WHAT IS COMPATIBILITY TEST?
We got to know about the technique of “Compatibility Test” in things you need to know before starting a new business. Therefore, in this post let’s understand the concept more deeply. Compatibility Test is nothing but an analysis of harmony between “The Business” and “The Form of Business”. In simple words; it is deciding whether the Business Structure you have chosen is apt for the type of business you want to run. You yourself can conduct the “Compatibility Test” and see the result!
WHY SHOULD EVERY NEW BUSINESSMAN TAKE THIS TEST?
Starting business is a serious matter. Deciding Business Structure is not as simple as buying an outfit without trying it on and thinking if it doesn’t fit; you can always exchange it afterward. Once you choose a particular Business Structure you also accept the benefits, risks, liabilities and responsibilities it represents. Therefore, every new businessman must know what sort of advantages and challenges his intended business structure may bring him in future.
Now, let’s see some Illustrations to understand the working of “Compatibility Test”.
ILLUSTRATION NO 1:
Mr. A wants to start Business of Web Designing. His deciding factors are 1. Sole Ownership/ control, 2. Cost: He is able to bear the initial Startup cost on his own; hence will not need any external financial help at this stage, 3. His scope of business shall be limited to local market initially and may expand to national and international level in future, 4. His expected Turnover for the first couple of years is between Rs. 5 lakh to Rs. 10 Lakh, and 5. He thinks having branding to his business form will boost his business.
Now, let’s see how we can give Mr. A his perfect form of Business by taking Compatibility Test:
So, we can see that Mr. A’s Business and deciding factors have given “Sole Proprietary” Business Structure 5 points whereas to “Private Company” 2 points.
So the result is: Mr. A should start his business in Sole Proprietorship and once his business starts to grow then he can probably think of converting his business structure to One Person Company or Private Company or LLP to gain the branding factor.
ILLUSTRATION NO 2:
Mr. M and Mr. N wants to start the business of Manufacturing Auto Parts. Their Factors are: 1. Joint Ownership, 2. Limited Risk and Liability, 3. Business Scope: All over India, 4. Investment: Heavy Funding is required. So they will both be introducing capital and taking loans as well. 5. Expected Turnover shall be around Rs. 50 Lakh for the initial year and expected to expand year by year and 6. Government Policy: Want to avail “Start Up India” benefits.[table id=5 /]
As a result; this test has given us multiple Business Structures. Now, how to solve this Dilemma!
1. Partnership Firm: If they choose this Business Structure; then they will be able to satisfy all the requirements except Partners’ Individual liability will be unlimited.
2. Private Limited and LLP: These Business Formats satisfies all the Factors and sacrifices nothing! So, How will they decide now!
An Ideal solution will be comparing the maintenance cost of these Business Structures. Generally maintaining an LLP will be cheaper than a Private Limited Company.
So, Mr. M and Mr. N can choose Partnership firm if they are willing to sacrifice the limited liability and risk factor. (They can always convert their business into LLP or Private Company once their business expands). Or they can choose LLP from the start!
Finally! See how easy it is to take the test! You also try it:)
Furthermore; Don’t forget to leave a reply and let me know what you think of the “Compatibility Test”!