Converting an idea into a breathing, tangible entity is the most consuming process for entrepreneurs.
As they pour their time and energy in this experiment, it makes sense to work out more mundane but relevant details like giving a public face to the venture as per their choice. This becomes all the more important if they want to base their operations in a country other than their own.
Many are enamoured by the exuberance of one billion plus population in India, which is socially mobile and clamouring for new products and services to meet the needs of a changing times.
It is a testing and intensely stimulating experience for the budding whiz-kids in India or abroad as they harness their creativity, juggle finances and human assets base, and consider how to frame their enterprise before treading in new waters.
The decision on how to introduce their venture in terms of a sole proprietorship or as a private listed company is made after considering various aspects like ownership, taxability, registration requirements, legal compliance and liabilities.
For a start, there is unlimited liability of business debts in a Sole Proprietorship, and which extends to even the private assets of the individual. In contrast, in a private limited company, the liability is limited to the extent of shares held but not paid.
In terms of the staff, just one person that’s the entrepreneur is sufficient to qualify for a valid Sole Proprietorship, while a minimum of two and maximum of 50 people are required for registration as a private listed company.
There is no separate legal entity for the venture, with the sole entrepreneur listed under Sole Proprietorship. In contrast, a private listed company has a corporate identity distinct from its individual members.
A Sole Proprietorship requires no registration before its starts operating. In contrast, a Private Company must be incorporated before the Registrar of companies so that it could be covered under legislation like service tax, professional tax, Provident Fund, ESI etc as applicable.
There is no charter document for the single-entrepreneur venture while a listed company needs to have a Memorandum and Articles of Association.
A Sole Proprietorship entity ceases to exist after the death of the founder while a Private Listed Company is perpetual and can only be terminated through a series of winding up processes.
Property under sole proprietorship belongs to the individual. In case of a privately listed entity, the company owns the physical assets.
Since the individual and the sole proprietorship share the same identity, the individual can sue or be sued by concerned parties. In contrast, a company can sue or be sued only in its own name since it is a legally registered entity, independent of its members.
When it comes to taxation, a sole proprietorship is taxed as an individual would be on his/her earnings under different slabs. In contrast, a privately incorporated entity will be taxed as a company.
In case of a sole proprietorship owned by a woman resident in India, there is no tax on annual income up to Rs 1, 90, 000, while other entrepreneurs, barring senior resident citizens, are exempt from paying tax on income up to Rs 1, 60,000 a year.
There is a tax slab of 10 per cent on annual income above Rs 1,90,000- Rs 5,00,000, 20 per cent on income between Rs 5,00,000-Rs 8,00,000, and 30 per cent on earnings above Rs 8,00,000.
Tax liability on sole proprietorships owned by men would be 10 per cent on annual income of Rs 1, 60,000-Rs 5, 00,000. The rest of the taxes will be similar to that applicable on women sole proprietors.
When taxing private companies, all the enterprises incorporated in India are deemed as domestic entities for tax purposes, even though they might be owned by foreign companies.
For domestic corporations, the effective tax rate with surcharge is 30%. However, if the taxable income is above 1 million then a surcharge of 10% of the income tax is levied.
Foreign companies that are domicile to India are taxed on their global income whereas foreign entities here are taxed on their income within the Indian Territory. The incomes that are taxable in case of foreign companies are interest gained, royalties, income from the capital assets in India, income from sale of equity shares of the company, dividends earned, etc.
For overseas enterprises seeking business in India, a lot depends on the priorities they have. What shape or form they choose for their operations depends on their expectations in terms of a long-run in India or short-term gains. Either way, knowledge of the local customs and law will go a long way in helping them make that choice.
Related Topic: Private Limited Company Formation in India