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Small Business: Starting Trouble

Posted: December 5, 2011

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Starting a small business can be cumbersome for entrepreneurs in India. How to register your business and get started

By Vandana Chatterjee

Plain vanilla Sole Proprietorship, Partnership, Partnership with registered deed, LLP and Private Limited – many such terms confuse the first-time entrepreneur.  Add to this, issues such as Sales Tax registration, Service Tax number, personal PAN, Company PAN, TAN number, lawyers, accountants… phew! The problems faced by startups in India seem endless.

Truly, the ‘business’ of starting a business can kill many an entrepreneurial dream. Yet several women have overcome these seemingly insurmountable obstacles to start and sustain their own ventures. How does one decide which route to take while starting off on one’s own? To answer this, we spoke to three women who operate in diverse spaces, about how they structured their companies and what they would advise other people starting out.

Sole proprietorship: Easy route for entrepreneurs in India

Sangeeta Khushalani runs X-cellent Technologies at Gurgaon, selling and servicing computers office automation equipment. X-cellent is a Sole Proprietorship firm. Sangeeta who has built a strong network of clients in the NCR region today, says, “The Sole Proprietorship model suits new entrepreneurs best. There is minimal to no paper work, your personal PAN number is also your company PAN; making your accounts and the finances of the enterprise indivisible. Any regular CA who files your Income Tax can handle the accounts of a Sole Proprietorship firm.”

All you need to start business is a current account in your firm’s name. If you are into manufacturing or reselling products however, you do have to be registered with the Sales Tax authorities and get a TIN number from them, both State as well as Central Sales Tax (CST). For registering a company, you need to have one CST Purchase with a courier receipt of the delivery along with the invoice. It is called First Purchase. Along with that a simple form has to be filled. No lawyer is required. The cost of getting this registration is below Rs 5000. Sales Tax returns have to be filed with the relevant authorities every quarter.

Can partnerships work when starting a small business?

Divya Keshav, who runs her family business, Krishna Printernational at Delhi is also of the opinion that a Sole Proprietorship is the easiest and most painless way to get a business off the ground. It is simple to start, easy to run, is low in costs and compliances. However she points out certain drawbacks to Sole Proprietorships as well as Partnerships. The main issue in these is that the liability of the Proprietor or the Partners is unlimited. Simply put, it means that if your business has incurred losses, or unpaid bills –  your personal property can be attached to make good that loss, be it to suppliers, vendors, clients or employees. Partners are liable in proportion to their partnership.

…to safeguard one’s interests, drawing out a detailed Partnership Deed and getting it registered is of utmost importance.

Another important issue that Divya highlights is that Partnerships generally start very well, but once the honeymoon period is over, disputes can emerge. In such situations, in order to safeguard one’s interests, drawing out a detailed Partnership Deed and getting it registered is of utmost importance. This Deed should cover all important aspects such as succession issues, capital brought in by partners, profit sharing, mode of profit calculation, distribution of work among partners, the time frame for which the partnership should exist at a minimum and solutions in case of death of any of the partners. This ensures the continuity of the business as well as a clear understanding of responsibilities.

Scaling up to a Private Limited Company

Ruhee Chopra-Dubey has been running a successful events business at Gurgaon for the past few years. She started her company as a Sole Proprietorship, but has now converted it into a Private Limited Company to suit her company’s growth needs. Ruhee says that when you operate in a B2B model with large corporates as buyers, having a private limited registration helps project your business as stable and also prove your credentials as a serious player. It helps you to scale up more easily as adding more Directors brings in more capability into the Management Team.

The process of registering is simple and does not need a lawyer, although professionals are available to guide you through the process. Once registered however, annual declaration of accounts have to be made to the concerned authorities, and once your scale of operations goes beyond a certain figure, your accounts need to be audited by an independent auditor as well. In the case of a Private Limited company, the company has to have a separate PAN number. Service organizations have to have a Service Tax number. Service Tax returns need to be filed every quarter.

…when you operate in a B2B model with large corporates as buyers, having a private limited registration helps project your business as stable and also prove your credentials as a serious player.

Special businesses such as those in Food and other perishable items require separate licenses and permits which vary from state to state. Certain kinds of businesses need a Trade License which is issued by the Municipality of the concerned city.

In conclusion, a Sole Proprietorship seems the simplest route to start an enterprise. As your business settles down and you consider scaling up, other models could be considered.

Are you an entrepreneur in India? What model did you start your business in and how did it go? Do leave a comment and let us know!

Photo credit: creationc

About The Author: Vandana Chatterjee turned entrepreneur 4 years ago with Skan Consultants, a professional executive search firm. More recently, she has launched Beehire, a specialist recruitment service for startups and SMEs.

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