India is an emerging market with wide scope and opportunities for both Indian and foreign investors. The Government of India offers entrepreneurial friendly policies which makes invasion and growth of businesses in India easier. Before starting a business it is very important for the entrepreneur to prepare a blueprint of his business.
The choice of a business organization is driven by a combination of several factors such as nature of activity, capital requirement, degree of independence required, etc. There is no ready made formula for selecting the particular type of business organization. Tax consideration is also an extremely important factor besides incurring recurring cost for particular business entity and restrictions imposed by parent law of the entity.
Proprietary Firm-Self Employed.
A Sole Proprietorship describes any type of business owned by one individual, and is among the most basic of business structures. The Sole Proprietorship can be any size, from a simple corner market, to a large warehouse. Their inherent simplicity makes them the easiest business to get off the ground, but this simplicity of structure also leaves the owner of the sole proprietorship vulnerable to direct liability. The owner is completely responsible for its debt and tax liability, and this means that all of his business and personal assets would be in jeopardy in the event of a financial, tax, or legal liability or litigation that resulted in an unfavorable outcome. This loss can arise from a business or a personal dispute.
Sole proprietorship is a form of business or Professional entity where a single individual handles the entire business organization. He is the sole recipient of all profits and bearer of all loses. There is no separate law that governs sole proprietorship and hence no registration required. However there are requirements by local municipal laws to get the entity registered with them. An example is Shops & Establishment Registration (Gumasta Dhara) with BMC, which now has been relaxed to require that only information to be submitted online. As regards obtaining PAN, you don`t have to apply for new PAN but het the name of your Proprietary Firm incorporated in your personal PAN by applying for change in personal PAN. For manufacturing activity obtain SSI/MSME Registration.
Hindu Undivided Family-HUF
The Joint Hindu Family Business is a distinct form of organisation peculiar to India. Joint Hindu Family Firm is created by the operation of law. It does not have any separate and distinct legal entity from that of its members. The laws that govern HUFs are not codified and are read along with the Hindu Succession Act and the Income-tax Act.
The business of Joint Hindu Family is controlled under the Hindu Law instead of Partnership Act. The membership in this form of business organisation can be acquired only by birth or by marriage.
The business of the Joint Hindu Family is controlled and managed by one person who is called ‘Karta’ or ‘Manager’. The Karta or manager works in consultation with other members of the family but ultimately he has a final say. The liability of Karta is unlimited while the liability of other members is limited to their shares in the business.
The Joint Hindu Family Business can be dissolved only at the will of all the members of the family. It is very easy to start the Joint Hindu Family Business. No legal formalities are required to be faced, such as registration. It requires no agreement, though in actual practice, it is documented to avoid litigation and for regulatory purposes.
It`s a Family entity, separate from Individual family members. No Audit or Books to be maintained till Turnover of Rs.2 cr. and presumptive Income @ 6% (8% for Non Cheques turnover). Income Stream Business, Property, Capital Gains or Investment related.
Key Points in creation of HUF is Deed.
So to open HUF account we should take following steps.
1. HUF Formation Deed. (Many banks have their own format)
2. Gift Deed for receiving funds-Inheritance, Gifts from “Relatives” other than members of this HUF.
3. Permanent account number (PAN)
4. Open a bank account and D`mat Account
Partnership Firm:
A Partnership describes any business or enterprising venture where there is more than one owner involved. The partners in a partnership can be individuals, corporations, or trusts, and the ownership is shared among the partners; this includes all income as well as all debt and liability. While a partnership can facilitate the launching of a business or venture because assets are pooled in the interest of the business, the downside of a partnership has many hidden dangers. Chief among these dangers is that of unlimited, direct liability for all of the partners. Because they are direct owners of the business, the partners are also directly liable for any debts incurred, any losses experienced, or any tax or financial liabilities that arise from the operation of the partnership. Further, the partners face risk even from themselves, with the ability of any of the partners to engage the business in financial obligations that may not be beneficial to the business, or that result in financial or tax liability. And the liability is not limited to financial commitments: the rest of the partnership can be liable for any actions committed by another partner, leaving them exposed to lawsuits. Finally, although there can be some tax advantages in a partnership over a sole proprietorship, they are not as significant as they can be with a properly organized, incorporated business. Partnership is “the relation between persons who have agreed to share the profits of the business carried on by all or any one of them acting for all”. It is governed by the Indian Partnership Act 1932.
Key features: Registration required. Partners (Maximum 20), Capital, Interest on Capital @ 12%, Salary limits to partners, Profit Share. No Audit or Books to be maintained till Turnover of Rs.2 cr. and presumptive Income @ 6% (8% for Non Cheques turnover).
Co Operative Society: Registration required, shares, Salary, Dividend, Compulsory Audits, Tax @ 30%.
Most of the societies, nowadays are found to be carrying on business activities. The profits and gains from such business by society are to be determined according to the regularly employed method for such computation and according to accepted commercial principles. The approach adopted by society must be consistently followed every year. Thus, a co-operative society may adopt a cash basis method or a mercantile basis method. What is important is that the same system should generally be continued.
Limited Liability Partnership (LLP):
Under LLP (Limited Liability Partnership) the liability of at least one member is unlimited whereas rest all the other members have limited liability, limited to the extent of their contribution in the LLP. Unlike general partnership this kind of partnership does not get terminated by the death or insolvency of the limited partners. It is governed by Limited Liability Partnership Act of 2008.
Almost similar to Partnership with no limit on number of Partners but with limited liability to partners.
Private Limited Company (Pvt.): Key Highlights: Registration required with minimum 2 & maximum 50 members, shares, Salary to all working Directors, Dividend after payment of taxes. Costly because of compliances and audits, many restrictions on loans, interested party transactions, strict compliances, heavy penalty for delay. Compulsory Audits.
Public Limited Company (Company): Key Highlights: Registration required with minimum 7 members with no upper limit, shares, Salary to all working Directors, Dividend after payment of taxes. Costly because of compliances and audits, many restrictions on loans, interested party transactions, strict compliances, heavy penalty for delay. Compulsory Audits of accounts and normally preferred for large venture. Generally preferred where outside Investors are insisting.
Liaison Office Liaison Office is a kind of representative office which is set up to understand the business and investment environment. It is barred from taking up any commercial/industrial/trading activity and its role is limited to aggregation of information and promotion of exports/imports. It has to maintain itself out of inward remittances received from the parent company.
There are provisions for Conversion of Existing Business Entity like Proprietary or Partnership firm to LLP, Pvt Ltd. Company or Public Limited Company to scale of your business or Profession.
Basic requirements for any Entity:
· Shops Establishment License from Municipality
· PAN Number
· TAN (for TDS Deductions & payments)
· GST (Minimum Turnover Rs.40 lakh)
· Professional Tax is a kind of tax charged by various State Governments. The tax is charged on the income earned by individuals who are engaged in various businesses & professions and to be paid by business entity as well as deducted from Employee`s monthly salary as per slabs.
· Labour Laws Applicability: Over 20 Employees
· Maintenance of Books: As per Income Tax, If Total Receipts exceeds RS. 25 Lakh in a year
· Bank Account-Bank would ask for PAN & Registration Document.
· Chartered Accountant Certificate to open Bank Current Account is desired by many Banks.