Every business structure needs capital to function properly. Companies maintain the capital by way of raising funds. Raising funds are influenced a lot by the business structures.  Also, the amount of capital required depends a lot on the business structure. The promoters and subscribers of the company have to decide the business structure according to the amount of capital required for its future growth and stability since the capital investment by the initial members of the company is not sufficient in the longer run.

Types of business structure

Following are the kinds of business structures to start with:

• Private limited company :It is an entity under private ownership, where the shares are non transferable to the general public.

• Sole proprietorship firm: It is an unincorporated entity run and owned by a single individual without creating a separate legal entity from its owner .

• Limited Liability Partnership: It is a separate legal entity where the partners have limited liability.  It has features of both a corporate firm and a partnership firm .

• Partnership firm: Partnership firm is a type of entity where a minimum of two individuals enter into an agreement to share the profits of the business. The partners are principal and agent to each other. 

Source for raising  funds 

A business raises funds in two ways:

• Equity funding: It is one of the most effective forms of raising funds, where shares are issued to the investors in exchange of their investment in the company. Through this , both investors and the company can benefit, thus making it secure for raising funds.

• Debt funding: Companies also raise their funds by borrowing money at a rate of interest for a particular period of time also known as debt funding.

Different business structures and their way of raising funds

Following is the brief of  kinds of business structure and their ways of raising funds :

Private limited companies 

A private limited company usually raises its fund through equity. It issues shares to the investors in exchange of their investment. By becoming shareholders of the company, the investor gains some control over the operation of the company.  However, such control is proportional to the share they have.

There are several ways in which the company can raise its fund through equities, which are as follows:

• Right issue: When an existing shareholder of the company invests in the company, additional shares are issued to that shareholder only. This way, the private limited company does not have to share the control over its company. 

• Private placement : Funds are also raised by issuing shares to a selected small group of individuals.  However, the rule of maximum 200 members in a private limited company as prescribed in the Company Act,2013 shall not be violated.

• ESOP: Funds are also generated by issuing equities to the directors and employees of the company. After completion of one year only, such a way can be applied. The shares issued to the employees and/or directors are not subject to the rule of 200 members of the Companies Act, 2013. However, such shares cannot be transferred to any person.

Another way by which a private limited company raises its fund is through securities. With compliance to certain restrictions prescribed under the Companies Act, 2013^[1], a private limited company can issue security to the public.  A company can also raise funds through debt in the form of debentures, bonds, etc.

Limited Liability Partnership 

Since this kind of business structure has features of a partnership firm and a corporate entity, it enjoys the benefits of both.  Although the funds cannot be raised through equities in a limited liability partnership, the funds can be raised through investments by the partners of the firm or through bank loans or advances. Since it has a separate legal entity status, it is easier for these kinds of business structure to get loans and the limited liability of partners provides security to the partners in case of financial distress.

Partnership firm

In this kind of business structure, the partners of the firm bring in capital and investments as per the need of the business. In case the firm wants to raise funds, the existing partners can bring in more investments or new partners can be added bringing more capital.

Again, it has a separate legal entity status, so easy availability of loans in banks is an added benefit; it adds on to the ways of raising funds for the firm.

Sole proprietorship firm 

An unincorporated form of business structure with a single owner, the rights of the company and the owner are identical. The ways of raising funds are quite limited in these kinds of business structures. The only convenient way of raising funds is self-investment by the owner. Since it does not have a separate legal status, the sanction of loans can be a difficult task. 

Comparison between different business structure 

Conclusion 

There are several options available for an individual to start a business. Every business structure has its own pros and cons. But, every company seeks funds for its growth and expansion.  The initial investment by the members of the company is not sufficient in the long run. There are several ways in which funds can be raised like equities, debts , bank loans, investment by partners of the firm or self-investment. One should be wary of the ways of fundraising before starting a business because the business structures majorly influences the amount of funds that can be raised for the company.  There are provisions for conversion from one form of business to another in case the company wants to do so. However, it is better to think and analyse about the long-term and short-term goals at the initial stages, before incorporating the company.

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