How to register an information technology company in Chennai
Chennai is one of the major hubs for software development companies, data management companies, KPO, BPO, and related businesses. Business in this industry is one of the luckiest and most thriving in terms of profitability, growth, rapid expansion, etc.
A business engaged in innovative product development, and new business models grows rapidly within a few years and this leads to high turnover and enhanced scope of business expansion in a short span of time.
The majority of businesses dealing in the information technology industry will be with overseas customers or SEZs within the country.
With the above important presumptions of the industry, it requires a robust and proper legal structure for software company registration in Chennai, we had covered most of the important legal registrations, compliance required, and other details in this article.
How to register your startup company in the software industry?
Registration of an information technology company in Chennai first requires the setup of a basic business structure, and then registering for other registration required for the business with the basic business structure already registered.
Setting up a software development company for startups in India
Generally, there are 4 forms of business structure that are frequently formed for new business, selection of the proper form of business is based on the expected turnover, nature of customers, no of persons joining to start the business, and volume of transactions, amount of investment, etc, based on these parameters and what these 4 forms of the business offers, the right selection of the business structure is to be selected from the below business structures.
- Proprietorship firm registration
- Partnership firm registration
- Limited liability partnership firm (LLP) registration
- Private limited company registration
Proprietorship firm registration for a software company
This is the most economical and easy-to-set-up business structure in India, business can be started without application for any registration, normally Udyam registration is applied (MSME) for proprietorship firms, practically Udyam certificate is not accepted as business proof in banks or even in government departments.
GST registration for software development companies can be applied if it is mandatory, in case it is not mandatory we can apply on a voluntary basis after considering the benefits of GST registration. Once a GST registration certificate is issued, it can be used as valid business proof for opening a bank account.
Advantages of proprietorship registration for IT development company
- Can be set up with minimum investment and fees for company registration.
- There is no separate PAN required for the set-up of a proprietorship firm, individual PAN no is used for all purposes of a proprietorship firm, so income tax filing is not required to be filed separately for a proprietorship firm.
- There is no requirement for renewal of proprietorship firm, the basic firm structure can be kept active till the lifetime of the individual.
- The individual who is the proprietor of the business makes important decisions, signs important documents, etc, so the power of decision-making lies completely with the proprietor.
When should we register a proprietorship for the software development company?
- When the major clients are end customers, that is in the case of small businesses like web development or web designing companies operating on a small scale, the business will be procured by the effort of the proprietor and branding never plays a major role. The only requirement of business formation is for tax purposes and billing, which does not demand other structures of business.
- When there is minimum scope for business development, turnover will be low, which does not justify the cost of maintenance of other forms of business.
- When a business is registered as a freelancer.
- There is no third-party risk which results in high compensation etc.
- There will be no requirement for the additional person for investment or as a key person or for important decision making.
Partnership firm registration for the software development business
Partnership registration for IT development business is cost-effective, the firm can be registered with a minimum of 2 partners who should be Indian citizens. The initial cost of setting up a partnership firm in Chennai will be around Rs.6000.
The business can be commenced immediately after the partnership deed is signed as per Partnership Act 1932, In a practical scenario we recommend applying for a PAN card as soon as the deed is signed. Once the deed is signed by all partners, the partnership deed along with the address proof and other relevant details application for the partnership firm registration will be submitted to the registrar of firms for the respective district in which the firm has its registered address.
Responsibilities of partners and rights of partners are governed by the Partnership Act 1932, for a detailed guide on admission, and the retirement of partners, surf through How to manage partnership firm tax and legal compliance.
What are the advantages of registration of a partnership firm for an IT development company?
- Flexible to add partners into business without much documentation, government fees, and professional fees paid to partnership firm consultants. Admission, removal, or retirement of partners can be carried on by partnership amendment deed.
- Partnership firms have a separate identity for administrative purposes, it can have a separate pan in its name, certificate of registration for the partnership firm will be issued by the registrar of the firm, which serves as the document issued by the government for the existence of the partnership firm.
- Audit is not compulsory for partnership firms, audit is applicable only if turnover crosses the threshold limit, or on the basis of % of cash transactions the benefit of presumptive taxation under section 44ADA is applicable for professionals, who can opt for declaration of profit as 50 % of turnover during the financial year if turnover does not exceed Rs.50 lakhs.
- Scope of getting funded by external sources by admitting them as one of the partners.
- A proper business entity in the eyes of clients and others.
- Flexibility to get the desired name for the partnership firm.
When should we register a partnership firm for a software development company?
- When 2 or more people invest in a business or take part in business activities, in some cases there may be an agreement between two persons to start a business where one will invest the money and the other will take care of operational activities, in such case also partnership firm can be registered with appropriate profit sharing ratio.
- When all the persons investing in a business or taking part in operational activities require equal power in decision-making. As per Partnership Act 1932, all partners have equal rights in decision making relevant to firm activities.
- Where the majority of partners are interested to admit others only on approval of all partners, admission of a new partner can be done only if it is approved by all the partners. This is beneficial for software-related business because the founders would have developed the business concept, developed the product, marketed the product, and unfortunately a third party without any contribution in the initial stages of firm activities may come in as a shareholder or director in case of private limited.
- When the business requires branding without much cost to set up and annual compliance.
Limited Liability Partnership firm (LLP) registration for IT development business
Limited liability partnership firm is a hybrid of the benefits of a partnership firm and a private limited company, apart from many features of a limited liability firm over a traditional partnership firm, a limited liability partnership comes with the benefit of limited liability and a separate legal entity.
A minimum of two partners called designated partners are required for LLP registration as per the Limited liability partnership Act 2008.
To register LLP, forms and other documents are required to be submitted to the registrar of companies, the application for reservation for the name of LLP shall be applied after considering resemblance to an existing private limited company, existing LLP, or trademark. Digital signatures for all the partners shall be applied and get it approved for the application of the designated partner identification number (DPIN).
Documents relevant to LLP registration are to be submitted after name approval and the registrar will approve the LLP registration after following approval guidelines for approval of a limited liability partnership.
Advantages of LLP registration for IT development company
LLP has the same advantages as a traditional partnership firm, with the following additional advantages
- Improved credit facilities from banks and financial institutions
- LLPs have separate legal entity benefits, so the LLP can hold properties in its name. The partners of the LLP are separate from the LLP for all purposes.
- Protection from use of the same name for other private limited or LLP, Once LLP is registered, or it is active the same name or similar name cannot be provided to other companies.
- There is no compulsory dissolution in the case of LLP when a minimum of partners falls below 2 persons, the new partner shall be appointed within 6 months of the vacancy.
When should we register LLP for software development business?
Situations and reasons are the same as applicable for partnership firms, as discussed above. In the following additional scenarios, LLP can be registered for IT development business registration in Chennai
- When your business is prone to third-party risk such as compensation to third parties in case of unforeseen events. Eg : if a court declares compensation that was beyond the payment capacity of the LLP firm then the partners’ personal assets cannot be attached, and partners are liable only for the unpaid amount of agreed capital.
- The branding capability of LLP is at par with a private limited company, so when a private limited company is a primary option for its benefit but does not pass the criteria of cost-benefit analysis compared with LLP then LLP is the right solution. (For cost-benefit analysis cost of the annual audit, MCA compliance forms, and Annual returns are considered).
How and when to register a private limited company for software development business in Chennai?
Private Limited company registration for It development business is one of the top-line business structures that can be registered for software development and related business.
Application for the private limited company shall be submitted to the registrar of companies by uploading the forms to the website of the Ministry of corporate affairs.
As per our standard operating procedures (SOP), an application for name approval is first made with a choice of two names, if the registrar is satisfied that the name does not resemble any existing company or trademark, and there is no other reason to reject, it will be approved by the registrar.
The approved name shall be used for submission of other documents required for company registration within 20 days from the date of approval of the application for name approval.
What are the advantages of registering a private limited company for an IT development company in India?
- It is considered as a top basic business registration in India for privately-funded entities.
- Better goodwill compared to other forms of business while dealing with third parties and others.
- Multiple compliances enforced by the Companies Act 2013 on Pvt ltd company give confidence to sub-contractors, vendors, clients, staff, etc.
- In the case of certain tenders issued by government departments, only private limited will be eligible to participate.
- Highest borrowing capacity compared to LLP or partnership firm.
- Venture capitalists and angel funds prefer to fund the projects under the management of a Private limited company
- Companies Act 2013 lays down a complete set of important organization hierarchies required for legal compliance such as rules relating to directors, loans, dealing with third parties, etc. When everything was in control due to monitoring by means of periodical returns, the entities registered as private limited enjoy enormous benefits.
- Finally, overseas clients prefer private limited companies over other forms of business, so it will directly impact the level of sales when the business engages in overseas projects or clients.
When should you register a private limited company for software development business?
- The primary deciding factor for registration of the private limited company is the cost of registration and cost of annual compliance, and professional fees associated with it. In most cases for this kind of business, cost-benefit analysis would not hinder the decision as the benefits will exceed the cost spent for it. The only scenario for negative decisions will be in case of low expected turnover or business without a confident future forecast.
- When you deal with international clients
- If the major clients are corporates they prefer to do business with a company that is expected to be in the long run, corporates consider private limited companies as a business that will continue in the future.
- When the project or product to be developed is expected to make a big and unexpected rapid growth, it is suggested to register a private limited company because it will facilitate venture capitalists and angel investors to invest in the projects.
What is the other registration required after setting up the software development company?
After setting up basic business registration in any one of the four business forms we should apply for other registration required for other legal compliances. Here we had listed out some of the required registration that would be applicable for business.
When to apply for GST registration for a software development company in India ?
GST registration is mandatory only when the turnover crosses the threshold limit, for example, if a business is registered in Chennai the threshold limit applicable for a supplier of services is Rs.20,00,000, so GST registration is mandatory only if the turnover crosses Rs.20,00,000 in a financial year.
Most of the transactions of IT development companies will be with the corporates so practically GST registration for software development companies is required for engaging in business transactions with peers. Unregistered entities expose themself as small businesses with low turnover hence this may give a negative impact when pitching for fresh contracts with the big corporates. So apply for GST voluntary registration even if the threshold limit is not crossed.
If the client is located overseas and billing had to be done to an overseas address then it will be considered as an export of services, so GST registration is mandatory, however, tax is not required to be paid on such supplies if the business furnishes letter of undertaking (LUT) to the GST department.
The general rate for software services is 18 % so if the end-user is the clients who do not avail of the benefit of input tax credit (ITC), then the company can opt for a composition scheme and pay taxes at the rate of 6 % of the value of supply if the aggregate turnover is up to Rs.50,00,000.
Professional tax registration for a software development company
Professional registration is applicable based on slab rates applicable on salary paid to employees as well as remuneration to the owners of the business. The professional tax shall be paid half yearly to the state government to the respective municipality or corporation. Professional tax paid shall be claimed as a deduction from salary while filing individual income tax returns of the employee as well as the owners of the business.
FSSAI registration/license is required to be applied if the nature of the business is a food delivery aggregator or other business which are required to apply with FSSAI. In case of state license or central license is required to be applied FOSTAC course should be completed.
Shop and Establishment Act registration
Registration under the Shop and Establishment Act is mandatory if no of persons employed is 5 or more. In case a female staff is employed specific forms are required to be submitted for the declaration of safety measures of female staff.
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