Basics of stock market 1: Starting and Formation of a Business
Here, I will be talking in-depth about how one will start a business right from the Idea phase. This explores how you will be approaching each stage in your business career and how you will tackle each one of them.
Table of contents
Introduction
There can be a lot of inspiration for someone to start a business. It can be your dream to make something which you are passionate about, or you don’t want to work under someone and be your own boss. So, the reason can be anything, but with focus, confidence, and discipline, anything is possible.
Before you dive into something, you really need to know what you’re up to. You don’t need that idea where no one has thought about. Think about the odds here, there are 8 billion people and you come up with that idea no one has thought about is rare.
The thing here is, you need to come up with an idea which you are interested in and how you can give value to others with your service. From here, you can see what other businesses are there in the market already and familiarize yourself with those businesses. Study these companies, see how they perform, how they exist, how their business model works.
Business plan
Making a strong business plan is very crucial in this step. You need to start planning for at least a year. If you’re starting your business tomorrow, right from tomorrow to the next year, write down what all your going to do, budget report, capital, and investments, expense, and profit, where to get the capital, what all milestones you’re going to achieve and how you’re going to achieve all of them. Make this as detailed as possible so that if a potential investor sees your report, he should be convinced that this business model will work out.
Choosing the business structure
Now you are one year down the line or in between this phase. To register your business with the government, you need to first define which type of business you’re into. This is the business structure you’re going to define. The business structure you choose influence everything from day-to-day operations to taxes and how much of your personal assets are at risk. You have the option to convert this at a later point in time, but there may be restrictions based on your location. So, let's explore the types of business structures.
Sole proprietorship
You can easily form this and as the name suggests, you have complete control over your business. From the start, if it's only you who have grown your business to this level, then automatically you are the sole owner of your business.
Here, you cannot produce a different business entity. This means, your business assets and personal assets and liabilities are treated as one. You are still able to get a trading name, but you can be held liable for debts and obligations of the business. Also, banks are hesitant to give loans to a sole proprietorship business owner.
This can be good for low-risk businesses and owners who want to test their business idea before forming a more formal business. One advantage is the registration charge, and the government regulations are minimum in this structure. You need to go to the local authority, which is the municipality, gram panchayat for registrations. This model is best if you have just 5-10 employees involved.
Partnership
This is the simplest structure of you have a friend or friends who are also involved in your business. While formation, they also own a part of the business. Here, the two types are limited partnership (LP) and limited liability partnership (LLP).
Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability. The partners with limited liability have limited control over the company. Here, profits are passed through personal tax returns and the general partner must also pay self-employed taxes.
Limited liability Partnership (LLP) is similar to a limited partnership, but a limited liability to every owner. Here, all the partners are protected from debts against the partnership and wouldn’t be responsible for the actions of other partners. If you want to form the company just to build something and need to dissolve after that, then this type of model is the best suited.
Corporation
A corporation is a fully independent business that’s made of multiple shareholders who are provided with stock in the business. The most common is C Corporation which allows your business to deduct taxes much like an individual- but your profits will be taxed at the corporate level and individual level.
This is the most common and if you’re working in a corporate with multiple employees, this is the model much likely they will be following. This is only good if you are established as a business with several employees, listing your company as a corporation might be the correct move. You need to file specific documents with the state and obtain appropriate business licenses and permits.
Corporation offers the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. Additionally, you need more extensive record-keeping, operational processes, and reporting.
Limited Liability Company (LLC)
An LLC lets you take advantage of the benefits of both the corporation and partnership business structure. LLC protects you from personal liability like vehicle, house, saving account and these wouldn’t be at risk in case your LLC faces bankruptcy or lawsuits.
Members of LLC are considered self-employed and must pay self-employed tax contributions. LLC have limited life in many states as some states may require LLC to be dissolved and reformed when a new member joins or leaves.
The plus point about LLC is that members aren’t personally liable for business decisions or actions and there is far less paperwork involved in creating an LLC as compared to other corporations.
Private Limited Company
There should be a minimum of 2 shareholders and minimum 2 directors for the company. It can have a maximum of 200 shareholders. If it goes beyond this, you need to make a public limited company. The shareholders are personally not liable for the company.
This increases trust with the bank and builds the reputation of your company. Most of the startups go for PVT limited companies. Seed funding and initial investments are easy to acquire in this type. Since this type is very trustworthy, the regulations from the government will also be high.
Non-Profit Organisation
The name itself is self-explanatory. The aim of this business is to promote educational or charitable purposes. Here, the money earned by the company must be kept by the organization to pay for its expenses, programs, etc. The process requires filing paper works with the government for them to recognize you as a non-profit organization.
Company registration
If you want to register your company in India, then you must submit an application to the Ministry of Corporate Affairs (MCA) online at the MCA portal. Additionally, you also need a Digital Signature Certificate (DSC) and Director Identity Number (DIN) among other things.
The MCA maintains a record of registered company names, so you will have to access the directory to check if your company name is already registered, if so, then you might need to change your company name.
Provided that you have all the documents while submitting, the registration process will take between 10-15 days to register your company formally. At this time, you can check the status of your application through MCA services in the MCA portal.
Tax Registrations
GST registration: If your company turnover is more than 20 Lakhs per annum. This also includes if your business does import-export of products, within states and inside states as well. E-commerce business is also liable for GST. You might need to do professional tax registration according to the state regulations as well.
Import Export Code registration (IEC): If your business is involved in import-export, then you need to register for import-export code registration also.
Employee State Insurance Registration (ESI): if your company is having more than 10 employees, then you will need to register your company under employee state insurance registration.
Provident Fund Registration: If your company has more than 20 employees, then you will also need to register for the provident funds.
MSME registration: This is an optional registration for micro small and medium enterprises. If you do this registration, you get benefits like getting loans easily, tax subsidies, exemptions schemes.
Current account: A current account help businesses in the smooth flow of banking transactions. Since there will be a large set of transactions, a savings account can be limited in ways of leveraging high transaction charges and limited transactions per day.
Yearly mandatory Compliance
These are some of the things which you need to do every year irrespective of whichever sector you’re into. You need to file income tax returns every year with the government. You might need to have an accountant to keep all your accounting up to date. This can be done by making a balance sheet showing all the assets, liabilities, and shareholder equity.
If you have registered for GST, you might also need to file for GST returns on a monthly or quarterly basis. There is additional secretarial compliance for LLP, OPC, PVT LTD structures. You also need to do a statutory audit if your yearly revenue is above 40 Lakhs.
Role of Incubation centers
These programs help businesses with the registration process and help them grow. These are usually set up by universities, government. But most of them are running in grants. That’s the reason why most of the time they don’t charge you with any part of your equity. Some incubators charge some equity of your company in return for the service they are providing. The duration is somewhere from 6 months to 2 years.
T-HUB is one of the largest incubators in India which was set up by the Telangana government. Kerala start-up mission is an initiative by the Kerala government to accelerate and boost the startup environment in Kerala.
Start-up gets into the incubator in the very early stages. This is the stage where you’re really working on your idea, getting things done, and getting some initial seed fundings. They guide you to meet your mentors, experienced entrepreneurs, meet organizations, working space, and interact with like-minded people related to your business. They also help you connect with potential investors for your business.
There aren’t any criteria to get into the incubation program as such, but some university incubators might prefer their own students and state-owned incubators might prefer their own residents.
Conclusion
Now you are all set to start, build and grow your business. Running a business might be tough and with COVID times, tough get tougher. One thing to keep in mind is to think about how you can give value to your customers, clients, or society. This can be through a product or a service. Think about amazon delivering products to your home as a service and Sony making products for you to enhance your standard of living.
Every business focuses on giving value and if you focus on giving value to your customers, then your business will be always in the right direction. This places your passion in the first place since if you have passion for what you're doing, then only you can add value to others.
Also, do business where it will lead to a better world and environmentally sustainable business. If you’re thinking on the levels of destroying the environment to profit out your business, then you wouldn’t be sustained for a longer time. For example, Adani was making a coal mine near the great barrier reef in Australia, which will impact this ecosystem and destroy them. So, think about making a positive impact on the world.
Now you’re all set to start your own business. In the next article, we will explore what are the ways we can get investments into our company. We’ll talk about angel investors, venture capitalists, bankers, and private equity investors.
Stay tuned!