What if an brilliant idea strikes your brain and you are all set to (optionally quit your job) and start a business of your own?
Legally speaking, how can a person engage in a Business?
There are three principal forms, each with minor variations:
1. Sole Proprietorship: This is the oldest and simplest form of doing a business. You are the only owner and you can claim all the profits and you will be liable for any losses your business makes. Since the profits are part of your individual income, all the tax you pay is your individual (personal) income tax. This is best advantage of a Proprietorship - other forms of business are taxed twice as explained later. Since yours is not a company, you cannot hire employees officially, but what you can do is to enter into contracts with other people who will help you in carrying out your business. Grocery stores are the best examples of Sole Proprietorship.
More info: http://business.gov.in/starting_business/sole_proprietorship.php
2. Partnership Firm: A group of people, called partners, enter into a partnership to do a business . Both, registered and unregistered partnerships are legal. Its easier to approach a court in case of conflicts, convince income tax officials, sue and get sued if the partnership is registered. Important in this form of business is the "partnership deed" which specifies the terms and conditions such as ownership percentage, sharing of profits and losses, roles and responsibilities such as working partner, investing partner, etc among partners. Income from partnership is taxed twice - once on the profits the partnership firm makes, then as individual income tax on the profits the partners receive. A partnership can hire employees. By default, partners have unlimited liability, unless registered as a Limited Liability Partnership (LLP). Business like large stores, franchises like pizza hut outlets or shell petrol pumps, etc are examples of partnerships.
More info:
http://business.gov.in/starting_business/org_partnership.php
http://business.gov.in/starting_business/limited_liability.php
3. Corporation: This is the biggest form of business and has many variations such as Private companies and Public Companies. Corporations are by default a limited liability business - investors or owners are liable and can lose only the investment they make in the business when the business closes down. Starting a company is a cumbersome activity and has many compliance and regulatory issues. At the same time it provides a strong framework in which the interests of investors, employees and customers are safeguarded. From a legal perspective, a company is an independent person with legal existence which is distinct from its owners. It is born when the company is registered. Its ownership can easily change hands by trading of shares. Corporation is also taxed twice, corporate tax on the corporation, income tax on salaries of the employees and profits of investors.
Will explain more about a corporation, its history, types, advantages, etc in later blogs..
Indian Law recognizes the following types of ways to do business:
> Proprietorship
> Private Limited Company
> Partnership Firm
> Co-operatives
> Public Limited Company
> Joint Hindu Family Business
> Limited Liability Partnership
QUESTIONS????
5 comments:
I think "Proprietorship" would be a safe first step for a new bee in business.
On the contrary, I believe new-bees should look out for partners in their ventures. What type of people to look out may differ a lot depending upon type of business, business acumen and confidence of the person, etc. Some people might prefer a experienced hand as their partners. Here the risk becomes low but the returns might be low as well. But nevertheless a very good way to enter a completely new domain. Others might choose equally inexperienced friends as their partners. Here there is a very high risk factor but lot of self-learning as well.
Thanks for the Great Info Manya!!
Regarding the 'Partnership', you have rightly highlighted facts about 'partnership' , but as this blog has an Indian touch to it.
I think the primary reason for 'partnership' in India is for leveraging a talent/expertise in one partner which is absent in the other!!!!
It may be money, technology , marketing , networking etc..
But Partnership has a big disadvantage. If the partnership falters , the business will falter!!!! (to avoid this the partnership deep has to be precise regarding such hitches)
Rightly said. The algorithm is simple:-
1. If the business idea is your own and you have all the skills and capital (investment) required, go in for Proprietorship, else goto step 2.
2. Partnership.
The BIGGEST DISADVANTAGE of Proprietorship is unlimited liability. If you screw up your business badly, banks and other people can attack your personal wealth to compensate their losses.
The Advantage of Limited Liability and the Flexibility of a Partnership were brought under a single umbrella by the Limited Liability Partnership Act 2008, before 2008, all Partnerships had Unlimited Liability.
Good one Manoj! Quoting Narayana Murthy..
“Early to bed and early to rise and work like hell. Those people who have entrepreneurial strengths need to get a marketable idea and understand the window of opportunity for it. They have to bring together a team that has mutually exclusive, but collectively exhaustive skills and work out a value system. Entrepreneurship is about running a marathon, not a 100-meter dash.”
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