Tuesday 3 March 2015

All about start ups formation and your first venture

The First question that every start up faces is "what should be the organisational format to proceed with?"
Many startups end up going for a costly business format even though not necessary. One should always consider below mentioned things for choosing the correct business format so that the funds don't get diverted to unnecessary activities and also avoiding there by complicated legal compliances. 
There are five business formats currently which are commonly adopted by startups. i.e. Individual or proprietorship, Partnership firm, Limited Liability Partnership (AKA LLP), Limited Company and Association of person (AKA AOP, BOI).
Following points one must take in to account before starting a venture. 

1. Business as a Freelancer (Individual / Proprietorship) 

If you are selling services as a freelancer or individual, there is no need to register a company. Freelancers such as consultants, authors, designers or any one providing services just need a bank account in their name or a facility like 'PayPal' to receive overseas payments. 
It doesn't matter how the payment is received. The question here is: for what the payment is received. Self-employed professionals have to pay taxes on their income just like any individual would on their income. The normal tax slabs and respective rates that apply for employees also apply for freelancers. Apart from this you also need to consider in to account the Service tax which is an Indirect Tax levied on Gross amount of Fees you charge to your clients. In case you are charging a lump sum fees the Service tax will be calculated on inclusive basis. 
Although a proprietorship concern does not require any registration, all specific business licenses are required to be obtained depending on their applicability. e.g. if you are providing a service and has a turnover more than 10 Lacs in a particular financial year, you need to obtain service tax registration. Click here for a list of common licenses required to run a business. Click here to know more

2. Partnership Company: 

A General Partnership Firm (many times referred as Partnership Firm) is a business entity formed by 2 or more people. This business form has not been very popular in India in recent few decades. A GP is not a separate legal entity in the eyes of law. Although it is treated as a separate entity for all taxation purposes (direct taxes or indirect taxes). The law also allows the partners of a GP firm to sue or to be sued in the name of firm (only applicable for registered firms). As per Indian Partnership Act, 1932, 'partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. Read more....

3. Limited Liability Partnership: 

LLP is a separate legal entity from its partners. Any two or more persons, associated for carrying on a lawful business with a view to profit, may by subscribing their names to an incorporation document and filing the same with the Registrar, form a Limited Liability Partnership. The LLP has a perpetual succession. The liability of the partners are limited to their agreed contribution in the LLP which may be of tangible or intangible nature or both tangible and intangible in nature.

The minimum number of Partners or Designated Partners is 2. The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners is governed by an agreement between partners or between the LLP and the partners subject to the provisions of the LLP Act 2008. To form LLP Click here 

A firm, private company or an unlisted public company is allowed to be converted into LLP in accordance with the provisions of the Act. Upon such conversion, on and from the date of certificate of registration issued by the Registrar in this regard, the effects of the conversion shall be such as are specified in the LLP Act. On and from the date of registration specified in the certificate of registration, all tangible (moveable or immoveable) and intangible property vested in the firm or the company, all assets, interests, rights, privileges, liabilities, obligations relating to the firm or the company, and the whole of the undertaking of the firm or the company, shall be transferred to and shall vest in the LLP without further assurance, act or deed and the firm or the company, shall be deemed to be dissolved and removed from the records of the Registrar of Firms or Registrar of Companies, as the case may be. Read more.....

4. Private Limited Company: 

A Private Limited Company is a Company limited by shares in which there can be maximum 200 shareholders. It cannot offer its shares or debentures to Public, cannot make or accept deposits from Public and there are restriction on the transfer of shares. The liability of each shareholder is limited to the extent of the amount of shares subscribed. However, the liability of a Director / Manager of such a Company can at times be unlimited. Read more ....

5. Association of person or Body of Individual:

This is not a common formate for business. Moreover it is also not tax friendly. The taxation is always on higher side. Generally these are formed for a non profit organisations. Read more...

I hope this post helped you get an overview of the different types of business formations available in India. The format would also depend on future predictions, Business Plan, Proposed Angel investments and so on. 
CA Anand Mutha 

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