Incorporating a Business in India: What You Need to Know

Incorporating a Business in India: What You Need to Know

It’s usually a very big deal to be able to launch your own company, but a lot of people do it without incorporating it. Is this the right and wise decision? What risks do we take on when we go into business without first forming a separate company?

There are around 22-24 Lacs of private limited companies incorporated in India so far and all these companies are regulated by the Ministry of Corporate Affairs as per the provisions and guidelines of the Companies Act, 2013. The Indian government has greatly streamlined the procedures for incorporating a business in India. Taking such steps have ensured that the entrepreneurs get the required motivation and encouragement to easily register and launch their dream business.

Incorporating a business in India provides several benefits and legal protections. Some of the reasons why one might choose to incorporate a business in India are enumerated below.

1.    Legal Entity:-
Incorporating a business leads to creation of separate legal entity for the business, distinct from its owners. This means that the business will have its own rights, liabilities, and obligations, offering protection to the company’s owners by limiting their personal liability.

2.    Brand Building & Credibility:-
Incorporating your business adds credibility and professionalism to your brand by demonstrating to customers, investors and suppliers that the company is committed to long term operations and follows proper legal procedures.

3.    Access to funding:-
An incorporated business in India can have access to various funding options like loans from bank, private equity, venture capital, and many government schemes. Financial institutions prefer to fund businesses that are incorporated as they provide more security and accountability.

4.    Tax Benefits:-
By incorporating a business, a company can get a few tax benefits like taking advantage of deductions, exemptions, and other benefits available for business entities.

5.    Limited Liability Protection:-
As a separate legal entity, the company’s shareholders or owners are generally not personally liable for the debts and obligations of the business. This protects the personal assets of the shareholders from being used to settle business debts.

6.    Perpetual Existence:-
An incorporated business has perpetual existence, meaning it can continue to operate even if there are changes in ownership or management. This provides a kind of stability and long term planning opportunities for the business.

7.    Easy Transfer of Ownership: -
Incorporating a business allows for the easy transfer of ownership through the sale or transfer of shares. This facilitates raising capital, succession planning, and attracting potential investors or partners.

8.    Government Contracts and Tenders:-
Many government contracts and tenders are given only to the businesses that are incorporated and the provisions with respect to the companies Act, 2013 are complied with.

9.    Intellectual Property Protection:-
Incorporating a business can help to a large extent in protecting assets like patents, trademarks and copyrights from infringement and unauthorized use.

Here are some of the risks involved in not forming an incorporated company:

1.    Personal Liability:-
Non incorporation leads to personal assets being at risk. This means that if the business faces legal issues or financial troubles, our personal finances can get affected.

2.    Limited Legal Protection:-
Incorporating a business provides certain legal protections, such as limited liability for shareholders. Without incorporation, we may not have the same level of legal protection.

3.    Tax Implications:-
Incorporating a business allows for specific tax benefits and deductions. By not incorporating, we may miss out on potential tax advantages and could be subject to different tax obligations.

4.    Difficulty in raising capital:-
By not incorporating, capital raising might get difficult as investors prefer to invest in secured and incorporated company.

5.    Credibility and Perceived Professionalism:-
Incorporating our business gives it a more formal and professional image. Without incorporation, customers, clients, and partners may perceive our business as less credible or reliable.

It’s important to consult with legal and financial professionals to understand all the potential risks and advantages of incorporating or not incorporating our business. Their guidance can help us make an informed decision based on our specific circumstances and goals.

CS Chitra Shridhar
Assistant Professor of Commerce
Sage School of Management and Commerce

Enquire Now