How to Create a new Company
Introduction
In this article, we discusses one of the common problem faced by entrepreneurs. The problem is: “How to create a new company?” We explains the different types of business entities in details.
1. Proprietorship
Proprietorship or proprietary company means your own company i.e. a company, which is owned by you and is running because of your existence.For example:
If you run a consulting business, it is a proprietary business as it is own business.
Rules & Laws of Proprietorship:
Rules & Laws of the government in case of a proprietorship business are the same as in Income Tax.
For example:
No separate PAN card is required for a proprietorship.
Proprietary company has to register under GST-pay and receive GST.
Proprietary company gets Rs. 2 lakhs benefit (Rs. 1.5 lakh under sec 80c + Rs. 50k under NPS).
Proprietary company gets Rs. 2.5 lakhs exemption from Income Tax.
Suitability of Proprietorship:
Suitable for those who want to run their individual business
Suitable for those who don’t want to grow a huge business
2. Partnership
When two or more people come together to form a business to complement each other’s skill sets, it is known as a partnership.In partnership, there is an agreement between partners, which includes:
Investment by each partner
Profit-sharing ratio
Replacement in cash of sudden demise or liquidation of partnership
3. Unlimited & Limited Liability Business
Unlimited Liability: Proprietorship and partnership both are unlimited liability businesses, which means that the liability of owners is unlimited.For example:
Suppose you are running a proprietorship or partnership company and have taken a loan from the market or bank.
But, you are unable to repay the loan or your company defaults in making the payment.
In such a case, the bank has full rights to seal your personal assets to recover the debt.
For example:
Big companies who are not able to repay their debts go to the National Company Law Tribunal (NCLT) but the personal assets of the promoters remain safe because their company is of the following constitution:
- Private company
- Public company
- Limited liability partnership
Also Read: How to Create a Business Model
4. Limited Liability Partnership (LLP)
In LLP, the liability of the partners is limited up to the capital invested by them in the business.Advantages of LLP:
Partners have to pay 30% of the profit as tax to the government and the rest of the money is shared by the partners as per their profit-sharing ratio, which is completely exempted from the tax.
For example:
Profit after tax = Rs. 100
Number of Partners = 4
Profit sharing ratio = all partners are equal partners (1:1:1:1)
Hence, Rs. 25 would be shared by each partner who would be completely exempted from income tax as the LLP has already paid tax to the government.
Limitations of LLP:
LLP can only create partners but can’t create shareholders.
You can’t raise money from the market.
You can’t bring equity in the company.
You can’t bring an IPO for the company.
Hence, if in the initial days, your immediate objective is not to raise funds from the market or to bring an IPO, then you should keep your company as an LLP.
Later you can convert LLP into a Private Limited Company.
Regulations/Compliances of LLP:
Like any other business, you will have to file GST, pay tax and TDS.
There is only one additional compliance, which is filing with the Registrar of Companies (ROC) once in a year that can be done by your Chartered Accountant (CA) at a very minimal cost.
5. Private Limited Company
A private company with minimum 2 shareholders is known as a private limited company.Features of a Private Limited Company:
Private limited company has directors and shareholders. There is no such rule that the shareholders and the directors should be the same, which means is the case in most of the Indian companies.
Private limited companies have to organize at least 4 board meetings annually and have to report the decisions to the ROC.
Advantages of a private limited company:
If the turnover of a private limited company is less then Rs. 400 Cr, then they will have to pay 25% tax rather than 30%.
If a manufacturing unit has been set up as a private limited company after Nov 2019, then they will have to pay 15% tax only.
These benefits are given only to the private limited and public limited company because the government wants the flow of foreign investment in Indian companies.
You can issue shares, private equity and VC funds.
You can convert the private limited company into a public limited company.
Limitation of a private limited company:
If you have decided to take out and put some money in your pocket from a private limited company, it will be considered as an income and you will have to pay the income tax as per the slab rate.
6. Public Limited Company
These companies are listed on BSE or NSE, which means that a minimum of 25% of the shareholding of the company is in the hands of the public, either directly of through mutual funds and financial institutions.Features of a public limited company:
Follow the rules and guidelines of SEBI and ROC.
Quarterly report to the investors regarding improvements, problems profit and growth of the business.
Quarterly declare the results.
Declare the final results at the end of the year.
Declare the audited balance sheets.
Sit with your team and identify the objectives of your business for next 5 years, which will help you to decide a constitution/business entity for your company.
You shouldn’t be afraid of the compliances rather you should grow your business by following the compliances.
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