Posted by Neha De
June 18, 2020 | 8-minute read (1530 words)
Are you looking to start your own small business in India? Let’s be honest — it can be a challenging, yet exciting process. Starting a business in India requires numerous technicalities and procedures, which should be adhered to so your business can run with ease and generate maximum profits. At its core, a good business structure requires a solid business model and a firm legal foundation — irrespective of the country where it’s based.
The ease of doing business in India has improved exponentially over the past few years. India now ranks 63rd among 190 countries on the World Bank’s “Ease of Doing Business” index. The rankings are based on the average of each economy’s ease of doing business scores for the 10 topics included in the aggregate ranking. This improved ranking followed the reforms implemented by India's government in the areas of starting a business, dealing with construction permits, trading across borders and resolving insolvency.
Consider this step-by-step guide for starting a small business in India.
Step 1: Incorporate a Business Entity
After you have zeroed in on an idea for your business and you've done proper market research to validate that idea, the next step for starting a business in India is to choose a business entity. The right format will support your business plan and help accelerate its growth. It might also help you avoid high tax rates in addition to personal liabilities.
In India, a business can be set up by way of the following:
- Sole Proprietorship: This form of business entity is owned and managed by a single person, called a proprietor. Since the business doesn’t have a separate legal identity (from its owner) under the law, the proprietor is personally liable for all business debts. There is no specific procedure for setting up a proprietorship, and the proprietor cannot raise capital by selling an interest in the company.
- One-Person Company: This is a fairly recent concept introduced under the Companies Act, 2013. A one-person company has only one director, who is also the sole shareholder. According to the Act, only a natural person who is an Indian citizen and resident in India is eligible to act as a member and nominee of the OPC. The structure under OPC has high compliance requirements and cost, and few tax advantages.
- Partnership: If two or more founders are looking to set up a small company, then it can be registered as a partnership. This type of entity is controlled by the Indian Partnerships Act, 1932, and can have a maximum of 20 partners. The terms and conditions are bound by a partnership deed, which needs to be signed by all the partners. A partnership firm is suitable for small- and medium-sized businesses because debts can be recovered from the personal assets of the partners.
- Private Limited Company: This format has its own legal existence separate from that of its owners. Here, the owners and shareholders are only liable to the extent of their shares in case of a financial emergency. A minimum of two and a maximum of 200 people are needed to start a private limited company. The Companies Act, 2013 holds the provisions related to such companies in India, and all such entities must be registered with the Registrar of Companies. It is mandatory for these entities to file annual compliance , and failure to do so may lead to serious legal repercussions. If you are looking to raise funding or have shareholders, this would likely be the ideal option.
- Limited Liability Partnership (LLP): An LLP is a legal entity that offers the benefits of limited liability and the flexibility of a partnership. In terms of liability protection, a partner is liable only to the extent of their capital contribution. In addition, a partner cannot be held personally liable for any independent or unauthorized acts of any other partner. However, any such independent or unauthorized acts can tie up the LLP itself. Activities under an LLP system are managed as per the provisions of the LLP Agreement.
- Public Limited Company: This type of business is more suitable for mature businesses. A public limited company enjoys the advantages of a private limited company, and it also allows its shareholders to freely transfer their shares. Such businesses are highly regulated.
Step 2: Obtain the Necessary Registrations, Licenses
All companies are required to be registered with various government authorities, depending on the nature of their activities. The registration process differs based on the type of entity and structure you have chosen for your business. However, these are the various registrations and licenses that may be required by your organization to operate a legal business in India:
- Digital Signature Certificate (DSC): You can obtain a DSC from one of six private agencies authorized by MCA 21. All directors must submit the prescribed application form along with proof of identity and address.
- Director Identification Number (DIN): You can apply for a provisional DIN by filing application form DIN-1 online. A physical application form must then be signed and sent for approval to the Ministry of Corporate Affairs (MCA) along with proof of identity and address. After verification and approval, a permanent DIN is issued.
- Company Name: Approval for a company name must be done electronically. You must check the availability of your chosen company name on MCA’s website. A maximum of six names can be submitted. The selected name will appear on the website, once approved.
- Permanent Account Number (PAN): The application to obtain a PAN is made using Form 49A. It can be made online, but the documents need to be physically sent for verification. After the PAN is obtained, a printed PAN card is issued. The PAN is mandatory for opening bank accounts and filing income tax returns and TDS returns.
- Tax deduction Account Number (TAN): To apply for a TAN, you need to use form 49B and submit it at any TIN Facilitation Center. After verification, your application will be sent to the Income Tax Department and the TAN will be issued. The application can be made either online or offline. The TAN is needed by such companies engaged in deducting or collecting tax.
- Certificate of Incorporation: To apply for this certificate, you must electronically file such forms as the e-form 1, e-form 18 and e-form 32 on the MCA’s website. You are also required to attach scanned copies of the consent from the initial directors, as well as scans of the signed and stamped form of the MAA to Form 1.
In addition to this, submit one copy of the MAA, Articles of Association, Form 1, Form 32, Form 18 and the original name approval letter, consent of directors and stamped power of attorney to the Registrar of Companies. If everything is in order, you will receive the Certificate of Incorporation at your company’s office by registered mail.
- Goods and Services Tax (GST) Registration: As of July 2017, any business that has an annual turnover of more than INR 2 million (for some states, the amount is INR 1 million) must register for GST. The GST registration is also mandatory for those businesses involved in the intra-state supply of goods and services, irrespective of turnover.
- Import Export Code (IEC): IEC is a 10-digit code required by importers and exporters to clear customs and shipments, and to transfer money to foreign banks.
- Office of Inspector, Shops and Establishment Act Certificate: This is required for shops, eateries, restaurants, places of interest, theaters and so on. To obtain this certificate, send a statement containing the business owner’s and manager’s names, along with the establishment’s name, postal address and the category, to the local (state) shop inspector, along with applicable fees. The Act regulates the working conditions of employees with respect to the health and safety measures, number of working hours, payment of wages, holidays, etc.
This is not an exhaustive list. There might be other registrations and licenses that you would need to obtain, depending on the nature of your business. For example, you may need to get a FSSAI license if you are a food manufacturer, transporter or distributor.
Step 3: Trademark Your Brand
As your company grows, so will its brand value. Hence, it is imperative that you protect your intellectual property (IP), which can include your trade name, logo, tagline and other key phrases. Trademark, if registered with the government, gives you protection against misappropriation of value that you create in your business through branding and advertising.
The Trade Marks Act, 1999 registers trademarks applied for in India, provides for better protection of the trademarks for goods and services and also prevents fraudulent use of the marks. It is a good idea to file for your trademark at an early stage, before you begin your branding activities.
Step 4: Raise Capital
Apart from bootstrapping, there are other ways you can raise money for your startup, including angel investors, venture capitalists, business incubators, bank loans, government schemes or crowdfunding. Preparing a detailed business plan that includes market analysis, financial projections, organization management, sales and marketing strategies and so on can play a huge role in impressing potential investors.