Resources for Small Business

Why Is Company Registration Crucial For SMBs?

As registration shows a willingness to be transparent, you will find it easier to do business as a private limited company or limited liability partnership than as a sole proprietor.

Even as a small businessman online, you need to deal with several large entities. For example, you need to negotiate with payment gateways and ensure your shipments face no problems at state borders. As a sole proprietor, which makes you the business yourself, you go into these dealings completely alone. Why shouldn’t you? It’s because businesses run on trust. And your business partners, the authorities and vendors would much rather trust a registered business over a sole proprietor. Let’s find out why this is so, after we look into what registration is in the first place.

What is Company Registration?

The Ministry of Corporate Affairs (MCA) has the authority to register new businesses as companies and limited liability partnerships (LLPs). This is known as registration or incorporation. All such businesses enjoy several rights and advantages, but in exchange for them you need to comply with the regulations of the government. For companies, this includes having your accounts audited and having board meetings, while the requirements for LLPs are lesser. All registered entities need, however, to communicate to the MCA any changes that are made to their board, status, address or business.

How Does This Help Your Business?

Once you’re registered, you are forced into transparency. If you don’t comply, there are fines. Now, this may seem detrimental to your business, but it’s much the opposite.

1. Protect Your Personal Assets (Limit Risks)

As a seller, you’re constantly taking on risk. For example, you may be buying on credit from sellers in China. While right now they may be small quantities, but as your business grows larger, these orders could be substantial. Now, what happens if, for some reason or other, you are unable to repay your supplier? If you’re a sole proprietor, the supplier can go after your personal possessions if your business doesn’t have the money itself. The same if you’re fined by say, the customs department. On the other hand, if you’re a registered business, the supplier or customs can’t touch your home, car or jewelry; they can only get what they want from the registered entity.

2. Get Paid Quick (Faster Flow Of Cash)

If you wish to run an online store, you will know that you need to tie up with a payment gateway. But the major ones, which are usually aggregators of the services offered by the big banks, won’t entertain you as a sole proprietor (by the way, your website will also need a terms of service & privacy policy). Instead, you’ll probably need to get started with a smaller payment gateway service that will pay you the money once a week and charge you a higher commission.

3. Ship Easy (No Shipment Barriers)

Business is not easy in India. So shipping your goods across India without a registration is not recommended. While there shouldn’t be anything wrong with it, problems can arise at inter-state borders if the shipments are large and regular, leading to unnecessary delays.

With the necessary government registrations (if you’ve incorporated a company and got VAT/CST registration), this is much less likely to happen.

4. Grow Your Business (Future prospects)

Banks and other lending institutions like to see last year’s earnings, tax receipts and assess your future earnings before giving you a loan. While you may maintain these as a sole proprietor, the opposite tends to happen when people continue to operate as sole proprietors, particularly since declarations need not be made.If you’re convinced of the necessity of registration, you’re probably wondering whether you can afford it just yet. You should be able to. This is because you have two options: LLP and company. LLPs are cheaper to start and maintain (it costs just Rs. 4000 in compliance fees annually), whereas companies are costlier (at around Rs. 30,000 in fees annually).

However, if you’re looking to raise investment or offer ESOPs to employees, it may make sense to just go with a private limited registration.

 

This is all for now. If you have any other queries regarding the same, leave a comment and we’d love to help you. Thinking which registration to pick up? Ask us!

 

 


Hrishikesh Datar

Hrishikesh Datar, alumnus of National Law School, Bangalore and CEO or Vakilsearch, one of  India’s leading online legal services companies.

 


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  • Steve Davidson

    Hi, Zepo thanks for the detailed post about Company registration and other issues has been involved on that term. Uptra

  • Hi Kartikeya,

    It is always beneficial to register under One Person Company when compared to sole proprietorship.

    1. If in case the business fails to do well OPC takes only business asset as your liabilities while sole proprietorship takes your personal assets as your liabilities as well. More risks.

    2. It is easier to convert to Private limited from OPC than sole proprietorship.

    3. The process for OPC is simpler, requires fewer documents and hassle free for a single owner startup.

    For more information about One Person Company registration you can take a look into the following blog:-
    http://www.zepo.in/blog/2014/11/08/a-to-z-about-one-person-company-registration-in-india/

    Hope this helps.