Start up Constitution / Type of Start up / Entity

Hi Guys,

Every potential entrepreneur thinks a lot about to start a venture and he/she has many questions related to type of constitution, raising funds, taxation, compliance, marketing, distribution, strategy etc.

We have tried here to resolve query related to type of entity as per Indian Scenario.

Type of Constitution

Sole-Proprietorship
If you are alone to start with then best way is Sole Proprietorship.
Pros: 

• This is easiest way of doing business. You may run this even with your saving bank a/c. It is not mandatory to have an Current a/c in a bank. There is no monetary limit also.
• If you want to start business with some Trade Name, you can open a Current a/c with that name in any bank as per their terms (bank).
• There is no requirement of compliance with any Govt Authority until you cross some limits like:
• If you are in service business and crosses turnover of Rs 9Lakh in a year then you required to have a Service Tax Registration No. and charge Service Tax from clients and pay Service Tax to Govt when turnover crosses Rs 10Lakh;
• If you are in Product selling business then you are required to follow state VAT/CST rules those are different in almost every state;
• If your net income crosses maximum exempted limit i.e Rs 2 Lakh in case of Individual other than Senior Citizen; 

Cons:

• As it doesn't have a structured or corporate touch and does not suitable when grows up to a big level and has unlimited liability of proprietor.

Partnership

If you are a team of 2 or more guys, then you can start business in this form.

Pros:

• This is also easiest way of doing business for group of persons;
• You guys required to have a Partnership Deed disclosing name of business, what business, place of business, partners details, capital contribution, profit sharing ratio and other terms in between partners for smooth functioning of business;
• There is no monetary limit of capital contribution;
• You would have to open a Current a/c for that you need to apply PAN on Partnership name;
• There is no requirement of compliance with any Govt Authority until you cross some limits like:
• If you are in service business and crosses turnover of Rs 9Lakh in a year then you required to have a Service Tax Registration No. and charge Service Tax from clients and pay Service Tax to Govt when turnover crosses Rs 10Lakh;
• If you are in Product selling business then you are required to follow state VAT/CST rules those are different in almost every state;
• If firm's net income is positive then you would be paying income tax at flat rate i.e 30% with Education Cess and Secondary and Higher Education Cess; 

Cons:

• It also doesn't have a structured or corporate touch and does not suitable when grows up to a big level;
• Partner's has unlimited liability in case any partner do wrongful act then other partners would be liable for that;
• TDS provisions to be followed;
• High Income Tax rate.

LLP - Limited Liability Partnership

If you are a team of 2 or more guys, then you can start business in this form with partner's limited liability toward other partner's wrongful act, this is the only difference with simple partnership.

Pros:

• As it is an structured and corporate way of doing business because it is registered with ROC;
• Partner's has Limited Liability;
• Minimum Capital requirement is Rs 1Lakh;
• You guys required to have a Partnership Deed disclosing name of business, what business, place of business, partners details, capital contribution, profit sharing ratio and other terms in between partners for smooth functioning of business;
• You would have to open a Current a/c for that you need to apply PAN on Partnership name;
• There is no requirement of compliance with any Govt Authority until you cross some limits like:
• If you are in service business and crosses turnover of Rs 9Lakh in a year then you required to have a Service Tax Registration No. and charge Service Tax from clients and pay Service Tax to Govt when turnover crosses Rs 10Lakh;
• If you are in Product selling business then you are required to follow state VAT/CST rules those are different in almost every state;
• If firm's net income is positive then you would be paying income tax at flat rate i.e 30% with Education Cess and Secondary and Higher Education Cess and if it has losses then AMT is applicable as per IT Act;

Cons:

• Compliance with ROC every year;
• TDS provisions to be followed;
• High Income Tax Rate.

Pvt Ltd Company

This is suitable to group of investors/persons with fully structured and corporate way.

Pros:

• As it is an structured and corporate way of doing business because it is registered with ROC;
• Investor's has Limited Liability;
• Minimum Capital requirement is Rs 1Lakh;
• A company would have a separate PAN, TAN, VAT registration, Bank a/c;
• There is no requirement of compliance with any Govt Authority until you cross some limits like:
• If you are in service business and crosses turnover of Rs 9Lakh in a year then you required to have a Service Tax Registration No. and charge Service Tax from clients and pay Service Tax to Govt when turnover crosses Rs 10Lakh;
• If you are in Product selling business then you are required to follow state VAT/CST rules those are different in almost every state;
• If it's net income is positive then you would be paying income tax at flat rate i.e 30% with Education Cess @2% and Secondary and Higher Education Cess @1% and if it has losses then MAT provisions would be applicable as per IT Act;

Cons:

• Compliance with ROC every year;
• TDS provisions to be followed;
• High Income Tax Rate.

Hope everybody would have maximum clarity on this topic.

Regards,

CA Kapil Kumar Sehgal
Kapil Sehgal & Associates

kapilk4@gmail.com