One of the first steps when starting a new business, which is often not given enough thought to by the entrepreneur, but which is vital for the business to start operating, is deciding the type of business entity and registering the business.
A business entity is broadly defined as an entity that is formed as well as administered by one or more persons, in accordance with corporate laws to carry out the business activities, which can also sometimes include charitable work and other activities. There are various entities or structures such as a One Person Company (OPC), partnerships, sole proprietorships, limited liability partnership (LLP), companies or corporation, and limited liability companies (LLC). Registering a business under any one of the structures is mandatory under the laws of the country.
Importance Of Choosing The Appropriate Business Structure
Deciding on the structure while starting a business is as important as any other decision and task related to the business since an optimum structure will help the business carry out its operations efficiently. Chiefly, the Income Tax Returns structure and tax compliances vary depending on the type of business entity and thus by choosing the most suitable business structure, the entrepreneurs can streamline the taxation laws applicable to the particular business. The right business entity can also be effective for the business to meet its targeted goals.
Since there are a number of business structures to choose from, each entity has its share of positive and negative features but deciding the appropriate entity will depend on the nature of the business, the goals of the business and the requirements of the entrepreneurs starting and registering the business. For instance, a Company has to file income tax just like a partnership along with annual returns too with the Registrar of Companies and for this filing of returns they might have to hire accountants, auditors and probably taxation advisors which can be services that can add an additional cost to the Company. However, at the same time Companies have their share of advantages too. A detailed study to compare the difference between a partnership and company and similarly for other business entities can help entrepreneurs make a more informed and better decision.
The decision to choose the most appropriate business structure must be made while considering the specific requirements of the said business, such as-
- The number of partners or owners present in the business
- The initial investment made towards the business as the legal compliances and the cost towards fulfilling them needs to be adhered to
- The willingness to bear the liabilities of the business and to what extent
- The taxation structure and the Income Tax returns rate applicable to the business in question
- The availability of funds and the future ability to obtain funds from investors easily
Choosing the most appropriate business structure for a particular business can be quite a tough decision to make since there are so many types of entities to choose from. Knowing a little about each type of business entity can help entrepreneurs come to a more informed decision best suited to their business.
Information About Types Of Companies As Business Entities
Among all the different types of entities, such as a sole proprietorship and partnerships, a Company is the most popular and has a number of benefits for the enterprise too. A Company can be defined as an entity where there are shareholders who each have a stake in the Company and the liability of these members or shareholders is limited to their shareholding within the Company. Companies in India are governed by the Company Act, 2013 along with the rules and regulations stated in the Memorandum and Articles of Association of the Company.
Before wondering as to how to form a company, it is a good practice to know of the different business structures which can be categorised under a Company.
One Person Company (OPC)
This is a relatively new type of business entity where there is only one person but the structure combines the benefits of a Company too where the entrepreneur can operate as an independent business person while enjoying the benefits that come with being registered as a Company. An OPC is thus a structure where the sole owners have limited liabilities and tax advantages such as a tax holiday for the first three years along with benefits on depreciation and the dividend distributed is also free from tax. The legal compliances for this entity include business returns filed under Limited Registrar of Companies (ROC) as per the compliances.
Private Limited Company (PLC)
A Company, including a Private Limited Company, is basically where there are shareholders as well as directors of the Company but the Company is a legal entity which has its own separate identity, apart from that of the individuals. A Private Limited Company is best suited for businesses that have a high turnover. Under the tax compliance benefits enjoyed by this entity includes a tax holiday for the initial three years of the business, under the Startup India scheme and benefits on depreciation are also enjoyed. The legal compliances include tax returns to be filed along with returns to be filed to the Registrar of Companies and additionally, an audit is compulsory.
Public Limited Company (PLC)
This is a public entity where there is a voluntary association of members incorporated under the Company Law. A Public Limited Company is suited for businesses that have a high annual turnover. The entity, just like any Company, holds a separate legal identity and existence which is different from that of the shareholders who have a liability equivalent to that of the number of the shares the members hold. A PLC enjoys certain tax exemptions and needs to file tax returns and carry out audits mandatorily.
Limited Liability Partnership (LLP)
A Limited Liability Partnership is a separate legal entity where the partners in the partnership have liability that is limited to the contribution agreed to by the partners. A Limited Liability Partnership is suited for service-oriented businesses and similar low investment businesses. The entity enjoys tax benefits on depreciation and the legal compliances include tax returns and ROC returns to be filed by the business.
Benefits Of Opting For A Company As A Business Entity
The advantages of setting up a Company as a business entity include-
- It is a separate legal entity
- It is a well-structured organisation
- The member’s liabilities are limited to their shareholding with the Company
- The Company can raise funds and capital quickly by issuing shares to the members of the Company
- The Company’s existence is perpetual and ceases to be affected even if the directors or members of the Company leave or change
These features and advantages make a Company the preferred choice of business entity, especially in large and complex projects.
How To Form A Company?
It has been observed that often businesses are apprehensive about opting for a Company as a business entity while carrying out the registration of the business because they are clueless about how to set up a company and will thus make better decisions if are informed in brief about the steps involved in forming and registering a Company.
The first step involved in forming a Company is to arrange for the documents required for the registration and keep them handy. It is wise to keep a checklist for incorporation of company handy and some of the documents that are necessary for this incorporation include:
- Address proof and identity proof of the directors and shareholders of the Company such as an Aadhar Card and PAN card
- Address proof of the registered office of the Company
The actual procedure for forming and incorporating a Company involves filling out and filing e-forms present on the website of the Ministry of Corporate Affairs or MCA. The steps involved include-
Obtaining The Director’s Identification Number Or DIN
It involves the process where the directors of the Company get themselves registered and obtain a Director’s Identification Number or a DIN.
Obtaining Digital Signature Certificate Or DSC
It involves the process where the directors of the Company or authorised representatives of the Company obtain a Digital Signature Certificate or a DSC.
Registration Of The Company Name
This step involves registering the name of the Company with the Registrar of Companies while ensuring that the proposed name is not already present. For reserving and approval of proposed name a form needs to be filed through RUN (Reserve Unique Name) service available on MCA website. Also, the name of a Private Limited Company must end with “ Private Limited or Pvt Ltd” while the name of a Public Limited Company must end with “Limited or Ltd” while naming the Company.
Stamping Of The Company Documents
This process involves the submission of documents for the incorporation of the Company. The important documents include the Memorandum of Association and Articles of Association. Additionally, another form is also filed which is named as the SPICE Form which stands for Simplified Proforma for Incorporating Company Electronically.
Getting The Certificate of Incorporation
After the submission of the documents, a scrutiny of the documents is carried out by the Authorities after which they might suggest or ask for corrections, which after being implemented and submitted, result in the Company Certificate of Incorporation being issued.
Post the entire process involved in forming a Company, including filling out and filing of documents, it takes approximately 15 to 20 days to obtain the Certificate of Incorporation. At the end of the submission process, the Company formed gets the following documents of Incorporation-
- The filed Incorporation forms
- The Certificate of Incorporation
- The Memorandum and Articles of Association
While forming a Company it must be kept in mind that the formation of a Company is costlier and time-consuming than registering for other types of business structures. Also, a Company has to adhere to several compliances, which if not completed, can result in legal proceedings and penalties against the Company. Additionally, the tax percentage for a Company is comparatively higher and the procedure to dissolve a Company is also a lengthy procedure. The other points to keep in mind while forming a Company is to consider the means of raising capital for the Company and also listing down the activities to be undertaken by the Company to be formed.
For assistance regarding making the right choice of selecting a business structure to the procedure to register the business under that structure, contact deAsra for sound advice and guidance.