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Business Set Up in India

Setting Up a Business in India

 

Business Entity Type

  • Proprietorship Firm
  • Partnership Firm
  • Private Limited Company
  • Public Limited Company
  • Limited Liability Partnership (LLP)

 

  1. Proprietorship Firm - It is the most common and easiest business setup in India.
    1. Advantages
      1. Very easy to start and wind up.
      2. Income tax rates are as per the slab rates prescribed to Individual that may be 10, 20 or 30%. (Hence most income tax effective for starters).
      3. Most preferable to businesses/profession usually having small market, small capital, like freelancers, small traders, small service providers.
      4. Relatively there is very little statutory compliance burden at the initial level as compared to other type of business entities.
      5. There are no mandatory registrations required by the law to get the proprietorship firm registered subject to trade registrations (e.g. Vat Registration/ Service Tax Registration).
    2. Disadvantages
      1. It is not an ideal type of entity for all businesses.
      2. It is very difficult to raise capital hence this entity will have limited growth potential.
      3. Legally Proprietor and Firm are not distinctive nature and there is no protection for the personal assets of the proprietor in case of payment defaults, creditors can make claims against the personal assets of the owner.
      4. This form of entity is less attractive to investors or financial institution as it has no long term vision or transferability or transparency.
      5. In a business scenario where there are more than one owner then proprietor firm cannot solve the purpose. This limitation can be taken care in all the other type of business entities.

For Registration, Process, costs, compliances and documents required for Proprietorship Firm please contact us at varun@avcindia.co.in

  1. Partnership Firm: - To Form a partnership firm at least two people are required which are called partners in this kind of business entity.

Partnership firm is formed by an agreement which is known as Partnership Deed. Partnership Deed is the key document in forming a partnership firm which should be very carefully prepared. The law relating to a partnership firm is contained in the Indian Partnership Act, 1932. Likewise Proprietorship Firm It also does not require compulsory registration of firms. It is optional for partners to register the firm and there are no penalties for non-registration. A partner of an unregistered firm cannot file a suit in any court against the firm or other partners for the enforcement of any right conferred by a contract or the Partnership Act. Likewise the unregistered firm cannot seek legal action in the court of law against any third party howsoever it does not limit a third party from suing the firm. In order to avail legal privileges a partnership firm must be registered with the Registrar of Firms. It is not necessary to register at the time of formation. A firm may be registered at any time by filing two wheel electric scooter for sale an application with the local Registrar of Firms.

  1. Advantages
    1. As like Proprietorship Firm there are no mandatory registrations required by the law to get the Partnership firm registered subject to trade registrations (e.g. Vat Registration/ Service Tax Registration).
    2. This arrangement enables enterprising individuals to pool their resources to establish and expand a business.
    3. Most preferable to businesses/profession providing service or small scale companies which require pooling of capital and management expertise for running of the business.
    4. Relatively there is very little statutory compliance burden at the initial level as compared to other type of business entities.
  2. Disadvantages
    1. Partnership Firms in India can have a minimum of two partners and a maximum of 20 partners.
    2. Income tax rate is flat 30% from the single Rupee of Profit which is very high as compared proprietorship firm.
    3. Like proprietorship the firm also does not have a separate identity, the partners and the firm is one and the same. In the event of the assets and property of the firm is insufficient to meet the debts of the firm, the creditors can recover their loans from the personal property of the individual partners.
    4. All the partners are liable for the acts of all the other partners.
    5. There are restrictions on transfer of rights; no partner can transfer his individual rights to another third party without the unanimous consent of all the partners. The firm may be dissolved on the retirement, lunacy, bankruptcy, or death of any partner.

 

  1. Limited Liability Partnership (LLP):- It was introduced in India through Limited Liability Partnership Act, 2008. Limited Liability partnership provides all the benefits of an incorporated company as well as the flexibility of a partnership. Likewise the partnership firm, LLP and its partners shall be governed by an agreement between partners or between the LLP and the partners subject to the provisions of the LLP Act 2008. The LLP is required to maintain proper accounts. Annual statement of accounts and solvency shall be filed by every LLP with the Registrar. LLP agreement is the key document in formation of Limited Liability Partnership which should be drafted very carefully (preferably with the help of a consultant).
  1. Advantages
    1. Unlike a partnership firm there is no restriction on the number of partners.
    2. It has a unique legal identity and is separate from the partners.
    3. Unlike the partnership firm, the liability of the partners is limited to their agreed contribution in the LLP.
    4. There is no minimum capital requirement
    5. This arrangement enables enterprising individuals to pool their resources to establish and expand a business.
    6. The relative ease of setting up an LLP as compared to companies, limited liability, perpetuality and minimal compliance requirement and cost makes it increasingly popular among small businesses involving professionals.
    7. Internationally renowned form of business in comparison to Company
  2. Disadvantages
    1. LLP cannot raise funds from the public.
    2. Any act of the partner without the other may bind the LLP.
    3. Under some cases, liability may extend to personal assets of partners.
    4. No separation of Management from owners.
  1. Private Limited Company- The governing provisions for a Private Limited Company are contained in The Companies Act, 1956. A private limited company must be appropriately incorporated with the Registrar of Companies (ROC). India being a vast country with several provinces, ROCs are located across the states and Union Territories. A company incorporated in any state of India can do business all over India.

The minimum paid up capital at the time of incorporation of a Private Limited Company is INR 100,000. It can be increased any time, by payment of additional stamp duty and registration fees. A Private Limited Company must have a minimum of two and a maximum of 50 members as its shareholders. It must have minimum of two directors and maximum of 12 directors. Where the paid-up capital is equal to or exceeds INR 50 million a company secretary must be appointed. The shareholders and directors need not be locals.

  1. Advantages
    1. A Private Limited Company has a separate legal identity. It is perpetual. Although the liabilities of the shareholders are limited, at times, the liability of a Director/Manager can be unlimited.
    2. A Private Limited Company is easy to set up and there are relatively less compliance requirements than a public limited company.
    3. The liabilities of the share holders are limited to the shares subscribed by them.
    4. Nevertheless, it is an ideal vehicle where the shares of the company will be closely held and where there is no requirement for more capital to be raised through public issue.
  2. Disadvantages
    1. A Private Company is prohibited from inviting the public to subscribe for any shares or debentures of the company.
    2. It is also prohibited from inviting or accepting deposits from persons other than its members, directors or their relatives.
    3. The shares can be transferred only among its members and it involves some restrictions.
    4. Growth may be limited because maximum shareholders allowed are only 50.

 

  1. Public Limited Company

The regulatory provisions for this type of entity are contained in The Companies Act, 1956. A Public Limited Company must be registered with ROC.

A Public Limited Company is a Company limited by shares in which there is no restriction on the maximum number of shareholders, transfer of shares and acceptance of public deposits. The minimum paid-up capital for a public limited company is INR 500,000. A Public Limited Company must have a minimum of seven shareholders and have a minimum of three directors and maximum of 12 directors.

ADVANTAGES

  1. It is the highest form of doing business in India. Many of the big incorporations are public ltd co. It gives a brand value to the organisation.
  2. A public ltd co can attract huge amount of capital through issue of shares, for more capital you can increase through authorized capital and you can issue further capital.
  3. A public co has separate legal entity; its existence is different from its directors and shareholders. Even in case of death, insanity, dissolution of members the company still exists. The only way to close a company is to liquidate or wind up the company.
  4. The shares of public ltd company are freely transferable even without the consent of its shareholders.
  5. The share holders of a ltd co are not entitled to participate in the day to day management affairs of the company, it maintains separation of ownership from management.
  6. It ensures limited liability, the members are required to only that much amount which is unpaid on the shares held by them.

         DISADVANTAGES

  1. The public ltd co is strictly governed by laws to protect the public which has invested their monies. 
  2. The disclosure requirements are very high in case of a public ltd. co.
  3. There is large number of statutory and legal compliances to be followed by a public ltd co.
  4. It is a expensive form of organisation specially for small and medium sized organisations due to its high cost of incorporation and as well as annual recurring cost of statutory compliances.

 

Looking for Ca Firms in Gurgaon please contact us at varun@avcindia.co.in

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