First, we congratulate you on your interest in starting a new business in Chennai, owning a business is considered a lucrative and quick way to earn money. In earlier years, registration of business, setup, and success in business was considered as risky task due to heavy investment and other factors.
With the development of social media marketing, low investment business, GIG economy, freelancer platforms, and E-commerce integrator risk and investment to start a new business were reduced in great magnitude.
Accessibility of marketing mediums such as social media marketing, search engine marketing, and influencer marketing opened up business opportunities with low investment requirements.
In this article, we will discuss widely used different types of business structures that can used for new business registration in Chennai. At the end of this blog, you will get a clear understanding of how to register your business, and which business structure is suitable for you out of the most widely used business types in India.
Proprietorship firm registration in Chennai
This is the traditional form of business where the business owner is an individual, where he/she has complete control over the activity of the business & all its functions.
Proprietary firm registration is a suitable form of business when there is a minimum amount of investment required & limited level of business growth.
For example: Mr. Sanjay plans to start a new clothing store with his own investment, in this case structure of the business is not important as customers are end users who do not worry about the legal structure of the business.
Advantages of proprietorship firm registration
- There is no compulsory registration of proprietorship firms in India, and it is easy to set up, for proof of commencement of business MSME registration also called Udyam registration can be applied. MSME certificate can be used as legal proof for the establishment of a business, there is no requirement for renewal or any other major cost.
- Legal flexibility is one of the main advantages of proprietorship registration, there is no separate law for proprietorship business, therefore the is no requirement for compulsory registration, specific format for maintenance of accounts, submission of returns, transaction restriction, etc.
- Benefits of under the Income Tax Act such as presumptive taxation scheme U/s 44AD and U/s 44ADA can be utilized, which allows declaring profits as a minimum fixed percentage without producing books of accounts.
- In the case of other forms of business, financial credibility for loans is based on business income and business assets, while in the case of a proprietorship firm, all personal income and personal assets will be considered for financial credibility, thus there will be improved eligibility limit based on income and personal assets.
- You can get complete control over the activities of a business in the proprietorship firm, the sole proprietor takes complete responsibility and rights over the activities of the firm.
- A sole proprietorship firm can be closed by stopping business activities, there is no requirement for the preparation of any closure documents. However, tax registrations like GST registration and other licenses need to be canceled.
- Best suited for a family business where business structure is required only for tax and legal purposes.
Disadvantages of sole proprietorship firm registration
- The is no separate legal entity concept in a proprietorship firm, the firm and the proprietor are not separate, and all the activities of the firm are the activities of the proprietor.
- The business structure itself does not give financial credibility to the firm, the proprietorship firm gets the same loan eligibility as a business run by an individual in his / her name.
- The scope of expansion is limited due to its inability to brand itself with customers, most proprietorship firms thrive only due to the face value of the proprietor. Large-scale business transactions are very rare in the case of proprietorship firms unless the entire industry is dominated by a similar business structure.
- A proprietorship firm cannot get investment by sharing ownership in the business, the entire rights and ownership lies with the proprietor, and there cannot be multiple owners for proprietorship, therefore capacity to raise capital from another person is almost nil.
- Exemption from GST registration based on a threshold limit is a one-time PAN-based exemption, therefore once the threshold limit is crossed, the threshold exemption cannot be claimed in a lifetime under current GST law.
- The entire management of the firm is with the proprietor, and it will be difficult to create an organizational structure on a large scale to make others responsible for the tasks in the legal aspect.
- The business cannot be continued by others when the proprietor is incapacitated or does not exist.
- A proprietorship firm registration is not suitable for business which is prone to high risk where chances of financial loss are high, high risk of third-party claims, etc. Entire personal properties of the proprietor can be attached to settle the dues to third parties and others.
Partnership firm registration in Chennai
Partnership registration is considered as the best business structure for start-up businesses, due to its flexibility, cost of annual compliance, legal framework, etc. Partnership firm is governed by the Partnership Act of 1932 which lays down a general framework for rules and responsibilities of the partners.
The registrar of firms located in the concerned region (Chennai south, central, north, Tambaram zone) will issue a partnership firm registration certificate on submission of an application for partnership registration in Chennai.
Partnership deed to be drafted by an experienced partnership firm registration consultant who will draft professional business objects and other important clauses.
Advantages of partnership registration
- A partnership firm enjoys the benefit of a separate identity with economical cost and low compliance, it is easy to set up, and partnership firm formation is completed when all the partners sign the partnership deed. Registration of a partnership firm is mandatory for the existence, however for opening bank accounts, to establish the authenticity of firm operations, partnership registration is practically mandatory.
- Partnership firms will be flexible to increase capital by adding additional partners in to the business, new partners can be added to the partnership business with the approval of all existing partners.
- Multiple nature of business can be added to partnership business as compared to difficulties in private limited company registration. Any number of businesses can be added to a business clause of the partnership deed.
- Documents and procedure for partnership deed registration is minimal for partnership firm, almost any name can be used for a partnership firm subject to the Partnership Act 1932.
- Profit sharing ratios can be different from capital proportions, ie, a partner who contributed lesser capital than others can be given the highest profit share, this benefit is not available in private limited company registration.
- Fewer regular compliance is required, only annual returns are required to be filed for the partnership registration renewal each year. Lower annual costs as low as starting from Rs.10,000.
- A partnership deed also called a partnership agreement is easy to modify with a simple document called as partnership amendment deed.
- Presumptive taxation benefit of the Income Tax Act is available U/s 44AD and 44ADA.
- GST registration threshold limit is available separately for partners as well as the firm, therefore even though if the firm is liable to apply online GST registration in Chennai, partners will be still eligible for exemption.
Disadvantages of partnership registration
- All partners are legally liable and binding for the activities of other partners, there is an exception only when it is not authorized by the partnership deed or partnership Act 1932 and against the objects of the firm.
- Partnership firm is not a separate legal entity, therefore personal assets of the partners can be attached to the liabilities of the firm which results in creating unlimited liability toward partners.
- The maximum no of partners can only be 20, thus restricting the exponential ability to raise capital.
- All partners have equal rights in the activities of the firm thus there is no differentiation between investment partner, working partner, or managing partner.
- Financial credibility is lower compared to private limited companies, and lower compliance results in poor reliability of firm documents in providing financial assistance by banks.
- Compulsory winding up when the minimum no of partners falls below 2 persons, there is no grace period to increase the no of partners. Once the no of partners falls below 2 persons, it is deemed to be dissolved as per the Partnership Act 1932.
It is wise to consider partnership firm registration for startups for its benefits, practically it is the best form of business structure with a perfect balance between advantages, disadvantages, compliances required, and costs.
Private limited company registration in Chennai
Private limited company registration is one of the top most priority of new start-ups due to its enormous advantage of branding and goodwill.
Pvt Ltd company registration is suitable for any business for any level of operations, attention can be drawn to cost-benefit analysis of company registration.
Registration and compliance of private limited companies is governed by the Companies Act 2013 and administered by the Ministry of Corporate Affairs.
Advantages of private limited company registration
- The members of the company are separate from the company thus the concept of a Separate legal entity protects its directors and its members from the acts of third parties when acted in good faith and prudency.
- The highest flexibility to expand the business, with the option to add shareholders by issuing shares.
- Management of the company is separate from its owners, which means shareholders and directors are separate.
- Shares can be transferred to other persons without the consent of all other shareholders.
- The liability of its members is limited by the legal benefit of the limited liability concept, where members are liable only to the extent of unpaid capital.
- The private limited company exists irrespective of its members exiting and incoming, therefore the legal immunity of perpetual existence is an advantage when no of members falls below the minimum limit. The minimum statutory limit shall be filled within the time allowed as per the Companies Act 2013.
- Due to multiple compliances for each and every financial transaction in the Companies Act 2013 and Income-tax Act, the private limited company enjoys enhanced financial credibility and high potential to raise funds through financial institutions.
Dis advantage of private limited company registration
- The private limited company registration process is complex as compared to partnership firm registration and proprietorship firm. There is a stringent approval process that makes it time-consuming for registration, normally it takes 15-30 days to register a private limited company in Chennai.
- Approval of the desired name for a private limited company is not guaranteed unless the name is lengthy and denotes the nature of the business accurately.
- The concentration of management of activities of the company will be in the hands of directors, which gives a sense of insecurity to shareholders other than directors.
- Multiple compliances like filing of resolutions, annual returns, and mandatory audit of accounts, increase the annual compliance cost. Tax audit under the Income Tax Act is mandatory therefore minimum cost of yearly compliance will work around Rs.40,000 – 50,000.
- The benefit of presumptive taxation is not applicable to private limited companies, therefore profit cannot be declared as a fixed percentage of turnover.
- The winding-up process is to be done on time if the business is discontinued, failure to file necessary documents and application for winding up will result in a large amount of late fee and penalty. Moreover, if the winding up application is not submitted within in time allowed, then the process is tedious and complicated to close the company.
Simple Comparison of tax advantages of partnership firm, private limited company, and proprietorship firm
|Partnership firm||Private limited company|
|GST||Threshold Exemption Available||Threshold Exemption Available||Threshold Exemption Available|
|Income tax||basic exemption limit available||Not available||Not available|
|Audit||Tax audit applicable based on turnover||Tax audit applicable based on turnover||Tax audits and audits under the Companies Act 2013 are Mandatory.|
|Presumptive taxation U/s 44AD and 44ADA||Available||Available||Not available|
|TDS provision applicable||Only for tax audit cases||Mandatory||Mandatory|
|Financial Credibility||Same as individual||Moderate||High
|Branding||Nil||Name not protected, another person can register a partnership firm with the same name||Only one company can be registered with one name, even similar names will not be approved.|
Some of the additional criteria for choosing the proper form of business with expert advice
1. Amount of investment
In case your business requires huge investment then it is appropriate to choose private limited Company registration because it is proper form a business subject to Multiple compliances & for obvious reasons your advantage from a private limited company will exceed the cost of maintaining a private limited company & tax effects
- Number of stakeholders
- Return on investment
2. Nature of business:
It is complex to explain in a small article, however, I tried my best to explain
The nature of business plays an important role in selecting a business constitution, for example, if you are going to start a software company then it is wise to recommend registration of a private limited company. To make it simple where your nature of business requires trust factor as primary criteria, a Private Limited Company is recommended. In the case of partnership firm registration, the business objects can be any legal business, there is no approval required for business objects of the partnership firm.
- Trust factor
- Customer perspective on stability
If you want to brand your business with the name, then you should go for a corporate structure. Most of the business brands opt for private limited companies. You may be the next big brand.
- The rapid growth of the business to its brand value
4. Requirement of an additional source of funds for business expansion
This is a major problem everyone faces where there is an opportunity for expansion, proprietor concern often suffers from lack of funds & they also face trust factor due to the lowest level of compliance. Most of the proprietor’s concerns won’t take care of themselves regarding required financial discipline and other things. While a private limited company is subject to heavy compliance & funding eligibility by itself, credit scores will be high for the private limited company compared to other forms of business.
5. The number of stakeholders:
When there are a number of stakeholders, it is recommended to go for the private limited company rather than a partnership business formation, this avoids most of the problems e.g.: investors may not be individual, day-to-day affairs of the business. In the case of a partnership firm, you can’t restrict any of the partners from taking part in business activities.