The other day while browsing through Quora, I discovered a strange pattern. All newbie’s or to- be entrepreneurs had one question in common, how could they set up their start-ups legally. The common suggestion was to incorporate a company in India.
Choosing a suitable business entity is of utmost importance to convert your eureka moments into a reality. So the point of contention is, do we always need to incorporate a company or we have any other option.
Opting for Sole proprietorship over a company always has agitated entrepreneurs.
They are scared to remain as sole proprietors, afraid of its shortcomings. But how aware are they of the drawbacks of registering as a company?
Let’s walk through the reasons for not initiating your start-up as a company.
#3 Timing Is Important! It’s Too Early for the Start
To-be Entrepreneurs are often in a rush to incorporate a company. One fine day they wake up to a life-changing idea and the very next day they out there with their certificate of incorporation.
Is it wise to add overheads without doing anything towards practically running the business?
We have seen many small private limited companies which are converted into shell companies due to their inability to comply with the annual filings.
A practical approach to this is not to hurry up, initiate small and simple with a sole proprietorship and start your business. Indeed there is no easier way to launch a business than a sole proprietorship; you get to start working right away.
#2 No Registration Hassle! No Filing Fee
To start a company, you need to come with a unique brand idea and provide certain information and documents, which are filed with the concerned ministry for approval. At times the entire procedure takes 10-15 days to get the document processed.
Securing all the documentary proofs and certificates in the initial phase may eat up your crucial time.
Moreover, the entire process inclusive of the government fees are likely to be heavy on the pocket.
On the contrary, a sole proprietorship requires no registration. You can start off by opening a bank account. Instead, its registration is recognized by any one or more of the following registrations:
- Licensing under Shops & Establishments Act (for all office establishments)
- Professional Tax (for all employers)
- MSME registration (for small- and medium-sized manufacturers and service providers)
- Importer-Exporter Code (if you’re in the import or export business, of course)
- GST (Goods and Service Tax)
- FSSAI Registration.
#1 Way to Flexible! No compliance stopwatch
Every company has to fulfill a lot many legal formalities, both pre and post its incorporation. On failing to comply with any of the procedural formalities, heavy penalties are imposed.
The statutory formalities range from the filing of annual returns, to board meetings, annual general meetings, tax filings, recording of minutes and a lot many.
On the other hand in a sole proprietorship, there are no mandatory requirements. You can maintain books on your will, to streamline your work. It is you, who is the business. All the profits and losses of the business are clubbed to your tax returns. No separate returns are required to be furnished.
The stark reality is, in case you open a confectionery start-up, and someone happens to fall ill, they can personally sue you. A sole proprietorship has unlimited liability. Any damages will be recovered from the personal estate of the entrepreneur.
Many entrepreneurs have burnt out while gambling with their dreams, however, it does not presuppose the fact that you should initiate your start-up as a company. In case of risking it into a complicated deal, secure your liability by minimizing it.
As a start-up, if you are looking out for some investments, sadly you can’t mobilize funds in such a structure cause there is a bar on trading of equity. However, if you incorporate a company just prior the investment, it will create some tax complications. You can convert into a company when you start to look out for investments.
Well, the bottom line is, know when to pivot.