EDITIONS

Starting of business in India

Various modes of business and their major compliance

Suman Kumar
28th Jul 2018
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one of the most important question in the mind of every entrepreneur is which form of business structure suits them? In this article, we will discuss some major forms of the business structure so that we can understand which form of business structure will meet our requirements to the best.

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Some of the major business models prevailing in India are as follows:

*Sole Proprietorship

* Partnership

* Company

Let,s start with one of the simplest and easiest forms of business model prevailing in India i.e. Sole Proprietorship.

Sole Proprietorship

A sole proprietorship is a type of unregistered business entity that is owned, managed and controlled by one person. Sole proprietorships are one of the most common forms of business operating model in India and is widely used by most micro and small businesses operating in the unorganised sectors. The most important feature of Proprietorships is that it is very easy to start and have very minimal regulatory compliance requirement for starting and operating.

It may be noted that there is no mechanism provided either by the Central government or by any state government for the registration of a Proprietorship. Therefore, the existence of a proprietorship must be established through tax registrations or other business registrations that a business is required to have as per the rules and regulations applicable to that particular business. 

For instance GST Registration can be obtained in the name of the Proprietorship firm if the business activity of the proprietorship is within the ambit of GST and if the business activity of the proprietorship is Import and export then IEC (Import Export Code) Registration can also be obtained in the name of the Proprietorship firm apart from these registrations Trademark can also be obtained in the name of sole proprietorship concern.

No separate Pan card is issued for the sole proprietorship firm however a current account can be opened in the name of sole proprietorship firm

Partnership

Another major type of business model prevailing in India is a partnership firm. Partnership firm is owned, managed and controlled by an Association of People for profit. Partnership firms are created by drafting a Partnership deed which consists of the rights and obligations of all the partners. A partnership firm is suitable in case of a business where the initial capital requirement is medium i.e. it is neither too large nor too small. 

Business like retail and wholesale trade or small manufacturing units can be successfully started by partners. In a partnership firm persons having a different ability, managerial talent, skill, and expertise join together. So it is most suitable for a construction business, legal firms etc. where each partner contributes the best as per his specialization and experience.

There is two types of Partnership firms, registered and un-registered Partnership firm. It is not compulsory to register a Partnership firm; however, it is always advisable to register a Partnership firm due to the added advantages of the registered firm over unregistered firm as mentioned under Section 69 of the Indian Partnership Act, 1932. Some of the major benefits of registering partnership firm are as follows:

a. Power to file a case in a Court by a partner against the firm or other co-partners

If any dispute arises among the partners or between a partner and the firm or between a partner and ex-partners, and the dispute is based upon the rights arising from contract (i.e. partnership deed) or upon the rights conferred by the Indian Partnership Act, 1932, then a partner of a registered firm can always file a case in the court. This power is not available to the partner of an unregistered firm.

However, a criminal proceeding can be brought by a partner of an unregistered firm against the other partner(s). Thus, if a partner steals the property of the firm or puts fire to the buildings of the firm, any partner can prosecute him for the same.

b. Power to file a case in Court by the firm against 3rd parties

The partners of a registered firm can always file a case in the court (if required), to enforce any right arising from contract e.g. for the recovery of the price of goods supplied. This power is not available to the partners of an unregistered firm (except in case of a criminal proceeding).

It should, however, be noted that although an unregistered firm cannot file a case against the 3rd party, the 3rd party always has the power to file a case against both registered as well as unregistered firm.

c. Power to claim set-off

If a 3rd party sues the firm to recover a sum of money the registered firm can always claim a set-off i.e. the registered firm can say that the 3rd party also owes some money to the firm and the same should be adjusted against the claim in question. This power is not available to an unregistered firm.

The above are some of the major benefits of registering a partnership firm and all partnership firms are advised to register themselves with the registrar of firms. It should however be noted that registration for Income Tax purposes is different from registration with the Registrar of Firms. Registration with Income Tax Department is mandatory for all Partnership Firms.

Statutory Compliance

It may be noted that it is mandatory for the Partnership firm to file Income tax return of the firm irrespective of the fact whether the business is in profit or loss.

Due dates for filing return of firm

a. 30th September, where accounts of the partnership firm are required to be audited under the Income Tax Act or under any other law for the time being in force.

b. 31st July in any other cases

Limited Liability Partnership(LLP)

However, with the introduction of Limited Liability Partnerships in India, Partnership Firms are losing their prevalence due to the added advantages offered by a Limited Liability Partnership one of the major advantage is that LLP has separate legal entity and another is that Liability of the Partners is limited in case of LLP i.e., only the amount contributed by the Partners to the firm can be used to pay off the debts of the LLP.

LLP Provides the benefits of both partnership firm and company into a single form of organization.

Name of LLP Every limited liability partnership shall have either the words “limited liability partnership” or the acronym “LLP” as the last words of its name.

Statutory Compliances

FILING WITH REGISTRAR OF LLP

1. Filing of Annual Return

An LLP is required to file the Annual Return with the Registrar of LLP (Form 11) within 60 days of closure of its financial year. An LLP has to close its financial year on every 31st March. So, the Annual Return is to be filed on or before 30th May every year.

2. Filing of Annual Accounts

Every LLP has to maintain books of accounts as per the double entry system of accounting and prepare a Statement of Accounts and Solvency (Accounts) every year ending on 31st March. LLP has to file such Accounts to the Registrar of LLP (Form 8) within 30 days from the end of 6 months of such fiscal year. So, the filing of Accounts is to be filed on or before 30th October every year. In case of an LLP whose annual turnover exceeds

Rs.40 lakhs or whose contribution exceeds Rs.25 lakhs shall be required to get its accounts audited by a Practicing Chartered Accountant.

INCOME TAX

An LLP has to file its Income tax Returns on or before the due dates as follows:

a. 30th September or such other date as may be notified by the Income Tax authorities where accounts of the LLP are required to be audited under Income-tax Act or under any other law for the time being in force.

b. 31st July in any other cases

COMPANY

Doing business in company form is one of the most organized ways of doing business. There are two types of Companies

1) Private Limited Company, and (Minimum two members and two Directors)

2) Public Limited Company (Minimum Seven members and three Directors)

Out of two/three directors, one director must be a director resident in India.

But for new-entrants, it is always advisable to incorporate private Limited Company or One person Company(Type of private Limited Company consisting of only one member and one director) initially. As Private Limited companies enjoy many exemptions under the Companies Act, 2013.

Here are Some of the major advantages of doing business in company form:

a) Limited Liability

First and foremost benefit of doing business via company is the limited liability conferred upon the company's directors and shareholders. As a sole trader or partnership business, personal assets of the proprietor or partners can be at risk in the event of a failure of the business, but this is not the case for a Company. 

The unfortunate events like business failures are not always under an entrepreneur’s control; hence it is pivotal to secure the personal assets of the businessman in the event of crises. Unlike proprietorship and partnership, if a Company becomes insolvent and is wound up, only the assets of the company are used to clear its debts. 

The Directors or Shareholders of the company have no personal liabilities and are not made bankrupt and are free to carry on business.

b) Separate Legal Entity

A private limited company is a juristic person established under the Act. It has its existence separate from its directors and members. Privately limited company status enables you to be taken more seriously than a proprietorship/partnership status does.

operating as a private limited company often gives suppliers and customers a sense of confidence in a business. Larger organisations, in particular, will prefer dealing with private limited companies than proprietorship/partnership organisations.

c). Perpetual Succession

Another important characteristic of a private limited company is perpetual succession. It is a popular saying that the directors may come and go the members may come and go, but the existence of a company remains forever. A company once incorporated remains alive unless and until it is wound up by complying with the provisions of Law. The death, disability or retirement of any of its members does not affect the continuity of the company, irrespective of change in its membership.

d) Project Cost and Risk Factors

For entrepreneurs going for hi-tech or high capital outlay projects, it is always advantageous to go in for a company form of organization. Where the financial stake involved is high, it is found that banks and financial institutions while sanctioning financial assistance, insist on having a private limited company

e) Borrowing Capacity

A company enjoys better avenues for the borrowing of funds. It can issue debentures and can raise funds by way of private placement etc. Even banking and financial institutions prefer to render large financial assistance to the company rather than partnership firms or proprietary concerns.

FILING WITH REGISTRAR OF COMPANIES

1. Filing of Annual Return

A Company is required to file the Annual Return with the Registrar of Companies (Form MGT-7) within 60 days from the date of Annual General Meeting (AGM) of the company.

2. Filing of Financial Statements

A Company is required to file the Financial Statements with the Registrar of Companies (Form AOC-4) within 30 days from the date of the Annual General Meeting (AGM) of the company.

It is mandatory for the Company to get its accounts duly audited by a Practicing Chartered Accountant.

INCOME TAX

A Company have to file its Income tax Returns on or before 30th September or such other date as may be notified by the Income Tax authorities

MISCELLANEOUS

It may be noted that in all form of business models If the tax liability is more than Rs 10,000 in a financial year then advance tax provisions need to be compiled by the assessee.

Due date of filing the Income Tax Return by Assesse who are required to furnish report under sec 92E of the Income Tax Act, 1961 is 30th November 2018.

Note: This editorial is just for knowledge sharing and not a professional advice

The author is a Corporate Consultant and Practising Company Secretary at K Suman & Associates (Company Secretaries) and can help you in starting your business and can be reached at cskumarsuman@gmail.com.

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