India has 126 unregistered business for every one registered business, as majority of businesses operate as proprietorships or partnership firms. Despite the introduction of new business entities like Limited Liability Partnership and One Person Company, the adoption of corporate entities is slow among the Indian Entrepreneurs. Popular notion and myths about maintenance of a corporate entity in India drive many Entrepreneurs to start their venture as a Proprietorship or Partnership and later convert into a Private Limited Company. In this article, we address some of the popular myths about a Private Limited Company.
Myth #1: Private limited company is costly
Incorporation of a Private Limited Company used to be a costly affair a few years ago – when professionals used to charge nearly Rs.50,000 for the incorporation of a Private Limited Company. Now with the advent of the internet and a competitive eco-system, Private Limited Company can be incorporated for as low as Rs.20000 through AdroitCorporation.in.
Further, Entrepreneurs who wish to start a small business can even register a Limited Liability Partnership (LLP). The all inclusive cost for LLP Registration is just Rs.12000 through AdroitCorporation.in. LLP would afford limited liability protection, transferability and a separate legal entity for the business – features not available for a proprietorship or partnership firm.
Myth #2: Shareholders meetings must be conducted often
An Annual General Meeting must be conducted by all Private Limited Companies and Board Meetings may be required, if special resolutions are to be passed. However, conducting an Annual General Meeting or Board Meeting is neither a formal or time consuming affair. Meetings relating to maintaining legal compliance of a Private Limited Company can be quickly conducted in a matter of minutes during the course of everyday business, without any extra effort. Therefore, conducting of annual general meeting or board meetings must never be a factor that prevents an Entrepreneur from choosing to start a private limited company for doing business.
Myth #3: Proprietorship and Partnership have lower tax rate
Partnership firms, Limited Liability Partnership, One Person Company, Private Limited Company and Limited Company are subject to the same income tax rate of 30% in India. Therefore, there is no benefit in incorporating a Partnership as apposed to a LLP or Private Limited for reducing tax liability.
Proprietorship’s are taxed similar to individuals in India. Therefore, income tax is based on the slab of income. Usually income of 2.5 lakhs to 5 lakhs is taxed at 10%, 5 lakhs to 10 lakhs is taxed at 20% and any amount over 10 lakhs is taxed at 30%. Therefore, for many small and medium sized businesses, the savings on income tax would be negligible – considering the benefits lost due to incorporation of a Proprietorship.
Myth# 4: Proprietorship and Partnership do not need audit
Proprietorship and Partnership firms are also required to furnish audit reports, if certain criteria’s are met. Proprietorship’s and Partnership firms are required to file tax audit report if the annual turnover exceeds Rs.1 crore or the proprietorship doesn’t achieve a profit of 8% during the financial year. Private limited company on the other hand is required to have its financial statements audited each financial year, irrespective of sales turnover or profitability.