Basic Legal Compliances for a small business

Informed decision is the best decision. When a businessman is starting a new venture, the very basic questions include what should be the format of business? whether it should be a partnership or a PVT LTD company or just a propritary concern. What will be the complainces, costs, pros and cons. To have an insight about what these business models comes with, lets have a comparative analysis.



Well known business constitutions

Type of Constitution	Regulated by	Process to formation
Proprietorship	State Government	Shop Act
Partnership	Registrar of Firms – State Government	Partnership Deed
Limited Liability Partnership (LLP)	Registrar of Companies Central Government	Online Registration process
Private Limited Company	Registrar of Companies Central Government	Online Registration process
One Person Company	Registrar of Companies Central Government	Online Registration process

 

Partnership Registration with Registrar is mandatory. If not registered: there is no legal recognition as per partnership Act 1932.

Secondly, for income tax Act recognize only registered partnership firm. If not registered, then the firm is treaded treated as Association of Persons and not a firm. And tax benefits are not available.

COMPARISON:

Particulars	Proprietary	Partnership	LLP	Pvt Ltd
Registration	Shop Act	Partnership Deed	Register with RoC	Register with RoC
Name of Entity	No restriction	No restriction	Approval of ROC	Approval of ROC
Legal Status	No separate legal status	No separate legal status	Separate Legal Entity	Separate Legal Entity
Members liability	Unlimited Liability	Unlimited Liability	Limited liability	Limited liability
Minimum members	One	Two	Two	Two
Maximum	One	Twenty	No Limit	200 Shareholders
Transferability	Non Transferable	Non Transferable	Can be transferred	Can be transferred
Existence or survivability	Dependent on Proprietor	Dependent on Partner	Not dependent on Partners	Not dependent on Members
Taxation	Taxed as Individual	30.90%	30.90%	30.90%
Meetings	No Requirement	No requirement	No requirement	Required.
Annual Filing ROC	Nil	Nil	Compulsory	Compulsory
Formation Cost	Rs.2,000/-	Rs.7,500/-	Rs.12,500/-	Rs.20,000/-
Time to Register	3-4 days	Up-to 1 week	2-3 weeks	2-3 weeks
Statutory Audit	Not Applicable	Not Applicable	Required after 40 lacs	Compulsory, no turnover limit
ROC Filing cost per annum	Nil	Nil	2- 3 thousand	Around 5 thousand

TYPES OF TAXES AND STATUTORY LEVIES





INCOME TAX

• Income tax, as commonly understood, is payable on the income earned. 
• Every year ITR is to be filed before 31st July / 30th September.
• A Tax Audit report is to be obtained from CA in case the turnover Crosses Rs. 1 Cr of turnover (Rs.25 lacs in case of professional services).
• In case the Income Tax amount is above Rs.10,000/- then Advance Tax Should be paid as per prescribed slab rates. (Not applicable to Senior citizens.
•  Otherwise, interest is charged for delayed payment of income tax as well as for missing advance tax dead lines.
• Besides there is one important compliance prescribed, the requirement to deduct tax at source (TDS) while making specific payments by specific payers. E.g. while making payment of Rent, Professional Fees, Labour Charges, Commission etc., TDS is to be deducted.
• TDS is applicable to partnerships/LLPs/Companies irrespective of the turnover of the business.

 ADVANTAGES OF FILING IT RETURN

• Now a days, income tax returns are required for any type of bank finance. Be it CC or term loan.
• Bank requires 3 years returns. And that too with at-least 6 months’ gap.
• There is appearance of stability from the returns you have filed.
• Also , at the time of projecting your future financials, actual returns filed in past makes the financial projections more reliable.
• Timely filed return can be revised n number of times.
• If there is business loss, it can be carried forward till 8 years and set off against future profit.
• There is penalty of Rs.5,000/- for non filing of return.
• For healthy growth in business, it is necessary to be complaint with the laws in force.  Non-compliance may disturb the business at any time in future. It may affect your cash flows beyond repairs.

VAT

• How Does VAT Works:
• Suppose you have purchased goods worth 100 from vendor with VAT Rs.5 = Rs.105
• And you sell the same with 10% margin. So your sale price will be (Rs.105 + 10% Margin) = 115.50/-.
• Suppose you have VAT Registration, you will get credit of the Rs.5 VAT charged to you.
• And so your cost price will be Rs.100 And sale price with 10% margin will be Rs.110/- plus VAT Rs.5.5 = 115.50/-
• Now you will collect this 5.5 VAT from customer and deduct Rs.5 Input VAT. So net Pay to Government will be Rs.0.50/-
• So there is no additional burden on you.
• VAT is compulsory on sales above Rs.10,00,000/-. This is cumulative sales and not FY based sales. (+ Fees Rs.525)
• VAT registration can be done voluntary also , by depositing Rs.25,000/- with VAT Department. (+ Fees Rs.5,025)
• In case the turnover crosses Rs.1 Crore, VAT audit is applicable.

 

SERVICE TAX:

• Service tax is chargeable when the sale of service exceeds Rs.10,00,000/-. This threshold is cumulative and not FY based.
• Registration is mandatory on crossing sales turnover of Rs.9,00,000/-.
• The interest and penalties for non compliance are too high.
• Service tax returns is to be filed every six moths.
• Service tax is to be paid on monthly basis by companies, and in other cased on quarterly basis.

Advantages of Complying with Indirect Taxes:

• Compliance with law.
• Now a days your vendor also demands for VAT TIN because in his return he has to furnish the details.
• Penalties and interest are high for non-compliance.
• Appearance of being more established and larger and also professional.
• Peace of mind.
• If you are registered under CST and issue a certificate for purchases to your inter-state vendor (C Form), there will be benefit of lower cost as the CST rate will be lower.
• In absence of C Forms, the CST rate can be as high as 12.50 % as against 2%.
• Indirect taxes are applicable on your turnover. They are not “Income” based. So irrespective of your profitability, you have to pay Indirect Taxes. 
• If the price of your product is not considerate of applicable Indirect Taxes, it may wipe out your margins in future.
•  E.g. Let us take example of VAT, which is applicable at 12.50%.
  • ¡Suppose today you do not comply with VAT, and sell your product with 10% margin.
  • ¡In future if the liability of VAT arise, you will have to pay from your pockets. Because at that time you wont be able to recover from your customer.
  • ¡In such case, your margin is 10% and you will end up paying 12.50% VAT plus applicable interest and penalties.
  • Now the departments share information among themselves. Since the data is recorded on the basis of PAN, it is easy to share data.
   

This article is a general note on applicable laws and their mechanism. it should not be construed as a professional suggestion. Before taking any decision, please consult your advisor or contact us.