5 Reasons why company registration is NOT a good idea!

27th Jun 2016
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Is it mandatory to register a company before starting a business in India? The answer is no!

Registering a company is not the only way to start a business in India. There are many other ways to start your business in India, but people are not familiar with.

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The simplest way to start your own business is to acquire any tax license, like service tax registration. Here are four steps that need to be followed to start your own business in India:

  1. If you are a services provider (for example, a tech startup, etc.), service tax registration is necessary (maximum cost will be Rs 3,000 including registration and it will take four to six working days).
  2. Open a current account with any bank of your choice with the license obtained. Now, you can run your business easily.
  3. For service tax, you just need to file the two half yearly returns, which can cost you Rs 2,000 max.
  4. Further, once your business is established, you can easily convert it into a private limited company, LLP or any other form of your choice.

Now, here are five reasons why you should not register your company to start your business in India.

  1. Costly affair: A startup has limited funds with many ideas. Hence, in the beginning you must spent your money on the value additions rather than incurring on company registration. Company registration is a costly affair, further the yearly annual compliances, accounting, stringent penalties only makes it worse.

Let us compare the cost incurred to run a private limited company and the service way.

ParticularsPrivate Limited CompanyService tax wayDifference
Incorporation cost15,0003,00012,000
Annual maintenance cost15,000*2,00013,000
Average fees for changes like director change, etc.5,000-5,000
Penalties and interest6,0001,0005,000
Grand total41,0006,00035,000

*We have assumed the least possible cost for company. The figures may increase depending upon the revenue numbers

Apart from the cost difference above, there are 25 percent of people who also strike off the company as they are not able to run their business freely.

Also, in the year 2015-16, more than two lakh people have chosen the service tax way to start their business in India.

  1. Complexities of Companies Act: Once you are registered as a private limited company, then you are bound to follow the stringent and binding provisions of the Companies Act.

Here are few restrictions that you are supposed to comply failing which might end up you in trouble:

  • The Director or shareholder cannot take money directly from the company. Any amount taken from the company will be attracting penal action.
  • A director is not allowed to take loan from the company.
  • You can take money out of the company, only if you are earning adequate profits.
  • You cannot take loan or any amount from any third party.
  • You can take a salary from the company, but that too in consonance with the Companies Act, 2013.

These are just few restrictions. There are a number of transactions that are under lens of the law. However, when you start your business simply with tax registration, there is no law restriction. You are free to do anything!

  1. The compliance burden: To get on top of the business, you must be free in all senses with all the focus on the prime objective. However, this is not true when you choose the company as your form of business.

The compliance burden on entrepreneurs is so high that they tend to waste a lot of time into legal troubles. Further, the heavy penalties on disobey of any provision only makes things worst.

  1. The closure cost: In India, it is easy to start but difficult to exist. Closing a private limited company is not easy. If you have carried on the business for some time and now you want to close it, then you might have to do a lot of hard work.

Sometimes, government does introduce some schemes under which a company gets dissolved easily. However, those schemes are not permanent and then you have to follow the worst and the longest procedure to strike off your company.

  1. The MVP dilemma: Before reaching to any conclusion or heavy spending, one should check the minimum viability of the product. Hence, if you had incorporated a company and acquired all the licenses and then you are checking your MVP, then you might have to think again before you are planning to do these things.

There is no point wasting time, money, and energy on something which is not worthy of it. Hence, one should start a business as a proprietor in the beginning and then gradually upgrade it to a full fledge company.

Conclusion

We have explained to you the advantages of starting as a proprietor. Be like a lean startup and gradually evolve your business. We recommend registering for service tax first and then you built your business and gradually upgrade yourself to a fully fledged company.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory)

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