Introduction
Greetings! I am CA Durga Shankar, a practicing Chartered Accountant in the Delhi NCR region for the past eleven years. The aim of this article is to provide guidance to those who are either already in business or planning to embark on a new venture.
Choosing the Right Business Entity
From my experience with clients in the early stages of their businesses, a common issue arises: uncertainty about the appropriate form of business entity to establish. This initial misstep can set the entire business on the wrong trajectory. For instance, one of my clients, who was employed at a reputed IT company, wanted to start his own IT firm to supplement his income with projects from both domestic and international clients. To protect his current employment, he made his uncle and aunt directors and shareholders in the new company. The first year was profitable, but then my client accepted a job abroad, and the company became dormant.
Implications of a Wrong Choice
Despite the inactivity, my client must spend approximately ₹15,000 to ₹20,000 annually to maintain the company’s active status. Why incur this expense if there’s no income? Because every private limited company must comply with the Ministry of Corporate Affairs (MCA) regulations, which include filing annual returns and undergoing mandatory statutory audits, regardless of the company’s financial activity. Over the past three years, my client has spent this amount to avoid hefty penalties for late filing. Now, shutting down the company will cost an additional ₹25,000 to ₹30,000 due to the lengthy closure process.
The lesson here is clear: choosing the right form of business entity is crucial. While I am not opposed to incorporating a private limited company, it is essential to understand the pros and cons of each type of business entity.
Types of Business Entities in India
In India, businesses can operate under several formats, each with its own set of rules and benefits. Here’s an overview to help you decide which one suits your needs best:
Proprietorship
• Registration: No mandatory requirement.
• Separate Entity: No, the business is not separate from the proprietor.
• GST Registration: Not mandatory unless annual turnover exceeds ₹40 lakhs.
• Current Account: Can be opened, but requires business registration proof.
• Documents for Current Account: GST or Shop & Establishment Act registration.
• Time to Register: 5-6 working days.
• Cost to Register: ₹1,500 – ₹2,000.
Partnership
• Registration: Partnership Deed mandatory, followed by PAN application.
• Separate Entity: No, the firm is not separate from its partners.
• GST Registration: Not mandatory unless annual turnover exceeds ₹40 lakhs.
• Current Account: Can be opened with necessary documents.
• Documents for Current Account: Partnership Deed, PAN, KYC of partners, and office address proof.
• Time to Register: 7 working days.
• Cost to Register: ₹2,500 – ₹3,000.
Limited Liability Partnership (LLP)
• Registration: Through MCA portal, followed by LLP agreement.
• Separate Entity: Yes.
• GST Registration: Not mandatory unless annual turnover exceeds ₹40 lakhs.
• Current Account: Can be opened with necessary documents.
• Documents for Current Account: Letter of Incorporation, LLP agreement, PAN, KYC of partners, and office address proof.
• Time to Register: 3-4 working days.
• Cost to Register: ₹7,500.
One Person Company (OPC)
• Registration: Through MCA portal, no agreement needed.
• Separate Entity: Yes.
• GST Registration: Not mandatory unless annual turnover exceeds ₹40 lakhs.
• Current Account: Can be opened with necessary documents.
• Documents for Current Account: Letter of Incorporation, MOA, AOA, PAN, KYC of director, and office address proof.
• Time to Register: 3-4 working days.
• Cost to Register: ₹9,440.
Private Limited Company
• Registration: Through MCA portal.
• Separate Entity: Yes.
• GST Registration: Not mandatory unless annual turnover exceeds ₹40 lakhs.
• Current Account: Can be opened with necessary documents.
• Documents for Current Account: Letter of Incorporation, MOA, AOA, PAN, KYC of directors, and office address proof.
• Time to Register: 3-4 working days.
• Cost to Register: ₹9,440.
Conclusion
Understanding the distinctions between these business entities is crucial for making an informed decision that will benefit your business in the long term. Evaluate your specific needs and choose the form that aligns best with your business goals.
Are you ready to take the next step in your business journey? Whether you’re starting fresh or restructuring, choosing the right business entity is vital. If you need personalized advice or have any questions, feel free to reach out to us. Visit our website SD and Associates or contact us directly at support@techmunshi.co.in. Let’s work together to set your business on the path to success!
Author Bio
Name: CA Durga Shankar
Qualification: Chartered Accountant in Practice
Firm Name: S D and Associates
Leave a Reply