THE PRACTICAL START-UP GUIDEBOOK

Transcription

1 THE PRACTICAL START-UP GUIDEBOOK Find the legal structure that suits your business

2 Contents Introduction 03 Comparison Criteria 04 Private Limited Company 09 Limited Liability Partnership 13 One-Person Company 17 General Partnership 21 Sole Proprietorship 25 The Practical Start-up Guidebook

3 PARTNER, DIRECTOR OR PROPRIETOR? IT S EASIER THAN IT SEEMS It should take no longer than 5 minutes to choose between the available legal structures for your business. Your options are the Private Limited Company, Limited Liability Partnership (LLP), One-Person Company (OPC), General Partnership and Sole Proprietorship. But the general approach to this decision is so academic, entrepreneurs end up Company and an LLP. This is because, with only a few exceptions, every business will be suited to just one legal doesn t allow outside funding to be raised, is there? All you need to do is match the needs of your business with the 5 simple questions we ve answered in this e-book. business structure. All this information follows the comparisons. They should answer all your questions. Nonetheless, if you have any questions, feel free to mail us at support@.com. 03

4 PARTNER, DIRECTOR OR PROPRIETOR? IT S EASIER THAN IT SEEMS It should take no longer than 5 minutes to choose between the available legal structures for your business. Your options are the Private Limited Company, Limited Liability Partnership (LLP), One-Person Company (OPC), General Partnership and Sole Proprietorship. But the general approach to this decision is so academic, entrepreneurs end up wasting their time. There s no need to educate yourself on the minute differences between say, a Private Limited Company and an LLP. This is because, with only a few exceptions, every business will be suited to just one legal structure. For example, there s no need for the founder of a tech start-up to know the tax benefits of an LLP if it doesn t allow outside funding to be raised, is there? All you need to do is match the needs of your business with the 4 simple questions we ve answered in this e-book. So long as you re clear of your current financial capacity and have given thought to your long-term goals, you should be ready to get started immediately. Do, however, take the time to find out more about your chosen business structure. All this information follows the comparisons. They should answer all your questions. Nonetheless, if you have any questions, feel free to mail us at support@.com. 03

5 WHOSE FUNDING NEEDS DOES IT SUPPORT? PRIVATE LIMITED COMPANY For start-ups looking to build a scalable business by raising equity, this is the only option. Investors are likely to demand conversion to this structure before investing. LIMITED LIABILITY PARTNERSHIP For professional services firms that can manage on debt. Private Equity funds and Venture Capitalists are unlikely to invest as it would require them to become partners. ONE-PERSON COMPANY Pick it if you re a single promoter planning to run the business with no outside funding or debt alone. However, OPCs need to be converted to private limited companies once they reach a turnover of Rs. 2 crore. So if you re aiming to run a large business, stay away. SOLE PROPRIETORSHIP Only small merchants and traders requiring no external funding should opt for this. The proprietor is, after all, personally liable for all debts the business cannot pay itself. PARTNERSHIP FIRM Small merchants and traders requiring no external funding can opt for this. The partners are, after all, personally liable for all debts the partnership cannot pay itself. The Practical Start-up Guidebook 04

6 WHAT WILL BE MY PRIVATE LIMITED COMPANY A relatively expensive option, with registration costs starting at Rs. 16,000. It takes 10 to 15 days to incorporate. LIMITED LIABILITY PARTNERSHIP Substantially cheaper than the Private Limited Company, with just registration costs of Rs. 11,000. Marginally cheaper than the Private Limited Company, with registration costs starting at Rs. 15,000. An OPC also takes 10 to 15 days to incorporate, under the new INC-29 process. SOLE PROPRIETORSHIP Your start-up costs are only what it costs to get the license/s you need (Sales Tax registration, for example). These start at Rs PARTNERSHIP FIRM If you choose not to register the parternship deed, you can get started at just Rs With registration, it would work out to Rs. 10,000, same as the LLP. The Practical Start-up Guidebook 05

7 WHAT ARE THE MANDATORY COMPLIANCES? PRIVATE LIMITED COMPANY All such businesses must maintain books of accounts, comply with statutory audit requirements and submit income tax returns and annual filings with the Registrar of Companies (RoC). ONE-PERSON COMPANY All such businesses must maintain books of accounts, comply with statutory audit requirements and submit income tax returns and annual filings with the RoC. SOLE PROPRIETORSHIP LIMITED LIABILITY PARTNERSHIP All such businesses must maintain books of accounts, comply with statutory audit requirements (if turnover exceeds Rs. 40 lakh or capital contribution exceeds Rs. 25 lakh) and submit income tax returns and annual filings with the RoC. PARTNERSHIP FIRM All such businesses must maintain books of accounts, comply with tax audit requirements (if turnover exceeds Rs. 1 crore) and submit income tax returns. It is advisable (but not necessary) for sole proprietorships to maintain books of accounts. Filing of returns is mandatory. The Practical Start-up Guidebook 06

8 WHAT ARE THE TAX ADVANTAGES? PRIVATE LIMITED COMPANY No general advantages (industry-specific advantages are available). Tax to be paid at flat rate of 30% on profits, Dividend Distribution Tax (DDT) applies, as does Minimum Alternate Tax (MAT). ONE-PERSON COMPANY No general advantages (industry-specific advantages are available). Tax to be paid at flat rate of 30% on profits, DDT applies, as does Minimum Alternate Tax (MAT). $ SOLE PROPRIETORSHIP $ Individual slab rates would be applicable. Option to declare profits at 8% of revenue when turnover is less than Rs. 1 crore. LIMITED LIABILITY PARTNERSHIP No general advantages (industry-specific advantages are available). Tax to be paid at flat rate of 30% on profits. However, MAT is applicable. DDT does not apply. Wealth tax is also not applicable. PARTNERSHIP FIRM Taxed at 30%. Remuneration paid to partners can be claimed as deduction, restricted to the limits specified (under the IT Act). MAT does not apply. The Practical Start-up Guidebook 07

9 WILL THE BUSINESS SURVIVE THE DEPARTURE OF A PROMOTER? PRIVATE LIMITED COMPANY Yes, of course. So long as there are a minimum of 2 directors and shareholders, the business can go on. This is because a private limited company has a separate legal existence. LIMITED LIABILITY PARTNERSHIP Yes. An LLP has a legal existence independent of its partners. There must be a minimum of 2 directors. There is no limit to the number of partners. ONE-PERSON COMPANY Yes. All OPCs must appoint a nominee director. In case of the death of the original director, the nominee director takes over the business. SOLE PROPRIETORSHIP The Sole Proprietorship is totally reliant on the involvement of the proprietor. It will not survive his/her departure. PARTNERSHIP FIRM No. The departure of a partner would bring an end to the Partnership Deed. There must be a minimum of 2 partners. There can be a maximum of 15 partners. The Practical Start-up Guidebook 08

10 Private Limited Company, the most popular legal structure for businesses, should be chosen by anyone looking to build a scalable business. Start-ups and growing companies pick it because it allows outside funding to be raised easily, limits the liabilities of its shareholders and enables them to offer employee stock options to attract top talent. As these entities must hold board meetings and file annual returns with the Ministry of Corporate Affairs (MCA), they tend to be viewed with more credibility than an LLP or General Partnership. PRIVATE LIMITED COMPANY Business Registration Guidebook 09

11 Advantages Limited Liability: Businesses often need to borrow money. In structures such as General Partnership, partners are personally liable for all the debt raised. So if it cannot be repaid by the business, the partners would have to sell their personal possessions to do so. In a private limited company, only the amount invested in starting the business would be lost; the directors' personal property would be safe. Investment-ready: Private limited companies easily accommodate equity funding as there is a clear distinction between shareholders and directors as well as limited liability. In fact, venture capitalists and private equity funds are unlikely to invest in any other structure. This is because LLPs would require them to become partners in the business, while an OPC can have only one shareholder. Better Debt-raising Capacity: A private limited company has more options for taking on debt than LLPs. Not only are bank loans easy to obtain (relative to OPCs and LLPs), the option of issuing debentures and convertible debentures are available to it. More Credibility: The private limited company structure lends credibility to the business, on account of the compliances that are necessary from the very beginning. On the other hand, several compliances for an LLP, such as appointment of an auditor, kick in only after its turnover crosses a certain amount, while many are not required at all. The Practical Start-up Guidebook 10

12 Procedure A private limited company takes up to 25 days to incorporate, depending on whether you have your documents in order, the workload of the MCA and much else. You will be informed of the various scanned documents you would need to provide over the course of the process by our representatives. 1 DSC Application All the proposed directors in the company need a Digital Signature Certificate (DSC), which is necessary for filing forms at the next stage. You will only need to provide a few scanned documents and details; our representatives will ensure the forms are correctly filled. Time to Complete: 1 to 3 days 2 Final Incorporation As soon as we ve the DSC, we will ask you for the unique name you wish to give your company (we can help you find the right combination). We will also require some information, signatures and scanned documents regarding the proposed company and its directors to complete the necessary submissions, including INC-29 and the Memorandum and Articles of Association. At this stage, you will also need to pay government fees for form filing and stamp duty. You will receive the Certificate of Incorporation, Permanent Account Number and Tax Account Number, as well as ESIC registration by the end of this process. Time to Complete: 5 to 15 working days The Practical Start-up Guidebook 11

13 FAQS Q: Do I need to be physically present during this process? A: No, as all documents are filed electronically, you would not need to be physically present at all. You would need to send us scanned copies of all the required documents. Q: How many directors and shareholders are permissible? A: A minimum of two and maximum of 15 directors. There can be anywhere from two to 50 shareholders. Q: What documents are required to complete the process? A: All directors must provide identity and address proof, as well as a copy of the PAN Card (for Indian Nationals) and Passport (for foreign nationals). No-Objection Certificate must be submitted by the owner of the registered office premises. Q: What is a DSC? A: The DSC is an instrument issued by certifying authorities (TCS and n-code are two of them) by which you can sign electonic documents. As all documents needed are electronic, partners need a DSC. Q: Does a private limited company have continuous existence? A: Yes, so long as the annual compliances are met, the private limited company will continue to exist. If you do not comply with the requirements, it will go dormant, until it is struck off the register altogether. Q: How do I pick a name for my company? A: You need to first ensure that your name has not already been taken. This can be done by checking the MCA website. However, if you're going to register the brand name, also check if it has already been trademarked. While framing your name, ensure that it has a unique component that you coin and a descriptive one that specifies the business you re in. 12

14 Limited Liability Partnership (LLP), introduced only in 2008, has quickly become a popular legal structure for businesses. Its main improvement over the General Partnership is that, as the name indicates, it limits the liabilities of its partners to their contributions to the business and also offers each partner protection from the negligence, misdeeds or incompetence of the other partners. The LLP is also cheaper to incorporate than a private limited company, requires fewer compliances and can be a smart choice from a tax perspective. However, if you're looking to raise venture capital or attract talent with employee stock options, private limited is the way to go as LLPs cannot easily accommodate it. This is why they are most popular with professional services firms (web designers or architects, for example) that require no equity funding. That said, it is not entirely uncommon for start-up founders to first register an LLP and convert it to a private limited company immediately before funding is raised. LIMITED LIABILITY PARTNERSHIP Business Registration Guidebook 13

15 Advantages Limited Liability: Businesses often need to borrow money. In a General Partnership, partners are personally liable for all this debt. So if it cannot be repaid by the business, the partners would have to sell their personal possessions to do so. In an LLP, only the amount invested in starting the business would be lost; all personal property would be safe. CHEAP Relatively Cheap: If you're bootstrapping, you may be interested in knowing that an LLP has no authorised capital (minimum of Rs. 1 lakh for a private limited company), significantly lowering the cost of registration. Reduced Compliance: An LLP only requires audited annual returns to be filed if it has a turnover of greater than Rs. 40 lakh or capital contribution of over Rs. 25 lakh. It also needs to communicate fewer business transactions and structural changes than a private limited company Tax Advantages: There are some important advantages over the private limited company. For example, Dividend Distribution Tax and tax surcharge don't apply. Loans to partners are also not taxable as income. The Practical Start-up Guidebook 14

16 Procedure The LLP incorporation procedure takes 20 to 35 days to complete, depending on whether you have your documents in order and the workload of the Ministry of Corporate Affairs (MCA). You will be informed of the various scanned documents you would need to provide. 1 DSC & DPIN Applications All the proposed partners need a Digital Signature Certificate (DSC), which is necessary to get them a Digital Partner Identification Number (DPIN). You will only need to provide a handful of scanned documents; our representatives will ensure the forms are correctly filled. Time Required: 4 to 6 days 2 LLP Name Approval The unique name you wish to give your LLP should be available and pass the naming guidelines provided by the MCA. Our experienced officers will give you all the help you need in finding the right combination. Time Required: 2 to 7 working days 3 4 LLP Registration During the final process, you would need to submit various documents relating to all the partners in the business and a No-Objection Certificate from the property's owner. We will prepare all of the forms and submit them to the MCA, which will take up to 15 days to verify them. All you need to do is provide us with the information, signatures and scanned documents relating to the LLP and its partners. Time Required: 5 to 15 working days PAN & TAN Applications Every company needs a registered Permanent Account Number (PAN) and Tax Account Number (TAN). We will make the application online ourselves, but you will need to courier hard copies of the required documents yourself. Both will be couriered to the your registered office address in 7 working days. Time to Complete: 7 working days The Practical Start-up Guidebook 15

17 FAQS Q: Do I need to be present in person during this process? A: No, as all documents are filed electronically, you would not need to do so at all. Q: How many partners are permissible? A: There is no maximum number, but you, of course, need a minimum of 2 to form the partnership. Q: Can a foreign national be a partner? A: So long as one of the partners is an Indian citizen, others can be foreign nationals. Q: What is DSC and DPIN? A: The DSC is an instrument issued by certifying authorities by which you can sign electonic documents. The DPIN is a unique identification number for an existing partner or a person intending to become one. A partner can have only one DPIN. Q: Does an LLP have continuous existence? A: Yes, so long as the annual compliances are met, the LLP will continue to exist. If you do not comply with the requirements. Q: How do I pick a name for my LLP? A: You need to first ensure that your name has not already been taken. This can be done by checking the MCA website. If you are disappointed that a preferred name is taken, do remember that the name of your concern doesn't have to be your brand name. However, if you're going to register the brand name, also check if it has already been trademarked. While framing your name, please ensure that it has a unique component that you coin and a descriptive component that specifies the business you re in. 16

18 The One Person Company (OPC) constitution was recently introduced as a strong improvement over the sole proprietorship. It gives a single promoter full control over the company while limiting his/her liability to contributions to the business. This person will be the only director and shareholder (there is a nominee director, but with no power until the original director is incapable of entering into contract). So there's no chance of raising equity funding or offering employee stock options. Furthermore, if an OPC hits a turnover of over Rs. 2 crore or has a paid-up capital of over Rs. 50 lakh, it must be turned into a private or public limited company within 6 months. ONE PERSON COMPANY Business Business Registration Guidebook 17

19 Advantages Limited Liability: Businesses often need to borrow money. In structures such as the Sole Proprietorship, proprietors are personally liable for all this debt. So if it cannot be repaid by the business, the proprietor would have to sell his/her car, house or jewellery to do so. In an OPC, only the amount invested in starting the business would be lost; all personal property would be safe. Fewer Compliances: An OPC does not need to file audited statement of accounts with the MCA and as few as three compliance-related forms to file on an annual basis. Continuous Existence: If a promoter were to operate as a Sole Proprietorship, rather than an OPC, the business would come to an end on his/her death. As an OPC has a separate legal identity, it would pass on to the nominee director and, therefore, continue to exist The Practical Start-up Guidebook 18

20 Procedure The OPC procedure takes up to 25 days to complete. You will be informed of the various scanned documents you would need to provide over the course of the process by our representatives. Here is a snapshot of the process: 1 DSC Application The proposed director needs a Digital Signature Certificate (DSC), which is necessary for filing forms at the next stage. You will only need to provide a few scanned documents and details; our representatives will ensure the forms are correctly filled. Time to Complete: 1 to 3 days 2 Final Incorporation As soon as we ve the DSC, we will ask you for the unique name you wish to give your company (we can help you find the right combination). We will also require some information, signatures and scanned documents regarding the proposed company and its directors to complete the necessary submissions, including INC-29 and the Memorandum and Articles of Association. At this stage, you will also need to pay government fees for form filing and stamp duty. You will receive the Certificate of Incorporation, Permanent Account Number and Tax Account Number, as well as ESIC registration by the end of this process. Time to Complete: 5 to 15 working days The Practical Start-up Guidebook 19

21 FAQS Q: Do I need to be present in person during this process? A: No, as all documents are filed electronically, you would not need to do so at all. You would need to send us scanned copies of all the required documents. We may, however, ask for hard copies of some documents, too, with the necessary attestations. Q: Will I get a printed incorporation certificate from the Government? A: No, the procedure has been completely digital these days and the Government does not issue a printed copy. They will send you a soft copy which you can print out if you wish. Q: How do I pick a name for my company? A: You need to first ensure that your name has not already been taken. This can be done by checking the MCA website. Do note that the name of your concern doesn't have to be your brand name. However, if you're going to register the brand name, also check if it has already been trademarked. While framing your name, please ensure that it has a unique component that you coin and a descriptive component that specifies the business you re in. Q: Does an OPC have continuous existence? A: Yes, so long as the annual compliances are met, the OPC will continue to exist. If you do not comply with the requirements, the OPC will go dormant, until it is struck off the register altogether. 20

22 A General Partnership is a business structure in which two or more individuals manage and operate a business in accordance with the terms and objectives set out in the Partnership Deed. This structure is thought to have lost its relevance since the introduction of the LLP because its partners have unlimited liability, which means they are personally liable for the debts of the business. However, low costs, ease of setting up and minimal compliance requirement make it a sensible option for some, such as home businesses that are unlikely to take on any debt. Registration is optional for General Partnerships. GENERAL PARTNERSHIP Business Registration Guidebook 21

23 Advantages Minimal Compliance: General Partnerships do not need to appoint an auditor or, if unregistered, even file annual accounts with the registrar. Annual compliances are also fewer as compared to an LLP. General Partnerships do need to file Income Taxes and, depending on turnover, service and sales tax. Relatively Inexpensive: A General Partnership is cheaper to start than an LLP and even over the long-term, thanks to the minimal compliance requirements, is inexpensive. You would not need to hire an auditor, for example. This is why, despite its severe shortcoming (unlimited liability), home businesses may opt for it. Easy to Start: It can be started with just an unregistered Partnership Deed in 2 to 4 days at Rs. 1,999; registration is, however, a wise choice. It would enable you to file suits in court against another firm or partners in the firm for the enforcement of rights arising from a contract or right given by the Partnership Act. The Practical Start-up Guidebook 22

24 Procedure The General Partnership process is straightforward and, if you're prompt with your submissions, can be completed in five days. This is, however, dependent on a few things, such as whether or not you want your business registered and availability of stamp paper. 2 Partnership Deed Registration (Optional) We will appoint an affiliate to take you through the process. All the partners would need to go to the registrar's office and bring along a passport-sized photograph and identity and address proofs. Time to Complete: 1 working day 1 Partnership Deed Drafting We will collect all the information regarding your business and its partners. The information will be used by our lawyers to draft a partnership deed covering the various aspects of the business on stamp paper (charged as per actuals). Time to Complete: 2 to 10 working days 3 PAN & TAN Applications Every partnership, registered or unregistered, needs a Permanent Account Number (PAN) and Tax Account Number (TAN). We will make the application online ourselves, but you will need to courier hard copies of the required documents yourself. You will receive the PAN and TAN at the address mentioned in the deed. Time to Complete: 7 working days The Practical Start-up Guidebook 23

25 FAQS Q: Do I need to be present in person during this process? A: Drafting is done online, but you and the other partners need to be present at the Registrar's Office if you wish to register the Partnership Deed. Q: How many partners are permissible in an LLP? A: A General Partnership permits a minimum of two and maximum of 20 partners. Q: Can a foreign national be a partner? A: No, partners must be Indian citizens residing in India. Q: Can a General Partnership have an investor? A: Yes, but only so long as he is an Indian citizen residing in India. It may be done without any approval. Such an investor can even be classified as a limited partner, which would excuse him/her from participating in business activities, thereby limiting his liability. Q: Can I convert my Partnership into an LLP or Private Limited Company? A: Yes, you can, but this is a tedious and expensive procedure. It may be better to close the partnership altogether and then start afresh as an LLP or Private Limited Company. Q: Is there a minimum amount of capital required? A: Not at all. You can even start with Rs. 100, if you wish. 24

26 A sole proprietorship is a business that is owned and managed by a single person. You could have one up and running within 10 days, which makes it very popular among the unorganised sector, particularly small traders and merchants. There is no such thing as registration; proprietorships are recognised by other registrations, such as a service or sales tax registration. As you would imagine with a business that s so easy to set up, though, its shortcomings are severe: the liability of the proprietor is unlimited and it does not have a continuous existence. For these reasons, it should only be considered by small merchants and traders. SOLE PROPRIETORSHIP Business Registration Guidebook 25

27 Advantages Minimal Compliance: Sole Proprietorships are only recognised via their government and tax registrations, so the extent of their compliance is limited to the annual filing of their service, professional or sales taxes. Easy to Start: A sole proprietorship could take as few as seven days if all you need is a Service Tax Registration, but this would stretch to 30 days if you need Sales Tax Registration. Either way, the process is uncomplicated. PAN card and identity and address proofs are usually enough to get this done. Relatively Inexpensive: A Sole Proprietorship is inexpensive as compared to a One Person Company and, thanks to the minimal compliance requirements, is inexpensive even over the long-term. You would not need to hire an auditor, for example. This is why, despite its severe shortcoming (unlimited liability), small merchants and traders opt for it. The Practical Start-up Guidebook 26

28 Procedure Proprietorship is recognised through one or more government registrations. Our representatives will advise you about the ones you will need based on the business you're in, and inform you of the documents you would need to provide in each case. Here is a snapshot of the process: 1 Select Registration We will help you decide what registration you need, whether service tax, sales tax, import/export code, MSME registration or Shops and Establishments registration. Time to Complete: Less than a day 2 3 Begin Procedure Once you've decided what you want, we'll ask you for the documents we need to get started. In most cases, you would first need to provide address and identity proof as well as a scanned copy of a passport-sized photograph. Some registrations (Sales Tax, for example) involve an inspection by the concerned government agency. We will assist you throughout the process until you receive the required registration. Time to Complete: Depends on selected service Get a TAN A proprietor would need a Tax Account Number (TAN) if he is going to pay salaries and rent. We will make the application online ourselves, but you will need to courier hard copies of the required documents yourself to the government office. You will receive the TAN at the registered address within 7 working days. Time to Complete: 7 working days The Practical Start-up Guidebook 27

29 FAQS Q: Who can be a proprietor? A: Only Indian citizens residing in India can be sole proprietors. Q: Can I open a bank account specifically for the proprietorship? A: Yes, you can. To do so, you would need to provide two of the recognised government registrations, such as sales or service tax registration, MSME registration and Shops & Establishments Act registration. PAN card would also be necessary. Q: Can I convert my proprietorship to a private limited company or LLP? A: No, you can't. You would have to close the proprietorship altogether and then start afresh as a One-Person Company, LLP or Private Limited Company. Q: Will I receive a certificate of incorporation? A: Sole proprietorships are never incorporated. They are instead recognised by the government via various registrations. Therefore, you would not receive such a certificate. 28

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