Guidelines To Starting A Business

Advisory

Type Of Legal Entity:

Similar to world over in India also there are various types business formats like Proprietorship Firm, Partnership firm, One Person Company (OPC), Limited Liability Partnership (LLP), Private Limited Company, NGO / Not-for-profit etc. Each of these format have its own advantages and dis-advantages. The decision to select business format depend upon type of business, scale, tax issues, long term vision, licenses, regulatory rules, management control, skill and capabilities of founder etc.

Overall Steps for Start-up:

Each of the type of business structure has more or less same sequence of actions to set-up like Finalise Structure Type, Check availability of Name for Trademark & Domain, check availability of company / LLP names, legal documentation for registration, obtaining DIN and Digital Sign, bank account, tax registrations, licenses for business and local body, office lease, employment contracts, registration of trademark and domain name etc.

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Private Limited Company

Limited Liability:

Generally limited to the amount required to be paid up on each share.

Long and continuity of Existence:

Private Limited companies are not affected by the status of their owner when it comes to their existence. Death or inability to continue the company by the owners does not hinder the proceedings of the company.

Ease of Raising Funds:

In a Private Limited Company, the minimum shareholders has to be 2 and the maximum shareholders can be 50, the limited number of shareholders and the reputation of private limited company makes it easier to raise capital funds in comparison to other forms of companies. Therefore, we can say scope of expansion is greater when a private limited company is incorporated. Taking debts from banks and other financial ventures is quite easy too

Limited Liability Partnership:

LLP is an alternative to corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. LLP is a newly introduced legal entity type in India for small and medium sized businesses. It is capable of entering into contracts and holding property in its own name. Only one partner is not responsible or liable for another partner misconduct. LLP will be operated not according to the company Act, 2013 but according to LLP agreement which is formed during the formation of the Company.
The property of LLP is not the property of its partners. Therefore, partners cannot make any claim on the property in case of any dispute among themselves.

Advantages of a Limited Liability Partnership

  • Low cost for setting up and running up
  • No limit on number of partners
  • Easy to establish
  • Less Compliance level

One Person Company:

One Person Company (OPC) is a form of business thereby carrying on the business in the Sole Proprietor form of business under the Companies Act, 2013. One Person Company is a perfect mix of Sole Proprietor and Company form of business.

Advantages of One Person Company (OPC)

  • One person company has better benefits than private limited company.
  • Limited Liability
  • Easy Funding
  • Minimum and maximum 2 persons as Director and Nominee Director

Partnership Firm:

Advantages of Partnership Firm

  • Formation of a Partnership Firm is easy
  • Tax Advantage
  • There is flexibility
  • Most suitable for small and medium scale business

In partnership firm, there is sharing of risk by the partners respectively.

Indian Government is committed to create an eco-system for ‘start-up’ to reduced initial struggle for entrepreneurs hence Govt. has announced a Start-Up India Policy in 2016 to create an eco-system covering various benefits to start-ups like concessional cost to form a company, subsidy for patent and trademark cost, get funding, tax benefits etc.

Eligibility:

    1.  It must be an entity registered/incorporated as :
      a. Private Limited Company under the Companies Act, 2013; or
      b. Registered Partnership firm under the Indian Partnership Act, 1932; or
      c. Limited Liability Partnership under the Limited Liability Partnership Act, 2008.
    2. Five years must not have elapsed from the date of incorporation/registration
    3. Annual turnover (as defined in the Companies Act, 2013) in any preceding financial year must not exceed Rs. 25 crore.
    4. Startup must be working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
    5. The Startup must aim to develop and commercialise:
      a) a new product or service or process; or
      b) a significantly improved existing product or service or process that will create or add value for customers or workflow.
    6. The Startup must not merely be engaged in: developing products or services or processes which do not have potential for commercialisation; or
      b. undifferentiated products or services or processes; or
      c. products or services or processes with no or limited incremental value for customers or workflow
    7. The Startup must not be formed by splitting up, or reconstruction, of a business already in existence.
      The Startup has obtained certification from the Inter-Ministerial Board, setup by DIPP to validate the innovative nature of the business, and
      a. be supported by a recommendation (with regard to innovative nature of business) , in a format specified by DIPP, from an incubator established in a post-graduate college in India; or
      b. be supported by an incubator which is funded (in relation to the project) from GoI as part of any specified scheme to promote innovation; or
      c. be supported by a recommendation (with regard to innovative nature of business) , in a format specified by DIPP, from an incubator recognized by GoI; or
      d. be funded by an Incubation Fund / Angel Fund / Private Equity Fund / Accelerator / Angel Network duly registered with SEBI* that endorses innovative nature of the business; or
      e. be funded by the Government of India as part of any specified scheme to promote innovation; or
      f. have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.

Process to set-up a Start Up to avail benefits under policy of Govt of India

  • E- registration
  • A self certification system will be launched
  • A dedicated web portal and mobile app will be developed
  • Arrangement of self certificate based compliance
  • No inspection during the first 3 years
  • 80 percent reduction in the application fee of start up patent
  • Easy exit policy
  • Inclusion of Credit Guarantee Fund
  • Relaxation in Income Tax for first three year
  • Special Arrangement for Female applicants
  • Introduction of Atal Innovation Mission. Innovation courses will be started for the students

Following flow chart is specifically applicable for startups seeking tax exemption:

Importer Exporter Code:

To facilitate trade and to avoid separate registration of importers and exporters at various custom houses under the Indian Customs EDI system, Importer Exporter Code (IEC) is issued by DGFT – Director General of Foreign Trade on behalf of Government of India to any bonafide person/ company for carrying out import/export. IEC is 10 digit code, PAN is prerequisite for IEC, only one IEC would be issued against a single PAN number.

Procedure to Obtain Importer Exporter Code:

    1. An application must be made in the Aayaat Niryaat Form 2A (ANF 2A) format to the Regional Authority of the Directorate General of Foreign Trade (DGFT) in the region where the registered office of the company is situated.
    2. All the necessary proofs to be submitted online while making application. Signed and stamped physical documents to be submitted at Department for verification.
    3. On successful verification of Documents IEC will be issued to applicant.

Shop & Establishment:

Shops and Establishment Act in India requires every shop, commercial establishment, residential hotel, restaurant, eating house, theater, or other place of public amusement or entertainment requires a registration from the local body as per rules of each state. Every state has its own set of rules and procedures in this category.

As a business owner of a shop or a commercial establishment, you need to register under the Shops and Establishment Act by payment of fees and registration requires periodical renewals.

Procedure to Obtain Shop & Establishment:

    1. Submit an application in the prescribed form to the Inspector of the area within 30 days of starting any work in your shop/establishment.

The application is to be submitted along with the prescribed fees and should contain the following information:

  • Name as the employer and the name of a manager, if any;
  • Postal address of your establishment
  • Name of your establishment
  • Proof of address
    1. Upon receiving the application for registration and the fees, the Inspector shall verify the accuracy and correctness of the application. Once suitably satisfied, he shall enter the details in the Register of Establishments and issue a registration certificate of your establishment to you. This certificate will be valid for 5 years and has to be renewed thereafter.

Tax Planning:

India has evolved tax structures for Direct Taxes and Indirect Taxes. Each person whether individual or business entity have to comply and pay taxes. For business these tax obligation has direct impact on decisions for setting-up new business structure as well as for ongoing business. Few examples of Direct taxes are Income Tax, Corporation Tax, Wealth Tax, Capital Gain Tax, Stamp Duty, Gift Tax, Professional Tax, Entertainment Tax etc. and Indirect tax examples are Value Added Tax, Service Tax, Excise Duty, Customs Duty etc.

Professional Tax Registration:

Professional tax is the tax by the state governments in India. Anyone earning an income from salary or anyone practicing a profession such as chartered accountant, company secretary, lawyer, doctor etc. are required to pay this professional tax. Business owners, working individuals, merchants and people carrying out various occupations comes under the purview of this tax. Different states have different rates and methods of collection. In India, not all states impose this tax. The states which impose professional tax are Bihar, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh, and Sikkim.

The maximum amount payable per year is INR 2,500 and in line with tax payer’s salary, there are predetermined slabs. It is also payable by members of staff employed in private companies. It is deduced by the employer every month and sent to the Municipal Corporation. It is a mandatory to pay professional tax. The tax payer is eligible for income tax deduction for this payment.

Procedure to Obtain Professional Tax Registration:

    1. An application must be made in the Aayaat Niryaat Form 2A (ANF 2A) format to the Regional Authority of the Directorate General of Foreign Trade (DGFT) in the region where the registered office of the company is situated.
    2. All the necessary proofs to be submitted online while making application. Signed and stamped physical documents to be submitted at Department for verification.
    3. On successful verification of Documents IEC will be issued to applicant.

TAN (Tax Witholding):

Tax Deduction and Collection Account Number (TAN) is a 10 digit alphanumeric number issued to persons who are required to deduct or collect tax on payments made by them under the Indian Income Tax Act, 1961.

The Tax Deducted at Source (TDS) on payments made by assesses is deposited under the TAN to enable the assesses who have received the payments to claim the tax deducted in their income tax return. So the concept to TDS is based on TAN- PAN mechanism. Every deductor has to apply for the TAN to deposit Tax deducted to Central Government.

Procedure to obtain TAN (Tax Witholding):

    1. To apply for TAN in the prescribed form to the Authority along with
    2. Identification Proof
    3. Address Proof
    4. On payment of prescribed fees, application get submitted and processed electronically.
    5. TAN is generated and communicated to applicant.

Good And Service Tax:

GST is a comprehensive indirect tax levy subsuming all central and state levies. GST is a destination based consumption tax levied on supply of goods and services. It is proposed to be levied at all stages right from manufacture up to the final consumption with credit of taxes paid at all previous stages.

GST is implemented from 1 st July, 2017 and the sellers who have registered themselves with the state VAT/CST or Service Tax laws is required to migrate their existing registrations into the GST regime.

India has adopted a dual GST model where Central and State Governments will simultaneously levy GST on a common tax base. On intra-state supply of goods and services, Central GST (‘CGST’) and State GST (‘SGST’) will be levied. CGST will be levied and administered by Central Government whereas SGST will be levied and administered by State Government. Similarly, Integrated GST (IGST) will be levied on every inter-State supply of goods and services (including import) by the Central Government.

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