Understanding Benefits and Misconceptions of Company Formation

The nature of business is such that many times many disputes arise. Extensive business laws can sometimes lead to very strict penalties in such cases, even when non-compliance is inadvertent. 
For entrepreneurs, it is imperative to have a solid safeguard against such legal issues. Forming and registering a company is one of the best ways to achieve this. 
Besides, company formation has numerous other benefits. Let’s look at some of them:

  • Limited Liability: The concept of a “corporate veil” is a safeguard for business owners that a registered company provides. A company by law is a “separate entity” distinct from its owners. In case of any legal issues, an owner is only liable for any damages only to the extent of his undischarged liability. This is very robust protection against painful “unlimited personal liability”. This is one major advantage of company formation over running a business as proprietorship or partnership.

  • Access to Capital: A registered company enjoys a reputation of reliability and trust in the investing market. Hence, it has much better chances of procuring funding than an unregistered business. Company laws in India mandate a company to be registered for it to seek equity investment. Moreover, if such equity is raised from the public, the company needs to be listed on a registered stock exchange. All this entails more disclosures and close regulation of the company, thereby increasing the investors’ faith in the business.

  • Exit Option for Investors: A registered company allows the transfer of shares to new buyers. This provides much-needed liquidity and exit mechanism for existing investors. Especially with public limited companies, this enables investors to allocate their funds efficiently to generate best-possible returns.

  • Expertise: With a registered company, the owners can appoint separate professional managers as now owners are distinct from management. This leads to better business performance and output.

Despite these many advantages, many businesses shy away from getting incorporated. Let’s clear out some of the misconceptions behind this:

Tedious Compliance and Paperwork: This used to be true in the past. But now, the incorporation process has been made agile and easy. Moreover, numerous experts can get this done for you smoothly.

  • Incorporation is Costly: Again, professionals now register your company at very affordable costs with online processes and increasing competition. Moreover, Income Tax Act allows you to amortize your pre-incorporation expenses in subsequent operation years.

  • Companies Are Taxed at Higher Rates: This is a common misconception. Partnerships and Companies are all charged at the same 30% slab rate. Partnership are charged at 30% tax and Companies at 25% in General Category and at 18% - for manufacturing units.

  • Threshold Turnover Needed: Again, this is simply not true. Your business does not need to generate a minimum turnover to get registered. Company Act, 2013 has provisions for many different types of companies to allow any business size to enjoy the benefits of incorporation.

Legal compliance is critical when you run a business. Any illegal action by your business, even if committed in innocence unintentionally, can lead to exorbitant legal costs and loss of reputation. A registered company also boosts customer confidence by convincing him of your bonafide business intent.

 For more enquiry  get in touch with us.

 

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