Starting a new business needs some decision making at a very initial stage. But they have bearing on the overall success of the business. The first question we need to answer is to choose the Business setup. There are various options. Indian law provides many options for a business set up. It contains a small business entity like a proprietor and can go to a complex one like a public limited company or further a listed company.
In this article you will understand all these setups.
Different Types of Business Setup to Choose
a). How to set up a proprietorship?
It is the simplest form of business setup. There is no need to apply for a separate PAN for starting a business as an individual. You can have different names for the business. No extra compliances are required.
b). How the income of a proprietor will be taxed in income tax?
The income of a proprietor is taxed on the normal tax rates of an individual. The income is shown in the income tax return of the proprietor as an income from business or profession. The tax rates of individuals are applicable on a proprietorship business.
a). How to set up an HUF?
A HUF is automatically formed at the time of marriage & includes women such as wives & unmarried persons/daughters. There must be one common ancestor to continue the lineage/descendants. Gifts, wills, property sale or inheritance are all collectively shared as assets & so not repeatedly subject to tax.
Upon being established, a HUF needs to be officially registered in its name. It should have a legal deed, containing details of members and the business nature of the HUF. A PAN number and bank account should be opened in the name of the HUF.
b). How to tax income of an HUF?
A Hindu Undivided family unit can save taxes by creating & pooling in assets to form an overall entity. This is taxed separately from its individual members.Hindus, Buddhists, Jains, and Sikhs can also form a HUF. This unit has its own PAN and files tax returns independently of its members.
The main advantage of this is that each family member can claim their own respective exemption as a deduction or tax rebate. Additionally, insurance can be undertaken for the entire family unit, whilst internal functional member salaries can be disbursed & later deducted from the total income (treated as an expense). Investment returns are again taxable overall, however HUF tax rates are the same as for individuals. This saves money for the family.
3. Partnership firm
a). How to set up a partnership firm?
A formal partnership deed on a stamp paper is required. The names of all partners and their details should be there in the deed. The object clause is required in partnership deed. The manner of sharing the profits , salary of partners and capital contribution is also covered in partnership deeds.
b). How to tax income of a partnership firm?
There is a separate tax rate to tax the income of a partnership. Their tax incidence is highest in comparison to all other forms of business. They don’t get any minimum exemption like the individual and huf.
a). How to set up an LLP?
An LLP can be set up fairly easily. All that’s required is a minimum of 2 or more assigned partners, their respective documents, including PAN & address proof, such as Aadhar, Driving license, etc. Furthermore, a photo of each participant & credentials pertaining to the property where the business will be based or conducted. These could be a rent agreement, tax receipt/ownership deed or latest utility bill. The same also applies in the case of partnerships with foreign nationals (using their documents from abroad).
b). How to tax income of an LLP?
This is simple & tax is levied at a flat rate of 30% on all income under Rs. 1 Cr, beyond which an additional 10% surcharge is applied over the total amount. Method of payment include downloading & filling a physical challan document (ITNS 280), subsequently making the payment at a designated bank branch. Alternatively, one can pay online via the e-pay portal.
a). How to set up an OPC?
A One Person Company (OPC) can be established with just 1 director & member (totalling a minimum of 2 people overall). This is as per Section 2(62) of the Company’s Act 2013. Firstly, one needs to apply for a Digital Signature Certificate (DSC) of the intended director. This requires an Aadhar & PAN card (both for ID, address proof & tax purposes), photo, email address & phone number.
Upon receiving the DSC, one needs to apply for the Director Identification Number (DIN) for the proposed Director using the SPICe form. This should be accompanied by the name and the address proof of the director. For existing companies, form DIR-3 is required. Since January 2018, the applicant doesn’t need to file this separately. The DIN can now be applied within the SPICe form for up to three directors.
Now the name of the company needs submitting & approval. This needs to be in the form of “ABC (OPC) Private Limited”. There are 2 avenues in applying for this: either using form SPICe 32 or the RUN web service by MCA (by submitting 1 name & the justification of this). Since 23/3/2018 though, the Ministry of Finance has permitted 2 proposed names & 1 resubmission (RSUB), whilst reserving unique names for unique names (RUN service) for companies.
Upon approval by the MCA, one can progress further.
The following documents need preparing to be submitted to the ROC (Registrar of Companies):
- The Memorandum of Association (MoA) which are the objects to be followed by the Company or state the business purpose for which the company will be incorporated
- The Articles of the Association (AoA) which stipulates the operating company by-laws
- As there’s only 1 Director and a member, a representative nominee needs to be appointed. In the event that they become incapacitated or dies & is unable to perform their duties, the nominee will act on the director’s behalf. Consent will be acquired in Form INC – 3, along with their PAN & Aadhar Card
Proof of the proposed company’s registered office, plus ownership and a NOC from the owner is also required. Furthermore, affidavit & consent from the proposed director on form INC -9 & DIR–2, respectively. Finally, a declaration by the professional which certifies that all regulations are fulfilled.
No coming onto the filing of forms with the MCA. All documents will be attached to the SPICe form series along with the DSC of the director & member. These will then be uploaded to their site for approval. Upon uploading, forms 49A & B will be generated for the PAN & TAN of the company. These need to be sent to the MCA as well.
Lastly, upon verification, the ROC will issue a certificate of incorporation, ready for initiating business operations.
b). How to tax income of an OPC?
This is simple: it’s merely applied at a flat rate of 30%.
6. Private company
a). How to set up a private company?
Upon finalising & deciding a name for the company:
#1: Apply for DSC (Digital Signature Certificate)
#2: Apply for the DIN (Director Identification Number)
#3: Check for the proposed name availability & secure it
#4: File the EMoa and EAOA to register the private limited company name
#5: Apply for both the PAN and TAN of the company
#6: Certificate of incorporation will be issued by RoC, along with PAN & TAN
#7: Open a current bank account using the company name
b). How to tax income of a private company?
This is levied at a rate of 25% plus surcharge of 7% if the total income exceeds Rs. 1 Cr but less than 10 Cr. Above 10Cr, the surcharge increases to 12%. The overall rate increases to 30% if the annual turnover exceeds 250 Cr.
7. Public company
a). How to set up a public company?
The requirements for registration of Public Limited Companies (PLC) are similar to those of establishing an OPC, with a few differences – yet it remains simple. There are a multitude of rules and regulations set under the Companies Act, 2013 for this. Aspects to consider during this process include:
- A minimum of 7 shareholders & 3 directors are needed to form a PLC
- A share capital of at least Rs. 5 lakhs is required
- A Digital Signature Certificate (DSC) of one of the directors is needed for submission
- Self-attested copies of identity and address proof
- The intended directors of the company will need a DIN
- An application is warranted for selecting the company name
The main object clause of the company must be mentioned, stating what a company will do after its incorporation. The application needs to be submitted to the ROC along with the required documents like MOA, AOA, filled forms DIR – 12, INC – 7 & 22. These need to be accompanied by the applicable registration fees. Upon obtaining an approval from the ROC, the company can apply for the ‘certificate of business commencement.’
Documents required for incorporating a PLC:
- Proof of identity & address plus PAN number of all the shareholders and directors
- Utility Bill of the proposed registered company office location
- NOC from the landlord/leaseholder where the company office intends to be situated
- DIN & DSC of all the directors
- Memorandum & Articles of Association (MOA) & (AOA)
b). How to tax income of a public company?
This is levied at a rate of 30% plus surcharge of 5% if the total income exceeds Rs. 1 Cr. Additionally, 3% Education cess & Secondary and Higher Education cess on the total of the income tax & surcharge.
8. Listed company
a). How to get a company listed?
Firstly, the issuer should be a company incorporated under the Companies Act 1956 / 2013 in India. Secondly, the post issue paid up capital of the company (face value) shouldn’t exceed Rs. 25 crore. A track record of at least three years of either:
i. the applicant seeking listing; or
ii. the promoters (holding a minimum of 3 years of relevant experience & holding at least 20% share of post issue equity capital share, collectively or individually) or a promoting company, established in or outside India or
iii.Proprietor/Partnership firm which subsequently converted into a company (however not in established as such for three years), then approaches the exchange for listing
The company/entity should have an operating profit (earnings excluding interest, depreciation and tax) from operations for a minimum of any 2 out of 3 financial years preceding the application and its net worth should be in the positive balance.
It’s also imperative that the applicant company has not been referred to a former board for Industrial and Financial Reconstruction (BIFR). Furthermore, no action should have been taken under the Insolvency and Bankruptcy Code against the issuer and promoting companies.
Lastly, the company shouldn’t have received any winding up petition admitted by a NCLT or court. No material regulatory/disciplinary action by a stock exchange or regulatory body should be recorded in the previous three years against the applicant company.
b). How to tax income of a listed company?
This is also referred to as corporation tax. It is set at 25% for annual turnovers of less than (& including Rs. 250 Cr) & 30% above this. A 5% surcharge is levied on any amount exceeding 1 Cr, irrespective of the total amount.
CA Shaifaly Girdharwal
|CA Shaifaly Girdharwal is a qualified chartered accountant practicing in GST. She is the co-founder of www.consultease.com and a famous YouTuber with more than 2,40,000 subscribers for her channel dedicated to the GST videos. She is also a trainer and author. She is a trainer at https://www.consultease.com/courses/.|