shares exposed to the public trade is minimal.
Understanding different types of businesses and how they work is essential for anyone who is planning to start a business. We should choose an appropriate type of business carefully considering the future of the company.