What is Business?
• A business is defined as an organization or enterprising entity engaged in lawful, commercial, industrial, or professional activities.
• An Individual can start a business on its own or with one or more Individuals or by funding from people and administrating the company by themselves.
• The new generation is looking forward to starting their own businesses thus flourishing their unique ideas.
• Do you have a business idea? Are you looking to start your own business? Congratulations! You’re onto something big—Entrepreneurs like you are fueling the economy. Let us help you out. Here’s a guide for you to identify the best type of business constitution for you which will help you with minimum tax and regulatory compliance and give you ease at business and you will have a healthy business life.
What is Sole proprietorship?
• A sole proprietorship is a business owned and operated by an individual.
Characteristics of Sole proprietorship.
• It is easy to form i.e. No separate registration is required
• It is best suitable for someone who wishes to run its business on own without any involvement of another person in decision making.
• An important thing to note is that there isn’t a legal or financial distinction between the business and the business owner.
• You being the business owner are now accountable for all of the profits, liabilities, and legal issues that your business may encounter.
• Thus arises the unlimited liability to the owner i.e., its personal assets are liable for recovery of any loss to the firm.
• Ease to make quick decisions and thus implement the same quickly.
• Sole proprietorships generally enjoy fewer options to raise capital. For example, the owner cannot sell an equity stake to obtain new funds. In addition, the ability to obtain loans depends on the owner’s personal credit history.
• The sole proprietor pays the income tax on the profits earned by the entity. The entity itself does not have to pay any separate income tax.
What is a Hindu Undivided Family?
• The term ‘Hindu Undivided Family’ (HUF) is defined under Hindu Law as it comprises all descendants of a common male ancestor and includes their wives and unmarried daughters.
• Eldest male member becomes the head of the family or the “Karta” i.e., manager of the family.
Characteristics of HUF
• Except for the Karta, the liability of all other members is limited to their shares in the business.
• HUF has a different identity other than its members.
• HUF will be allocated with a different PAN card and a separate bank account.
• The inherited property can form a part of the assets of the HUF.
• An Individual and HUF are taxed with the same rules under Income-tax Act, 1961.
• All the members of HUF and the HUF itself need to file their Income tax returns separately.
• A HUF can earn passive income and not active income. For example – HUF cannot have income from the head salary. However, HUF can earn rental income, interest income, etc.
What is Partnership Firm?
• An association of two or more persons who have agreed to share the profits of a business which they run together. This business may be carried on by all or any one of them acting for all.
Characteristics of Partnership Firm.
• Partnership Firms may be registered under Partnership Act,1932.
Registration of Partnership firm is not mandatory, but recommendatory for many legal & administrative purposes.
• As against proprietorship, there should be at least two persons subject to a maximum of hundred persons.
• There is an agreement among the partners to share the profits earned and losses incurred in a partnership business in a certain ratio.
• Partnership may be formed by an oral agreement or written one among the partners. Such an agreement can be modified according to the requirements of the partners.
• As there is more than one owner in partnership, all the partners are involved in decision making. Each partner is an agent for the partnership business. Hence, the decision made by anyone of them binds all the partners.
• Usually, partners are pooled from different specialized areas to complement each other. This gives the firm advantage of collective expertise for taking better decisions.
• No Separate existence of the Firm from the partners i.e., Owners
• Like proprietorship, each partner has unlimited liability in the firm. This means that if the assets of the partnership firm fall short to meet the firm’s obligations, the partners’ private assets will also be used for the purpose.
• Partners can be paid remuneration or they can share the profits of the firm or both. However, remuneration is only allowed to active partners within the limits of section 40(b) of the Income-tax Act, 1961.
• Partnership is based on mutual trust between partners. There are chances for conflicts between the partners. However, the responsibilities may be divided between partners through an agreement.
• Partnership firms are liable to pay income tax at the rate of @ 30% of total income (Plus Surcharge and cess as applicable)
• Individual partners need to file their ITR annually while Partnership firms file ITR separately.
What is a Limited Liability Partnership?
• It’s a great bet for businesses that are looking to raise capital from investors who aren’t interested in working the day-to-day aspects of your operations but to invest.
• Every limited liability partnership shall have at least two partners, out of which one must be resident in India.
Characteristics of LLP.
• It must be registered with Registrar of LLP under LLP Act 2008
• LLP is a separate legal entity registered under LLP Act.
• Designated Partners are responsible for day-to-day operations and statutory compliances.
• Remuneration to partners will be determined on the LLP Agreement and section 40(b) of the Income-tax act.
• Share of profit determined by partners as decided in the LLP agreement.
• Limited liability to the extent of the contribution made by partners towards LLP.
• Income of LLP Taxed at a Flat rate of 30% (plus surcharge and cess as applicable)
What is A Company?
• A Company is a legal identity representing an association of people with a specific objective registered under the Companies Act, 2013.
• There are multiple types under which a company can be formed under company law like One Person Company, Companies Limited by shares, a company limited by guarantee, Public Limited Company, Private Limited Company. Among these types, Private companies and public companies are the most popular.
• Company formation type is completely based on the liability of members, the number of members, incorporation mode
Characteristics of a Company.
• To be registered with Registrar of Companies under Companies Act, 2013. A company comes into existence from the day it is incorporated/registered.
• Company is a separate legal entity registered under Companies Act, 2013 i.e., like human beings it can buy, own or sell its property. It can sue others for the enforcement of its rights and likewise be sued by others.
• Likewise, LLP, a company enjoys a continuous existence. Retirement, death, insolvency, and insanity of its members do not affect the continuity of the company. The shares of the company may change millions of hands, but the life of the company remains unaffected.
• A company being an artificial person cannot sign for itself. A seal with the name of the company embossed on it acts as a substitute for the company’s signatures. The company gives its assent to any contract or document by the common seal. A document that does not bear the common seal of the company is not binding on it.
• Though shareholders of a company are its owners, every shareholder, unlike a partner, does not have a right to take an active part in the day-to-day management of the company. A company is managed by the elected representatives of its members. The elected representatives are individually known as directors and collectively as ‘Board of Directors.
• Directors are responsible for day-to-day operations and statutory compliances of the company.
• Limited Liability to the extent of the unpaid amount of share capital agreed to be contributed.
• Private Company is most suitable who have turnover but need external funding for smooth functioning.
• Taxation of a company is as follows:
1. In the case of a domestic company, the Tax rate would be 30% (plus surcharge and cess as applicable)
2. In the case of a domestic company, the Tax rate would be 40% (plus surcharge and cess as applicable)
• However, the companies have an option to opt for concessional tax rate @ 22% (plus surcharge and cess as applicable) provided certain conditions are fulfilled.
Domestic Manufacturing Companies
• For all the new domestic companies engaged in manufacturing or production of an article, concessional income tax rate @ 15 % (plus surcharge and cess as applicable) may have opted, provided certain conditions are fulfilled.
• The new company referred herein means a company which has been set up and registered on or after the 1st October 2019, and has commenced manufacturing or production of any article or thing on or before the 31st March 2023.
What is One Person Company?
• ‘One Person Company means a company that has only one person as a member. It is basically a private company with some unique features.
• The concept of OPC provides a more flexible structure and fewer compliance requirements, for a company.
• Characteristics of One Person Company.
• An OPC is primarily a private company. However, certain provisions which are applicable to a private company will not apply to an OPC. For instance, only one director is sufficient (as against two in the case of a private company).
• OPC can be created when an individual wants recognition as a company instead of working as a proprietor.
The company is governed by an act of statute as opposed to sole proprietorship, thereby making it more dependable by a third party.
• As per the Income Tax Act, OPC is treated as a different legal entity from the individual.
• The subscriber to the memorandum of a One Person Company shall nominate a person, after obtaining the prior written consent of such person, who shall, in the event of the subscriber’s death or his incapacity to contract, become the member of that One Person Company.
• It may be noted that only a natural person who is an Indian citizen and resident in India is eligible for nomination in OPC.
• No minor shall become a member or nominee of the One Person Company.
• OPC cannot carry out non-banking financial investment activities.
• OPC cannot invest in the securities of a body corporate.
• Applicable tax rate shall be as applicable to normal Domestic Companies i.e., @ 30% (Plus Surcharge and cess as applicable)
• However, OPC can opt for the lower rate of taxation i.e., @ 22% (Plus Surcharge cess as applicable)
Important Due Dates for the Month
