So your best friend wants to start a small business selling frozen yogurt. He ne

Question

So your best friend wants to start a small business selling frozen yogurt. He needs $10,000 to help him get some equipment for his production. He asks you to help him out. You want to participate in this venture. What are the different ways or forms of business he can structure the relationship to deal with financing, tax and liability issues? What are the specific effects of the different ways to organize your business for tax, liability and future growth? Please provide some insight and analysis with answers to these questions. So your best friend wants to start a small business selling frozen yogurt. He needs $10,000 to help him get some equipment for his production. He asks you to help him out. You want to participate in this venture. What are the different ways or forms of business he can structure the relationship to deal with financing, tax and liability issues? What are the specific effects of the different ways to organize your business for tax, liability and future growth? Please provide some insight and analysis with answers to these questions.

Explanation / Answer

The business venture can be structured in multiple ways depending upon risk apetite of investors, tax structuring, liabilities management.

Considering Indian scenario, i can suggest pros & cons of two setups

1. Limited liability partnership firm (LLP)

Person A & B, A being investor, B being business man.

A & B can enter into a partnership deed which shall have details about partnership share of each partner. This can based upon agreed % shares for investment, sweat equity, business responsibilities etc.

Pros

1. Limited liability in case of any adverse business scenario

2. Partners can easily take out surplus money from business without any corporate taxes

3. Lesser compliances as compared to Private limited setup, thus apt for small businesses.

Cons

1. Getting a financial institution to fund a LLP is challenge as most of institutions prefer funding to Pvt ltd companies as the disclosures & regulatory compliances are higher in Pvt Ltd companies.

Private Limited setup

A & B can be shareholders of the pvt ltd company in agreed ratio basis investment, sweqt equity, business responsibilites.

Pros

1. Regulated body corporate

2. HIgher trust for investment by Financial investors

3. Ease of raising capital from markets through private placement of securities/debentures/bonds.

Cons

1. Surplus cashflows which can be given to shareholders as dividends subject to dividend distribution tax. Hence tax outflows are higher.

Do revert if any speciifc information is sought

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