Are you a budding entrepreneur with an idea that could take you places? If you have a business idea and you’re about to take the plunge but don’t know how to go about forming your company’s legal set up, here is a guide to understanding available options in India for registering your company or firm. Let’s understand in this first article how to register your billion dollar idea.
In India, you can start your business by choosing any of the available legal structures as follows:
1. Sole Proprietorship
2. Partnership Firm
3. Limited Liability Partnership (LLP)
4. Company (Private Limited or Public Limited).
Sole Proprietorship
This is the easiest and the simplest form of business entity to establish in India because there is no specific requirement for its registration. When you are starting your business on your own, the business will be in your individual name and you will be called its Sole Proprietor. Though you can get a Trade Name for your business like ABC Consulting/XYZ Interiors Solutions/ABC Boutique/Studio etc, the business and the ownership is not separate from each other and you. You, however, need to apply for a Shop and Establishment License to run your business and this is the only legal formality which is applicable to get a legal status as a sole proprietorship firm. This Shop Act License requirement also depends and varies from state to state in India. The cost for getting this license is very minimal and ranges between Rs.1500 to Rs.3500 only; overall cost to start a proprietorship will be less than Rs.5000. The next step is to open a bank account (current) in your name or a trade name which you want and you are all set to run your business.
Apart from that, you do not need to enrol specifically with any other government organisation for registering yourself as a sole proprietor. However, if your business or profession requires you to charge and pay Service Tax or VAT or any other legal duty and taxes or it requires you to get a specific license for e.g. Food license to run a restaurant or a café/chains, then that needs to be applied separately. But these legal duties and licenses are applicable based on the nature of your business or profession and needs to be applied for, irrespective of you being a sole proprietorship or running a Private limited company. So Shop Act license is the only thing which gives a certain legal status to your business/profession. Another important thing you need to do is to protect your trade name and intellectual properties. Apply for a Trade Mark, Copyright or even file for a Patent wherever applicable to protect your idea/business process from getting copied by others. The only challenge a Proprietor has is the unlimited business liability which means if you have taken any loans or have outstanding liabilities and you default on the payments then your personal assets can be attached to recover the money by your creditors.
Partnership Firm
If you have another co founder or a partner in the proposed business or a profession then you want to protect each other’s interest in terms of the amount of money, time and ideas you are bringing on the table then you can look forward to form a Partnership Firm. When two or more people come together to share the profits and losses of a business without any formal entity, they are said to be running a general Partnership firm, it can have a maximum number of 20 partners. This will help you put down all your internal arrangement on paper and gives a legal status and helps to resolve any issues later on as everything had already been documented in terms of who commands what share of firm’s assets/profits, capital contribution, profit & loss sharing ratio or salary to partners etc.
For forming a partnership firm you need to buy a stamp paper (based on capital introduced) and make a legal contract, the same can be registered with the registrar of office or you even run your partnership business without registering it. Though in that case it may not command a legal status but in any case it does not prevent its partners from suing each other in a court of law. You can again name the business i.e. Trade Name and start a business, the cost to form a simple unregistered partnership firm will again be less than Rs. five thousand except legal stamp duty which again is caped at Rs. five thousand on a higher side. Here also your personal assets can be attached in case your partnership firm defaults on the payments to creditors or bank etc.
Let’s understand the other ways to register your company in the concluding part 2 next week, till then be ready with an idea which can change your life.
To be continued…
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