While scrolling through Quora recently, I noticed a common question from people new to the entrepreneurial world: How can they legally establish their start-ups? Many suggested setting up a company in Asia, particularly India.
Picking the right business entity is crucial when turning your big ideas into reality. This raises the question: Do we always have to incorporate a company, or are there other options? Entrepreneurs often grapple with the dilemma of choosing between solely operating as a proprietor or creating a company. They’re wary of staying solo due to potential downsides but might not fully understand the drawbacks of registering as a company.
Here are some reasons why you might not want to start your business as a company:
1. Timing Matters: It might be too soon to start. Aspiring entrepreneurs often rush into forming a company. They suddenly get a groundbreaking idea and, the next day, they’re ready with incorporation papers. But does it make sense to add extra overheads before even starting real business operations? Many small private companies end up becoming inactive because they can’t keep up with annual filings. A smart approach is not to hurry. Start small and simple as a sole proprietor, allowing you to begin operations immediately.
2. No Registration Hassles or Fees: Starting a company requires submitting specific information and documents for governmental approval, which can take 10-15 days. Gathering all necessary proofs and certificates early on can waste valuable time and money. Conversely, a sole proprietorship needs no registration. You can open a bank account and start working. Its recognition comes through various registrations like:
– Licensing under Shops and Establishments Act
– Professional Tax (for all employers)
– MSME registration (for small and medium enterprises)
– Importer-Exporter Code (for import/export businesses)
– GST (Goods and Services Tax)
– FSSAI Registration
3. Flexibility Rules: No Compliance Hassles: Every company has to meet numerous legal requirements before and after incorporation. Missing any procedural formalities can lead to heavy penalties. These obligations include filing annual returns, conducting board meetings, holding annual general meetings, tax filings, recording minutes, and more. In contrast, sole proprietorships have no mandatory requirements. You can keep records at your discretion. You are the business, so profits and losses are included in your tax returns, with no need for separate filing.
However, there’s a downside: If you run a confectionery and someone falls ill, they can sue you personally. A sole proprietorship has unlimited liability, meaning any damages are covered by your personal assets. Entrepreneurs often take risks to chase their dreams, but that doesn’t mean you have to start your business as a company right away. If you enter into complex deals, consider securing your liability to minimize risks.
As a start-up seeking investment, you might face challenges in raising funds since equity sales aren’t allowed in a sole proprietorship. Incorporating a company too early might lead to tax complications. You can always convert to a company when you start exploring investment opportunities.
Ultimately, it’s all about knowing when to pivot.
