Sole Proprietorship or incorporate my LLP/Pvt Ltd company in India
Starting your own business requires passion, zeal and aptitude for that business. But once you have decided to start on your own, there are a hundred and one questions zooming through your mind. This article aims at answering, at the least some of your questions.
What is my organization going to be?
Whatever be the form of organization, it is common for people to call it a ‘company.’ But technically, your organization could be a sole proprietorship, a partnership, a private/public limited company, or a limited liability partnership, to name the most commonly formed entities.
When you are the founder and the one and only proprietor for your entity, we call it sole proprietorship. What is important to bear in mind in this form of organization is that the proprietor and the business are one and the same. In a sole proprietorship, the concern/business is not a separate legal entity. The proprietor would be accountable for the concern’s debts, losses and all the profits (subject to tax) would belong to the proprietor.
Sole proprietorship is the simplest form of organization. We also do not have a string of procedures to start a sole proprietorship. What is important is to open a bank account and the bank would require the applicant’s PAN card details. It is not necessary that the business should have a separate PAN but the proprietor’s PAN card would suffice. Depending upon the type of business, service/sales tax registrations might also be necessary for a sole proprietorship.
When two or more persons come together to do business and share profits accrued, a partnership form of organization could come into play. It is a simple form of organization similar to a proprietorship. A partnership is governed by the Indian Partnership Act 1932. The maximum number of people in a partnership is ten in case of banking and twenty in case of non-banking business. The partnership has no separate legal existence and the partners are personally liable for the debts of the firm. Interestingly, while sharing profits, a partner can also be precluded from sharing the losses of the partnership.
It is pertinent to note that the partnership could be registered or unregistered. It is not legally mandatory for a partnership to be registered but it is generally advisable to do so.
Another important element as far as partnership is concerned is the partnership deed which broadly put, would provide the names and addresses of partners, business intended to be carried on and date of commencement, principle place of business, the profit sharing ratio of partners, capital provided by the partners, duration of the firm etc.
In case the partnership is to be registered, the next step is to approach the Registrar of Firms in the area where the place of business is situated, with
- The application for registration duly filled out and signed and verified by all the partners or their agents specifically authorized for this.
- Affidavit specimen filled
- A true copy of the partnership deed
- Rental agreement for the place where business is to be carried on or proof of ownership of the place where business is to be carried on.
All these documents must be submitted along with the prescribed fee. Once everything is found in order, the Registrar will enter the firm in the Register of Firms and certificate of registration is issued.
A PAN (Permanent Account Number) card could be obtained for the firm with the Partnership Deed or the Certificate of Registration. Similarly a TAN (Tax Deduction and Collection Account) Number is then obtained. A bank account could be obtained based on the already obtained PAN.
Limited Liability Partnership (LLP)
A Limited Liability Partnership is an extension of a partnership firm with certain advantages. As the name suggests, the liabilities of the partners are limited to the investment they have brought into the LLP. What is important to note in an LLP is that it is a separate legal entity. The minimum number of partners in an LLP shall be two.
It is important to note that the Ministry of Corporate affairs has digitized and provides remarkable online services (through its website www.mca.gov.in) that assist in getting an LLP and also other entities like a company incorporated quite easily. There are a few steps in getting the LLP incorporated.
- The first step would be to obtain the DPIN (Designated Partner Identification Number) and DSC (Digital Signature Certificate) for the partners. The eForm DIR-3 assists to obtain DIN or DPIN.
- The next would be to check for name availability. The website allows one to check if a name is available to be used for an LLP. Then an application can be made in Form 1 to reserve the name.
- Once the name is determined and reserved, the next step would be to submit the incorporation documents to the Registrar of Companies to proceed with incorporation of the LLP. The site http://www.mca.gov.in also provides the incorporation document and subscriber statement in Form 2. The Form 2 also requires to be signed digitally by a practicing Company secretary or Chartered Accountant or Advocate or a Cost Accountant engaged in the formation of LLP. The same can be filled out and submitted along with prescribed fee (the fee would depend upon the amount of contribution by the partners). The submitted Form 2 is then checked and if everything is found in order, the LLP is registered and a certificate of incorporation is issued.
- The next significant step is to file an LLP agreement within 30 days of incorporation of the LLP. Information on the LLP agreement has to be filed in Form 3.
There are certain important features which sets apart a company from other entities. These include separate legal existence, perpetual succession and limited liability.
Private Company – A private company is a company which prohibits invitation to the public, restricts transfer of shares, formed by two or more persons for any lawful purpose subscribing their names to a memorandum.
Public Company – A public company is company which is not a private company, i.e. does not go by the rules set forth above, with a minimum of seven subscribers.
One Person Company – The concept of One Person Company was brought into effect by the Companies Act 2013. A One Person Company is a combination of a sole proprietorship and a Private Limited Company. It imbibes the features of a corporate into a sole proprietorship form of organization. A One Person Company can be formed by one individual (member) resident in India. It is a separate legal entity like a company and has perpetual existence.
The most important factor to be noted in case of a One Person Company is that the member of the one person company must nominate another who will take over the one person company in case of death or disability of that member. The prospective nominee has to give his/her consent to act so.
It is pertinent to note that the Ministry of Corporate Affairs has come out with a fast track mode for incorporation of companies through Simplified Performa for Incorporating Company (SPICE INC-32). With the introduction of this form, a single application would suffice for name reservation, incorporation of company and DIN (Director Identification Number) allotment apart from application for TAN (Tax Deduction and Collection Number) and PAN (Permanent account Number) for the company. A public, private and one person company can be registered with this Spice form. It is pertinent to note that the company’s Memorandum and Articles are required to be provided in forms Spice EMOA (e Memorandum in form INC-33) and Spice EAOA (e Articles in Form INC-34).
In case of a One Person Company, the consent of the nominee should be provided in the Spice form INC-32 itself. The details of the nominee like identity proof and residential proof are also to be attached.
Apart from the above, an affidavit and declaration by the first director and subscriber(s) is required to be attached. If any director/subscriber does not have a DIN, then proof of identity and residential proof of such director/subscriber is also required to be attached.
It is pertinent to not that Spice form INC-32 lists a declaration section where the details of the Professional (like a Company secretary/Chartered Accountant/Advocate) providing declaration could be filled out followed by the declaration itself.
Once the form and documents are found in order, the company is registered.
Spice Form INC-32 is one of the quickest ways for incorporation of a company. Since it compresses the entire procedure in one step, incorporation has now become easier.
While these are the different types of entities you can form, each have their own benefits and shortcomings. You need to choose the one that suits your requirements. Remember one size never fits all.