A company is a legal entity made up of an association of people, be they natural, legal or both, for carrying on a commercial or industrial enterprise.
Registering a company is important as legally it is being considered as an entity and no other party can touch it and also consumers prefer registered companies as these are authentic in the eyes of law.
One should have the knowledge of the types of business structures that are practiced in one of the most populous country, India before registering a company.
The types are
Private limited Company,
Partnership Firm,
Limited Liability Partnership (LLP),
Sole Proprietorship,
One Person Company (OPC),
Section-8 Company,
Public Limited Company
A Private Limited Company consists of a group of shareholders and the total capital of the entity is made up of shares. These shares can be sold/ transferred to another individual who then also becomes one of the owners of the company. It can be of three types: Company limited by shares, Company limited by guarantee and Unlimited Company.
In a Partnership Firm, more than one individual is involved in the business. The roles, responsibilities and the share of each partner are specifically defined in a legal partnership agreement. Any profit earned by the business is shared between partners according to the legal partnership agreement. In case there are losses, each of the partners is personally responsible. Personal assets of partners may be used to compensate the losses incurred, if any.
If a business is registered in the name of an individual/ person then it is called as Sole Proprietorship. A single person is completely responsible for the entire business with the business and the owner not being separate from each other. The owner funds the business, takes any profits and bears any losses. It does not involve any complex rules or accounting. Personal assets and business assets are not separated from each other. Any profits from the business are just added to the business owner’s income for taxation purposes.
Entrepreneurs who on their own are capable of starting a venture by allowing them to create a single person economic entity can form One Person Company; here no other individual is required to form a company. A Section-8 company is an organization which is registered as a Non-Profit Organization (NPO). NPO/company has its objective of promotion of arts, commerce, and charity, and education, protection of environment, science, social welfare, sports, research, and religion and intends to apply its profits, if any, or other income in promoting its objects.
LLP is a separate legal entity from the partnership entity and business assets are separate from the personal assets of the partners. In case the business incurs losses, the personal assets of partners are not put at risk as the maximum liability of every partner is defined by his share capital in the entity. Compared to Partnership and Sole Proprietorship, Limited Liability Companies always have better credibility among investors. The main reasons include proper maintenance of financial records, incorporation records and tax records.
To start a company, first of all it is necessary to think what sought of company you want to start and what would be the business structure of your company. Your income tax returns will depend on the type of business structure you have chosen. While registering your enterprise, remember that each business structure has different levels of compliances that need to be met with.
You can consider some of the points to choose the right business structure. First point would be how many owners/ partners are making up the business to stand? In this case, if you are a single person who owns the entire initial investment required for the business, a One Person Company would be ideal for you and if your business has two or more owners and is actively seeking investment from other parties a Limited Liability Partnership (LLP) or Partnership Firm or Private Limited Company would probably the best option.
Secondly, investment also determines your choice of business structure and here it is the initial investment which is required to establish the business. If your investment is small, then Sole Proprietorship would be nice, but if you are strong enough to recover the incurrent losses then you should opt for One Person Company, LLP or a Private Limited Company.
Thirdly, interest of bearing the entire liability of the business. Business structures like sole proprietor, HUF, and partnership firm have unlimited liability which means in case of any default in loans, the entire money will be recovered from the members or partners in profit sharing ratio. The risk to personal assets is high in these cases but Private Limited Companies and LLPs have a limited liability clause. This means that the liability of its members is restricted to the amount of contribution made by them or the value of shares each member holds.
Lastly, it would be the plan of getting money from external sources for example, investors as entities like LLP and Private Limited Company are trusted when it comes to investment from the angel investors, venture capitalists as their the liability risk is limited. So, make sure that you are choosing the right business structure, so that if required you can outsource the service of an expert for proper guidance.
How to incorporate your startup/company?
There are four major steps involved in the process of incorporating a company and they are Acquiring Digital Signature Certificate (DSC), Acquiring Director Identification Number (DIN), Filling an e-form or new user registration and then incorporate the company. In the first step, each director of the company should obtain their identification number. To get DIN one need to file an eForm DIN-1. Second step is DSC which is the e-signature to help you complete the new company registration online. The Information Technology Act, 2000 has provisions for use of Digital Signatures on the documents submitted in electronic form in order to ensure the security and authenticity of the documents filed electronically. Once all these are ready, you have to file the forms for company after which you will get the certificate of incorporation.
Once you get the certificate of incorporation you get the pan number along with it and you can open the bank account. General documents required to register a company in India are passport sized photographs, copy of PAN card, latest bank statement/ Telephone or Mobile Bill/ Electricity or Gas Bill, Voter’s ID/ Passport, Notarized Rental Agreement, No-Objection certificates from property owner and utility bills for the registered address. You can send the documents online to start the registration.
