Register your business
In India, there are five main kinds of legal entities from which to choose when conducting business. These are the Limited Liability Partnership, Sole Proprietorship, Partnership Firm, Private Limited Company, and Public Limited Company. The selection of the company entity is influenced by a number of variables, including taxation, owner liability, compliance requirement, investment and funding, and exit strategy. A step by step process for registering a company is given here.
Entity Incorporation – Documentation/Approval
A sole proprietorship is not a separate legal entity. Incorporating a sole proprietorship in India, which is often referred to as a proprietorship firm, does not involve a formal registration process like corporations or partnerships. The proprietor is personally liable for all business liabilities, and the business is essentially an extension of the proprietor’s personal legal and financial status. The proprietorship firm is governed by various acts depending on the nature of the business, such as the Income Tax Act, GST Act, Shops and Establishments Act, etc.
It’s important to note that a sole proprietorship is not a separate legal entity from the proprietor, meaning that the proprietor is personally liable for all the business’s liabilities.
However, there are several steps and requirements that a sole proprietor needs to follow to legally operate in India:
Choose a Business Name
Select a unique name for the business. There’s no formal process for registering this name, but it’s advisable to ensure that it doesn’t infringe on existing trademarks.
Business Registration
While registration of the business itself isn’t required, the proprietor may need to register under specific government schemes depending on the type of business. For example, if it’s a shop, registration under the Shops and Establishments Act is required.
PAN Card
The proprietor must have a personal PAN (Permanent Account Number) card, as there’s no separate business entity in a proprietorship.
Opening a Bank Account
It’s advisable to have a separate bank account for the business. For this, banks may require the proprietor to furnish proof of the existence of the business, like registration under the Shops and Establishments Act or GST registration.
GST Registration
If the business turnover exceeds the threshold limit (INR 40 lakhs for goods and INR 20 lakhs for services, with variations for some states), then GST (Goods and Services Tax) registration is mandatory.
Other Registrations and Licenses
Depending on the nature of the business, other registrations like Udyog Aadhaar (for small and medium enterprises), FSSAI License (for food-related businesses), Import Export Code, etc., might be required.
Tax Compliance and Accounting
The proprietor must file income tax returns and comply with GST regulations if registered. Maintaining proper accounts for the business is also crucial.
Compliance with Local Laws
This includes adhering to local municipal regulations, environmental guidelines, and labour laws, if applicable.
The partnership is not a separate legal entity from its partners. Partners are jointly and severally liable for the firm’s liabilities. Incorporating a partnership firm in India is governed by the Indian Partnership Act, 1932 which outlines the rights, duties, liabilities of the partnership firm and its partners.
The process of setting up a partnership firm involves several key steps and requirements:
Partnership Agreement (Deed)
• Requirement: Draft a comprehensive partnership deed.
• Contents: It should detail the name and address of the firm and partners, nature of the business, capital contribution by each partner, profit-sharing ratio, rights, and duties of partners, etc.
• Legality: The deed should be on stamp paper according to the state’s Stamp Act and ideally should be notarized.
Registration (Optional but Recommended)
• Action: Register the partnership firm with the Registrar of Firms.
• Advantages: Registration provides legal recognition, the right to sue third parties, and protection under the Partnership Act.
• Documentation: Application for Registration of Partnership (Form 1), original and copy of the Partnership Deed, proof of principal place of business, and identity and address proofs of partners.
• Process: Submit these documents to the Registrar’s office of the state where your firm is located.
PAN Card
• Requirement: Apply for a PAN (Permanent Account Number) card in the name of the partnership firm.
• Documentation: Partnership deed and identity/address proof of partners.
Opening a Bank Account
GST Registration (if applicable)
• Requirement: Mandatory if turnover exceeds INR 40 lakhs for goods (INR 20 lakhs for services, with variations for some states) or for inter-state business.
• Documentation: PAN card of the firm, partnership deed, proof of business address, bank account details, and authorization letter for signatory.
Other Registrations and Licenses
• Depending on Business Type: May need to apply for Udyog Aadhaar, FSSAI License, Import Export Code, Professional Tax registration, etc.
• Documentation: Varies based on the specific registration or license.
Professional Tax Registration (if Applicable)
• Action: Register for Professional Tax as per state regulations.
• Documentation: Varies based on state requirements.
Set Up Accounting and Bookkeeping
• Action: Establish an accounting system for your firm.
• Note: Consider using accounting software or hiring a professional accountant.
Tax Compliance
• Requirement: File annual tax returns and comply with GST regulations if applicable.
• Documentation: Financial statements, audit reports (if applicable), and other relevant documents.
Compliance with Local Laws
• Action: Comply with local municipal regulations, environmental guidelines, labor laws, etc.
• Note: Specific compliance requirements depend on the nature of the business and local laws.
Incorporating a Limited Liability Partnership (LLP) in India is governed by the Limited Liability Partnership Act, 2008. The act governs the establishment and regulation of LLPs in India, providing guidelines on structure, operations, and compliance. This act provides a legal framework for the establishment and operation of LLPs in India.
Here are the key requirements for incorporating an LLP:
Partners
• Minimum Number: At least two partners (individuals or entities).
• Designated Partners: At least two designated partners who are individuals, with at least one of them being a resident in India.
• DIN for Designated Partners: Designated partners need to have a Director Identification Number (DIN) or a Designated Partner Identification Number (DPIN).
Obtain Digital Signature Certificates (DSC)
• Action: Acquire DSC for all designated partners.
• Documentation: Identity and address proofs of the partners.
• Providers: Authorized certifying agencies.
Obtain Director Identification Number (DIN) or Designated Partner Identification Number (DPIN)
• Action: Apply for DIN/DPIN for all designated partners.
• Form: Use Form DIR-3 on the MCA portal.
• Documentation: Photograph, identity, and address proof of the partners.
Name Approval
• Unique Name: The name of the LLP must be unique and not similar to existing company or LLP names.
• Application: Apply for name approval using the Reserve Unique Name (RUN-LLP) facility on the Ministry of Corporate Affairs (MCA) portal.
Incorporate the LLP
• Action: File the incorporation form (FiLLiP).
• Portal: Submit through the MCA website.
• Documentation: Consent of partners, details of partners/managers, proof of registered office address, subscription sheet signed by the promoters, and other relevant attachments.
Draft and File the LLP Agreement
• Action: Draft the LLP Agreement.
• Contents: Define business objectives, partner roles, capital contribution, profit sharing, management policies, etc.
• Filing: File the agreement with the MCA within 30 days of incorporation using Form 3.
• Documentation: LLP Agreement.
Apply for PAN and TAN for the LLP
• Action: Apply for Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN).
• Forms: Form 49A for PAN and Form 49B for TAN.
• Documentation: Incorporation certificate and other necessary documents.
Opening a Bank Account
• Action: Open a bank account in the name of the LLP.
• Documentation: LLP incorporation certificate, LLP Agreement, PAN card, proof of registered office, etc.
GST Registration (If Applicable)
• Action: Register for GST, if required.
• Criteria: Mandatory if turnover exceeds the threshold or for inter-state supply of goods/services.
• Portal: Register on the GST portal.
• Documentation: Business details, bank account details, and other relevant information.
Additional Registrations and Licenses
• Action: Depending on the business type, obtain necessary registrations and licenses (e.g., FSSAI, Professional Tax, Shop and Establishment Act).
• Documentation: Varies based on specific registration or license.
Compliance and Annual Filings
• Annual Return: Filing of Form 11 (Annual Return) and Form 8 (Statement of Account & Solvency) every year.
• Audit Requirements: Mandatory audit if turnover/receipts exceed prescribed limits.
Incorporating a private limited company in India is governed by the Companies Act, 2013. This act outlines the legal procedures, rights, duties, and obligations involved in forming a private limited company.
Here are the key requirements for incorporation:
Directors and Shareholders
• Minimum Directors: Two (at least one must be an Indian resident).
• Maximum Directors: Fifteen (can be increased with a special resolution).
• Shareholders: Minimum of two and a maximum of 200.
Obtain Digital Signature Certificates (DSC)
• Action: Get DSC for the proposed directors of the company.
• Documentation: Identity proof and address proof of the directors.
• Provider: Acquire from a certified agency authorized by the Ministry of Corporate Affairs (MCA).
Obtain Director Identification Number (DIN)
• Action: Apply for DIN for each proposed director.
• Form: Form DIR-3 on the MCA portal, linked to their PAN or Aadhaar.
• Documentation: Photograph, identity, and address proof.
Name Approval
• Action: Apply for the company name approval.
• Form: Use the ‘Reserve Unique Name’ (RUN) facility on the MCA portal.
• Criteria: The name should be unique and not similar to any existing company or LLP.
Incorporation Documents
• Memorandum of Association (MoA): Outlines the objectives, scope, and activities of the company.
• Articles of Association (AoA): Details the rules and regulations governing the internal management of the company.
• Other Documents: Affidavits and declarations by directors, proof of registered office (rent agreement or utility bill), NOC from the owner, etc.
File Incorporation Application (Form SPICe+)
• Action: Complete and submit the SPICe+ form (INC-32).
• Attachments: MoA, AoA, declarations, proof of registered office, and other relevant documents.
• Portal: File through the MCA portal.
PAN and TAN Application
• Integrated Application: PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account Number) can be applied for within the SPICe+ form.
• Issuance: PAN and TAN are issued along with the Certificate of Incorporation.
Opening a Bank Account
• Action: Open a bank account in the name of the company.
• Documentation: Certificate of Incorporation, MoA, AoA, PAN, and other KYC documents of the directors.
Register for GST (if applicable)
• Action: Register for Goods and Services Tax (GST) if required.
• Portal: Through the GST online portal.
• Documentation: Business details, bank account details, and other relevant documents.
Apply for Other Necessary Registrations
• Examples: Professional Tax, Employee Provident Fund (EPF), Employee State Insurance (ESI), etc.
• Dependent on: Nature of business and employment.
Ensure Compliance
• Regular Filings: Annual filings with MCA, GST returns (if registered), Income Tax Returns, etc.
• Statutory Audit: Conduct an audit of the accounts annually.
Note: For precise legal and procedural guidance, it is advisable to consult with legal experts or professional advisors or chartered accountants familiar with Indian corporate law.
Doing Market Assessment and Competitive Analysis
After understanding the need of its customers being catered to, a business should conduct a study of its market size in order to make informed business decisions. The market assessment involves studying the market size, attainable market share, product adoption rate, historical and projected market growth rates, market saturation and macroeconomic factors influencing the market one intends to target. The market assessment will help in finalizing the product placement and pricing for any enterprise’s product.
Before entering into a market an entrepreneur should do a thorough Competitive Analysis of the market. It is important to present a realistic image of the competition and other market participants that are working on related products. The competitive analysis includes study of market share of competitors, their strengths and weaknesses, importance of target market to your competitors, entry barriers, share that can be gained in near future, product mapping to show the similarities and distinctions among various rival offerings and presence of indirect or secondary competitors who may impact a product’s success.
Preparing Business Proposal
A sound business proposal helps an entrepreneur at every stage of a business. It ensures that the company’s offering is clearly communicated to all the relevant stakeholders and the company is able to attract new investors or business partners. A well-written business plan will act as a tool to persuade partners that working with this enterprise is the right move.
A business plan can be broadly based on below outline and may capture below components:
The executive summary should effectively capture key points that are mentioned in the detailed proposal helping the stakeholders get a bird’s eye view of the proposal.
In this section, the company should give details about its business model. The company should be precise in detailing the issues that the firm plans to resolve and list the people, groups, or companies that will be assisted through the same. It should include the list of enterprise’s suppliers and customers and take into account factors responsible for product’s stickiness with customers, agreements with vendors, etc.
This section will capture the organization structure (legal and in terms of shareholding) and the management team responsible for managing the day to day operations of a business. The proposal can also include individual work experiences of team members and how its relevance will lead to success of this business.
A thorough business proposal should include financial projections displaying profit and loss, balance sheet and cash-flows statements over time, investment needed, break-even points, and growth rates. The assumptions used in the financial projections should be explicitly stated to the satisfaction of the investors.
If the proposal also includes a request for raising the funds, the funding requirements should be clearly highlighted capturing the end-use of funds and the payback period for an investor. The financial projections will help in making effective pitch to both equity and debt investors showing adequate returns from investing in the business and adequacy of cash flows for servicing of debt.
The Annexures can be used to provide any material that was specifically mentioned in the proposal as a supporting documentation. It may include details on sale/purchase agreements, credit histories of founders, resumes, product images, letters of recommendation, licenses, permits, patents, and other contractual details relevant to the business.
Calculating Business profitability
An enterprise can calculate profitability of its business by assessing its costs and doing break-even analysis. The break-even is reached when overall costs and total revenues are equal, leaving a firm with no net profit or loss. i.e. revenue from a product equals the cost of manufacturing the product. The enterprise should organize its expenses which can broadly fall into rent, equipment and supplies, communications, utilities, licenses and permits, insurance, lawyer and accountant, inventory, employee salaries, advertising and marketing, market research, printed marketing materials or making a website. The company should organize these expenses into fixed and variable costs (cost dependent on volume of production) in order to arrive at a break-even point for the business. A sample template to do break-even analysis can be downloaded here.
Finance your business
Due to lack of a successful track record, risks associated with the novelty and innovation involved in the product proposition, it is difficult for a business to avail funds from a traditional financing institution like a Bank, Non-banking financial companies (NBFCs), etc. At the time of starting a business, the funding requirements can be taken care of by early stage venture capital investors or under the government programs.
Venture capital is a significant source of investment for small and medium sized firms. Venture capitalists are experts in a range of fields and will invest in a business after assessing its potential to generate profits. The venture capital investments take place through equity or equity-like products and investment is done majority of times in lieu of some stake in the business venture.
The Government, both at the Central and State Levels has been adopting a number of policy actions to meet the capital needs of an entrepreneur through establishing financial institutions and devising various policies and programmes, etc. The Government of India, through Start Up India have made a conducive ecosystem for supporting the budding entrepreneurs of the country. The various government schemes for Start Ups being supported by different Central Ministries and Departments can be viewed here.