Top 5 reasons why you shouldn’t start a company

We have three different type of legal structure to start a business in India i.e. proprietorship, partnership and company. Each and every form of business has its own merits and demerits. Based on your requirements, you can decide the type of legal framework best suitable for your business.

Even though company form of business is the best legal structure to get started your startup, it comes with few drawbacks for very small businesses.

In this article, we will discuss when you should not incorporate your business as a private limited or public limited or OPC.

Cost to setup and operate

Company registration can’t be done without the help of a finance professional such as chartered accountants, advocates and company secretaries. You also require their help in various return filing and compliance issues.

Your cost of registration and post compliance expenses will depend on the professional fees, government charges and the officials you required for legal compliance.

Your yearly cost can go up by Rs. 20,000 based on the kind of business you are running. This includes audit fee, various tax and other filing fees. It may further go up depending on your turnover and other factors.

In case of a proprietorship business, you are not required to incur these initial cost of registration and legal charges to run the business.

Complex process

Starting a company and exiting from it is not a easy process in comparison to proprietorship and Partnership business. Every month thousands of companies are formed in India. Out of these, many companies are in default for filing their financial statements and annual returns with ROC. These type of non compliance can result in disqualification of directors and payment of heavy penalties.

If the business didn’t do well as per your expectations, then you have two choices, either to close the company or continue complying with ROC and tax department. Closing a company is not a easy process if you already have business liabilities.

In addition to above compliance, you are also required to comply for change in registered office, increase in share capital and all most for each and every changes to the documents submitted initially at the time of registration such as MOA, AOA and directors KYC. You can comply to these requirements by hiring a good finance professional but it will be a costly if your business is not generating enough profit.

Additional work

If you are operating as a proprietor, then based on your profit you are required to file return of income with tax department. All of your business Income should be filed in one form.

However, if the same business is run by a company, then profit or loss from it has to be reported by filing ITR6 with tax department. It’s to be filed in addition to the filing of owner’s personal tax return, if they are liable to do so. Extra compliance will cost you based on the professional help you take for filing.

In addition to the tax return, you are required to prepare accounting reports, withhold tax on certain type of payments and file annual corporate forms with state ROC. All these require time and money.

Tax liability

For an individual who is below the age of 60 years, basic exemption limit has been set as Rs. 2,50,000. Below this limit, the proprietor of a proprietorship business is not required to pay any tax. However, in case of a company we don’t have such limit. In case of companies, corporate tax has to be paid if it’s in profit.

For instance, if your proprietorship business has a profit of Rs. 1,25,000 during the financial year 2018-19, you as a proprietor need not pay tax as it’s below the basic exemption limit. However, if the same profit is earned by a company, then you have to pay tax.

If you are planning to run a small family business by forming a private or public limited company then be prepared to pay more tax.

Audit and compliance cost

Audit is a must for companies even though they are not in business. Every year books of account has to be audited by a chartered accountant in practice. These audited financial statements along with other documents has to be compulsorily filed with state ROC on or before the due date. Failure in doing so will attract additional fee which will get multiplied based on the number of days in failure.

Above ROC compliance is in addition to the income tax filing. As per tax laws, you are compulsorily required to file company’s return of income with government on or before the due date of filing, it doesn’t matter whether the company has made profit or loss during the financial year. Delay in tax return filing will attract late fee of Rs. 5,000 or Rs 10,000 based on the date of filing.

Above two filing is a must irrespective of company turnover or profit/loss. If you are running a very small business under a company with a lesser profit then you are required to file company’s return of income with tax department separately in addition to your personal tax return.

These additional filing requirements can be very expensive in absence of much profit from business.

However, in case of proprietorship, you can include your business Income in your personal tax return. In this way, a proprietorship business can save audit fee and other professional charges that is required to comply in case of a company.

If the business is very small, proprietor doesn’t have much business assets, profit is less, you don’t have any plan of expansion and don’t have plan to share profit of your business with others then we suggest you to go for proprietorship form of business.

If you have lots of assets such as cars, rented buildings, stock, bonds, land and residential house, you don’t want it to be at risk if anything goes wrong in business, then we suggest you to incorporate a company. You are also suggested to form a company if you are planning to expand the business and interested in taking additional shareholders to raise capital.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.