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CA NEERAJ KUMAR AGARWAL
Are you looking to setup a business in India? How to setup business in India?
Before starting a business, you need to understand that starting a business is not just exciting but is challenging at the same time. At its core, a good business requires a solid business model and a good legal foundation irrespective of the country where it’s based.
India’s burgeoning economy is amongst the fastest emerging major economy of the world and offers a vast business opportunity for all. India ranks 63rd among 190 countries on the “World Bank’s Ease of Doing Business Ranking 2020”. To further enhance the ease of doing business in the country more than 39,000 compliances have been reduced and more than 3,400 legal provisions have been decriminalized.
Considering the popularity of the Startup Culture in India and entrepreneurial aspirations of the youth along with the technological advancements has opened up numerous business opportunities and made starting and managing a business easier. Therefore, at the present moment it is more rewarding than any other time to start a business in India.
However, setting-up and running a business in India involves numerous technical and procedural requirements, which needs to be taken care of in order to run business with ease and generate maximum profits.
Consider this step-by-step guide for starting a small business in India.
Step 1: Choose and Incorporate a business entity
In India, a business can be set up under any of the following constitutions:
- Sole proprietorship: This structure of business entity is owned and managed by a single person, called a proprietor. Under sole proprietorship, business entity and the legal owner doesn’t have a separate legal identity in the eyes of law and hence, the proprietor is personally liable for all business debts. There is no specific procedure for setting up a proprietorship, and the proprietor cannot raise capital by selling an interest in the company. One need to keep in mind that all businesses are not allowed to be carried out under sole proprietorship model due to certain regulatory provisions and hence this model is not suitable to carry on such business e.g. lending business.
- One-person company: This is a fairly recent concept that was introduced under the Companies Act, 2013. A one-person company has only one director, who is also the sole shareholder. According to the Act, only a natural person who is an Indian citizen and permanent resident of India is eligible to act as a member and nominee of the OPC. The structure under OPC has high compliance requirements and cost as compared to Sole Proprietorship though it provides protection of limited liability limited to investment in business entity as against Sole Proprietorship, where liability of the proprietor is unlimited and may compel them to use their personal assets to pay off business liabilities.
- Partnership Firm: If two or more founders are looking to set up a small company, then Partnership Firm could be an option. In a partnership firm, the business is owned and managed by two or more persons who share the profits and losses of the business. This type of entity is regulated by the Indian Partnerships Act, 1932, and can have a maximum of 20 partners. The terms and conditions are bound by a partnership deed, which needs to be signed by all the partners. The partners may opt for registration of executed Partnership Deed with the jurisdiction Registrar of Partnership. A partnership firm is suitable for small and medium-sized business(es). Partnership Firm also carries unlimited liabilities similar to a Sole Proprietorship where each partner has unlimited liability for the debts and obligations of the firm, which means that the personal assets of all partners are at risk if the business fails to pay its debts.
- Limited Liability Partnership (LLP): A corporate business vehicle created under the Limited Liability Partnership Act, 2008 enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner. Activities under an LLP system are managed as per the provisions under the LLP Agreement. An LLP provide benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership firm. In terms of liability protection, a partner is liable only to the extent of their capital contribution. In addition, a partner cannot be held personally liable for any independent or unauthorized acts of any other partner. However, any such independent or unauthorized acts can tie up the LLP itself.
- Private Limited Company: This format has its own legal existence which is separate from that of its owners. Here, the owners and shareholders are only liable to the extent of their shares in case of a financial emergency. A minimum of two members are needed to start a private limited company while maximum number of members are restricted to 200. Private Limited Company is governed by the provisions of the Companies Act, 2013 and is incorporated under the jurisdictional Registrar of Companies functioning under the aegis of Ministry of Corporate Affairs, Government of India (“MCA”). It is mandatory for these entities to file annual compliance, and failure to do so may lead to serious legal and financial repercussions. If you are looking to raise funding or have limited shareholders, this would likely be the most ideal option.
- Public Limited Company: This type of business is more suitable for mature businesses, where there is no restriction to the maximum number of members and which require to raise money with comparatively large section of people. A public limited company enjoys the advantages of a private limited company and allows its shareholders to freely transfer their shares. As there are larger stakes involved, such businesses are highly regulated and subject to legal scrutiny.
We, at MNRS can help you in identifying most suitable business structure commensurate with your peculiar needs. While advising on appropriate business structure, we also discuss with you extensively as to your present and future business plans which help us in suggesting the most dynamic structure which provides operational flexibility, room for desired growth and tax efficiency.
Step 2: Fulfilling Compliance and Obtaining Necessary Registrations and Licenses
Here are some of the common requirements which are appliable to most of the business entities in India:
- Digital signature certificate (DSC): You can obtain a DSC from one of the six private agencies authorized by MCA. All individuals willing to obtain DSC need to apply to the Certifying Authority (CA) in the prescribed application form along with proof of identity and address together with applicable fee, who post validation issues DSC to the applicant for specified use.
- Director identification number (DIN): DIN is required for becoming a Director in a Company or a partner in an LLP. You can apply online for a DIN by filing application in form DIR-3 together with a self-certified copy of proof of identity and address as well as pay the fee amount. After payment of Fee DIN is generated.
- Company name: Approval for a company name must be done electronically by submitting appropriate application to MCA. A maximum of two names can be submitted at a time in the order of priority. You must check the availability of your chosen company name on MCA’s website before applying in order to avoid rejection.
- Permanent account number (PAN): The application to obtain a PAN is made using Form 49A. It can be made online, but the documents need to be physically sent for verification. After the PAN is obtained, a printed PAN card is issued. The PAN is mandatory for opening bank accounts and filing income tax returns and TDS returns etc.
- Tax deduction account number (TAN): To apply for a TAN, Form 49B has been prescribed. The application can be made either online or offline but if made online, then you need to send the physical documents for verification. After verification, your application will be sent to the Income Tax Department and the TAN will be issued. TAN is needed for deposit of TDS and TCS in the applicable cases.
- Goods and services tax (GST) registration: As of July 2017, any business that has an annual turnover of more than the specified limit (for some states, the amount is lower as compared to normal limits) must register for GST. The GST registration is also mandatory for those businesses involved in the intra-state supply of goods and services, irrespective of their turnover.
- Import export code (IEC): IEC is a 10-digit code required by importers and exporters to clear customs and shipments, and to transfer money to foreign banks.
Alternatively, PAN, TAN, GST, IEC can be applied simultaneously at the time of applying for incorporation of a Company with MCA. However, this may delay the overall process of incorporation of the Company and should be resorted to when there is no hurry.
- Shops and Establishment Act certificate: This is required for shops, eateries, restaurants, places of interest, theaters and so on. To obtain this certificate, send a statement containing the business owner’s and manager’s names, along with the establishment’s name, postal address and the category, to the local (state) shop inspector, along with applicable fees. The Act regulates the working conditions of employees with respect to the health and safety measures, number of working hours, payment of wages, holidays, etc.
This is not an exhaustive list. There might be other registrations and licenses that you would need to obtain, depending on the nature of your business. For example, you may need to get a FSSAI License, Drug License, license(s) for Fire Safety, Environment Safety, waste management, Peer 2 Peer Lending License, Non-Banking Finance Company, Payment Gateway and Payment Aggregator etc. depending on the nature of business you are willing to pursue.
We, at MNRS can help you in identifying and securing registrations and licenses which are applicable to your business and are essential for unhindered functioning of the business. While advising on applicable registrations and licenses, we discuss with you extensively as to your present and future business plans and scale of operations. This helps in identifying appropriate time when a registration or license should be secured in order to maximize operational flexibility and achieve cost effectiveness.
Step 3: Trademarking your Brand / Patenting your Intellectual Property (IP)
- Trademark: Intellectual property (IP) may include your trade name, logo, tagline and other key phrases, which you need to protect for your exclusive use. Trademark, if registered with the government, gives you protection against misappropriation of value that you create in your business through branding and advertising.
The registration of trade mark in India is governed by the Trade Marks Act, 1999, which provides protection to the owner of the trademark by preventing fraudulent use of it by scrupulous persons. It is always advisable that one should have their trademark registered at an early stage, before even the start of branding activities in order to achieve maximum benefits out of it.
- Patent: A patent provides inventor the legal right to prevent others from counterfeiting, manufacturing, or selling the invention without their consent. This exclusive right enables the inventors to reap benefits of their unique concept/idea and invention. Even inventor can license the patent to gain royalties for an extended timeline for which patent is granted to them. This can provide a passible income in the form of royalties from licensed patents and works well in combination with registered trademark and design.
We, at MNRS can help you in getting Trademarks and Patents registered in India, which you consider essential to protect your long-term business interests in India. While advising on Trademarks and Patents registration, we discuss your needs with you to identify the requirement of registration and availability of desired Trademark and Patent. We also help in keeping a track of deadlines and continuously monitoring tracks of patent standards as well as required documentation.
Step 4: Raising capital
How Can MNRS Help?
- We can assist in determining the appropriate business structure based on the nature of the business, such as a sole proprietorship, partnership, limited liability partnership (LLP), or a company.
- We can help in registering the company and/or LLP with the Registrar of Companies (ROC) and obtaining the necessary licenses and registrations.
- We, at MNRS can help you in drafting a detailed business plan, identifying requirement of capital at each stage.
- We can also help in sourcing necessary capital from different means most suitable to the peculiar needs of your business. Our approach to sourcing finance for a particular business encompasses effective cost, operational flexibility, room for desired growth and tax efficiency.
- We can assist you in compilation of documents required to be presented to potential financier, vetting different available options, negotiations, disbursements, restructuring and enhancement.
- We can provide guidance on the various taxes that are applicable to the business, such as income tax, goods and services tax (GST), and customs duty. We can help in registering for these taxes and filing periodic tax returns.