Taxmann's Setting up of Business Entities and Closure (SUBEC) | TEXTBOOK

Contents PAGE Chapter-wise Marks Distribution

I-5

PART A SETTING UP OF BUSINESS (40 MARKS) CHAPTER 1

1.3

Choice of a Business Organization CHAPTER 2

2.1

Types of Companies CHAPTER 3

3.1

Charter Documents of Companies CHAPTER 4

4.1

Legal Status of Registered Company CHAPTER 5

5.1

Formation of LLP CHAPTER 6

Different Forms of Business Organisations & its Registration

6.1

CHAPTER 7

7.1

Formation and Registration of NGO’s CHAPTER 8

Financial Services Organisation and Its Registration Process

8.1

CHAPTER 9

9.1

Start-ups & its Registration I-7

I-8

CHAPTER 10

PAGE

10.1

Business Collaborations CHAPTER 11

Setting-up of business outside India and issues relating Thereto

11.1

CHAPTER 12

12.1

Conversion of Business Entities

PART B REGISTRATION, LICENSES AND COMPLIANCES (35 MARKS) CHAPTER 13

13.3

Various Initial Registrations & Licenses CHAPTER 14

14.1

Maintenance of Registers & Records CHAPTER 15

Identifying laws applicable to various industries and their initial compliances

15.1

CHAPTER 16

Intellectual Property Laws (Provisions applicable for Setting up of Business)

16.1

CHAPTER 17

17.1

Compliances under Labour Laws CHAPTER 18

Compliances relating to Environmental Laws (Provisions applicable for setting up of Business)

18.1

PART C INSOLVENCY, WINDING UP & CLOSURE OF BUSINESS (25 MARKS) CHAPTER 19

Dormant Company

19.3

CHAPTER 20

Strike Off and Restoration of Name of the Company & LLP

20.1

CHAPTER 21

Corporate Insolvency Resolution Process, Liquidation & Winding up: An Overview

21.1

ǣ Ǥ ʹͲʹͳ ȍ Ȏ

P.1

ǣ ʹͲʹʹ ȍ Ȏ

P.17

1

Choice of Business Organisation

CHAPTER

Chapter Coverage S. No.

Topic

1.1

Types of Business Organization

1.2 1.3 1.4

Choice of a Business Organization

Factors governing the decisions for suitable form of organization Features of Different Forms of Business Organisations

1.1 Types of Business Organization

Sole Proprietor- A form of business wherein one person owns all the assets of the business. ship No legal formalities are required to create a sole proprietorship other than an appropriate licensing to conduct a business and registration of business name if it differs from that sole proprietorship.

The owner reports income/loss from this business along with is personal income tax

return.

Partnership Firm ϐ ǡ ͳͻ͵ʹǤ

ϐ

Ǥ ϐ Ǥ

Ͷ͸Ͷ ǡ ʹͲͳ͵ ϐ ͳͲͲǤ ϐ ͷͲ vide ͳͲ ȋ Ȍ ǡ ʹͲͳͶǤ ǡ ǡ ϐ ͷͲ Ǥ

Hindu Undivided HUF is taxed separately from its members.

Family (HUF) One can save taxes by creating a family unit and pooling in assets to form a HUF.

ϐ Ǥ

Authors’ Comment: Hindu family come together and form a HUF.

Limited Liabil- LLP is an alternate corporate business entity that provides the benefits of limited liability of ity Partnership a company but allows its members the flexibility of organizing their internal management (LLP) on the basis of a mutually-arrived agreement as is the case in a partnership firm introduced ǡ ʹͲͲͺǤ

Co-operative So- ȋ Ȍ ciety voluntarily joined together to achieve a common economic end through the formation of a democratically controlled organization making equitable distributions to the capital required and accepting a fair share of risk and benefits of the undertaking.

Section 8 Com- ͺ ǡ ǡ ǡ ǡ ǡ ǡ ǡ ǡ ǡ pany ϐ ȋ Ȍ promoting only the objects of the company.

ǡ ʹͲͳ͵Ǥ

1.3

ͺ

1.4

ǣ

One Person Com- An OPC means a company with: pany ͳ

ͳ death / incapacity of original stakeholder.

Private Company Private company is a company which has the following characteristics:

Public Company

Shareholders right to transfer shares is restricted. ʹ

Ǥ

ʹͲͲǤ An

invitation to the public to subscribe to any shares or debentures or any type of security is prohibited.

A public company is a company which has the following characteristics:

Shareholders right to transfer share; is not restricted. ͹ Ǥ An

invitation to the public to subscribe to any shares or debentures or any type of security is permitted.

1.2 Choice of a Business Organization

A

person must carefully consider all the advantages and disadvantages of each type of entity before choosing one of the forms of business entity which suited best to the nature and size of the business which the entrepreneur/business owner desires to undertake. ǡ ǡ ϐ ǡ

ϐ ǡ ǡ

Business enterprise can be owned and organized in several forms. Each form of organization has its own

merits and demerits. The ultimate choice of the form of business depends upon the balancing of the advantages and disadvantages of the various forms of business.

ǡ ǡ ϐ Ǥ

Ǧ

ǡ and deliberation. The selection of a suitable form of business organization is an important entrepreneurial ϐ Ǥ

ϐ ǡ raised by one-self to face with the complex issues and procedures which ultimately results into the waste ǡ Ǥ

ǡ

Ǥ and liabilities as well as the willingness of the owners to bear it is also an important consideration in choosing the right business entity.

ǡ respect of all the sides of the glorious coin of each form of business entity and its suitability to the business ideas of an entrepreneur. There are several factors to be considered while selecting an appropriate form of business Ǥ ǡ of organization which most suited to the style of business should be chosen.

Example: While starting a business and at a later stage for meeting the needs of its growth and expansion, it is desirable to address this issue at both these levels.

Ǥ ͳ ǣ

1.5

Question For Practice

Ques 1: Choosing a form of business entity is crucial to a successful organization. Comment.

Hint: Refer Topic Choice of a Business Organization as discussed above.

1.3 Factors governing the decisions for suitable form of organization Nature of Busi- This is an important factor having a direct bearing on the choice of a form of ownership. ness Activity ǡ ǡ ǡ Ǧ proprietorship is predominant.

Examples are Laundromats, beauty parlours, repair shops, small retail stores, medicine stores, dentist, accounting concerns, boarding-house, restaurants, painters, decorators, bakers, confectioners, tailoring shops, small scale shoe repairers and manufacturers, etc.

ǡ provided the business is to be carried on a slightly bigger scale with help of one or ȋ ȌǤ Ǥ ϐ ǡ Ǥ Examples are financial businesses that find this for advantageous are tax, accounting, stockbrokerage firms, and consulting agencies etc. Also, Service enterprises like hotels and lodging places; trading enterprises, such as wholesale trade, retail houses; small scale manufacturing enterprises, small drug manufacturers, etc. can be undertaken in the form of partnership.

Where the persons intending to start a business wish to launch a business organization

clothed with a legal entity and in corporate form with a feature of having their sole ǡ Ǧ ȋ ȌǤ Ǧ business.

LLP are suitable generally in the service industry and where there is no dependence

ϐ Ǥ

Ǧ ȋ Ȍǡ

entity in the eyes of law and this creates a wall between the personal assets of the Ǥ ȋ Ȍ ȋ Ȍ ǡ Ǥ

Scale of Opera- ǡ ȋ Ȍ Ǥ tions

Ǧ Ǧ ȋ Ȍ Ǥ

ǡ Ǥ

ǡ ǡ ǡ Ǥ ǡ Ǧ Ǧ ǡ Ǥ originates from a large area- partnership including LLP or Company may be adopted.

Note: In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified as below:

a

micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore ϔ Ǣ

a

small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore ϔ Ǣ

1.6

ǣ

ǡ

ϔ ϔ Ǥ

Capital Require- Capital is one of the most crucial factors affecting the choice of a particular form of ownership organization. Requirement of capital is closely related to the type of business ments and scale of operations.

ȋ ǡ

ȋ ǡ

ǡ

Partnerships can often raise funds with greater ease since the resources and credit of

ǤȌ Ǥ ǡ the form of listed companies by raising money from the public and being listed on the stock exchanges.

ǡ ǤȌ Ǥ ǡ Ǧ ǡ ǡ ϐ Ǧ of form of organization. ǡ Ǥ ǡ ǯ ϐ sanctioning any loans or advances. all partners are combined in a single enterprise.

Companies are usually best able to attract capital because investors are assured that

ǡ ǡ Ǥ

Managerial Abil- Ǥ ity ǡ ǡ Ǥ ǡ Ǥ ǡ complex in nature and require professional management at various levels.

Degree of Control The degree of control and management that an entrepreneur desires to have over business affects the choice of form of organization. and Management

In sole proprietorship and OPC: ǡ ǡ

ǡ ǡ Ǥ

In partnership: management and control of business is jointly shared by the partners

ϐ ǡ incorporating various clauses in this regard in the partnership deed. They have equal voice in the management of partnership business except where they agree to divide Ǥ ǡ are legally accountable to each other.

In

a company: ǡ ǡ ǡ are generally the elected representatives of shareholders.

ǡ

Ǥ ǡ Ǥ ǡ Ǧ Ǧ ǡ organization.

Ǥ ͳ ǣ

1.7

Degree of Risk The size of risk and the willingness of owners to bear it is an important consideration and Liability in the selection of a form of business organization. The amount of risk involved in a business depends among other factors like on the nature and size of business.

ǡ Ǥ

ǡ

ǡ business carries small amount of risk with it as compared to partnership or company. ǡ extent of his entire property. ϐ Ǥ

ǡ

ǡ other forms of business organization. Creditors can force payment of their claims ǯ Ǥ ǡ Ȁ member/partner may lose the entire money he puts into or agreed to put into the ǡ pocket to satisfy the business debts of the company and LLP.

Stability of Busi- A stable business is preferred by the owners in so far as it helps him in attracting suppliers of capital who look for safety of investment and regular return and also ness helps in getting competent workers and managers who look for security of service and opportunities of advancement.

ǡ placed on them by law. The illness of owner may derange the business and his death can lead to permanent closing off the business operations.

ǡ ǡ ǡ ǡ ǡ Ȁ Ǥ

Companies and LLPs have the most business stability due to its feature or perpetuity

ϐ Ǥ Ȁ Ǥ Ȁ Ȁ may go but the company/LLP goes on forever unless and until it being wound up.

Flexibility of Ad- ϐ Ǥ ϐ ǡ i.e. the ministration ǡ ǡ ϐ Ǥ

Ǥ ǡ change in its administration can be affected with least inconvenience and loss.

ǡ

Ǥ

ǡ ϐ Ǥ ǡ any substantial change in the existing line of business activity. Example: From cotton textiles to sugar manufacturing may not be permitted by law if such a provision is not made in the ‘objects clause’ of the Memorandum of Association of the company.

ϐ ǡ

other form.

Division of Profit ϐ ϐ selection of a particular form of business organization. An entrepreneur desiring to ϐ Ǥ

ǡ Ǥ

ǡ ϐ ǡ Ǥ

1.8

ǣ

ǡ ϐ ȋ Ȍ are distributed among shareholders in proportion to their shareholding but the liability of the shareholders is limited. The rate at which dividend is to be distributed is decided by the Board though approved by the shareholders. Companies may also reward Ǥ ǡ ǡ at any time as per their own discretion.

Costs, Procedure Different forms of organization involve different procedure for establishment and are governed by different laws which affect the immediate and long-term functioning of a and Government Ǥ ǡ Regulation Ǥ ϐ by various state and central laws to give a valid proof of existence for instance Shops and Establishment Act. The technical competence and the business acumen of the owner and the requirement of meeting tax liabilities are necessary.

Tax Implication

Ǥ ǡ ǡ ǡ ϐ Ǥ partnership is relatively simple.

Geographical Mobility

Partnerships are also quite simple to be initiated. Even a written document is not always

Ǥ ǡ ǡ Ǥ ǡ Ǥ ǡ to be complied with for closure of companies. Non - payment of dues may land the company into insolvency or liquidation. Example: The cost incurred on the drafting of the Memorandum of Association, the Articles of Association, the Prospectus, issuing of share capital, etc. can be quite high. This cost is however, small in case of private companies. Besides, companies are subjected to a large number of antimonopoly and other economic laws so that they do not hamper the public interest. factor.

ǡ

ǡ ϐ Ǥ ǡ ȋ Ȍ Ǥ

Ǥ ǡ .

The

extent to which the product or service is proposed to be manufactured or made available also plays a vital role in choosing the type of business organization.

ǡ ϐ business may be suitable.

ȋ Ȍǡ Ǥ

Transferability ǡ Ǧ ϐ Ǥ of Ownership

ϐ

Ȁ Ǥ ǡ ǡ ϐ ϐ Ǥ

ǡ shareholding by any person or group of persons in favour of another person or group of persons.

Managerial Needs

Secrecy

1.9

Ȃ

Ȃ

Secrecy is of supreme importance particularly in small business concerns.

Independence

Ǥ ͳ ǣ

of organization. When the concern is small and it caters to local needs only then one person will be enough to manage the business. Ǥ business caters to more areas then more persons will be needed to look after various business functions in various areas.

ǡ to manage various departments. The company form of organization will be suitable for such concerns.

The entrepreneur would select the sole proprietorship for that reason.

ǡ be able to maintain the secrecy. He will have to exercise great care in taking partners.

ǡ Ǥ ǡ ǡ ǡ ϐ which are statutorily required to be placed in public domain are accessible to any person.

Ǥ ǡ prietorship or partnership.

Conclusion: The consideration of the various factors listed above clearly shows that:

These factors do not exist in isolation but are interdependent and all these factors are important in their own

right. Nevertheless, the factors of nature of business and scale of operations are the most basic ones in the selection of a form of ownership for setting up of a business organisation.

Ǥ ǡ ϔ business will depend on the nature of business and the scale of operations planned. Example: If a business ǡ ϔ Ǥ

The various factors listed above are only major factors and in no case they constitute an exhaustive list.

The problem in choosing the best form of business organisation is one of the analysing and weighing relative

ϔ may be assigned to different factors depending upon their importance in each form of organisation and the type of organisation that obtains the maximum weights may be ultimately selected.

PAST EXAMINATION QUESTIONS

Ques 1: Requirement of capital affects the choice of business organization. Comment.

[June 2019 (4 Marks)] Hint: Refer Topic Capital Requirements as discussed above.

Questions For Practice Ques 1: Nature of Business Activity affects the choice of business organization. Comment.

Hint: Refer Topic Nature of Business Activity as discussed above.

Ques 2: Discuss role of Scale of Operations as the choice of business organization?

Hint: Refer Topic Scale of Operations as discussed above.

1.10

ǣ

1.4 Features of Different Forms of Business Organisations COMPANY Company as Choice of Business Organisation for Start-Ups

Start-ups prefer company as a business structure because it allows outside funding to be raised ǡ tions to attract top talent. As these entities must hold board meetings and file annual returns ȋ Ȍǡ Ǥ

Features of Pri- For Raising Fund- Fast-growing businesses that will require funding from venture capitalists v a t e L i m i t e d ing Businesses ȋ Ȍ Ǥ Company private limited companies can make them shareholders and offer them a seat on the board of directors whereas LLPs would require investors to be partners and OPCs cannot accommodate additional shareholders Limited Liability Start-up Cost

ǡ business would be lost; the directors’ personal property would be safe.

Ϊ reduced to Zero for proposed companies where the authorized capital is Ǥͳͷ ʹͲ Ǥ

Requires Greater ǡ Compliance private company set-up needs to meet the compliances under the Com ǡ ʹͲͳ͵Ǥ ǡ ȋ Ȍǡ ǡ ǡ ǡ Ǥ

Few Tax Advan- The private company is assumed to have many tax advantages but this tages is not actually the case. There are some segment specific and industryspecific advantages but taxes are to be paid at a flat rate on profits.

ONE PERSON COMPANY (OPC) Introduction

Features

ȋ Ȍ ing his/her liability to contributions to the business. This person will be the only director and ȋ ȌǤ equity funding or offering employee stock options.

For Solo Entre- A big improvement over the sole proprietorship firm that your liability preneurs Ǥ Ǥ ǡ be a nominee that enabled perpetual existence of the OPC.

Low Compliance Requirements Ǧ ǡ ǯ ǡ its financial statement etc.

Minimal Tax Ad- OPC has some industry-specific advantages. But taxes are to be paid at a vantages flat rate on profits.

Start-up Costs

Fee for filing SPICe+ for incorporation of OPC has been reduced to Zero Ǥͳͷ in case of company having share capital or where the number of members ʹͲ Ǥ

Ǥ ͳ ǣ

1.11

LIMITED LIABILITY PARTNERSHIP Introduction

Features

A relatively cheaper approach to incorporate as compared to a Private Limited Company and Ǣ the liabilities of its partners to their contributions to the business and offers each partner ǡ Ǥ

For Non-Scalable ǯ ǯ ǡ Businesses you may want to register an LLP as it combines several benefits of the Ǥ ǡ ǡ ǡ partnership.

Fewer Compli- Ǥ ǡ ances tural changes need to be communicated to the ROC in the case of private ǡ Ǥ Number of Part- There is no limit to the number of partners there may be in an LLP. Exners ample: if you’re building a large advertising agency, for example, you need not worry about any cap on the number of partners.

GENERAL PARTNERSHIP FIRM Introduction

Features

operate a business in accordance with the terms and objectives set out in the Partnership Deed. This structure is thought to have lost its relevance since the introduction of the LLP ǡ Ǥ ǡ ǡ ǡ Ǥ Ǥ

Unlimited Liabil- ǡ ity Ǥ ǡ ǡ ǡ from his or her personal possessions.

Easy to Start

ǡ started is a partnership deed which you can have ready in just two to Ǥ ǡ ǡ in a day once you have the appointment with the registrar. As compared ǡ Ǧ much simpler.

Relatively Inex- pensive Ǧ ǡ ǡ Ǥ Ǥ ǡ ǡ Ǥ

SOLE PROPRIETORSHIP Introduction

Features

A sole proprietorship is a business that is owned and managed by a single person. There is no such thing as registration; proprietorships are recognized by other registrations such as ǡ ǡ ǡ Ǥ

Unlimited Liabil- A sole proprietorship has no separate existence. All debts can only be ity Ǥ ǡ liability with regard to all the debts. This should heavily discourage any Ǧ ǡ ǯ Ǥ Example: If you plan on running a business that requires a loan or may end up paying penalties, fines or compensation then its best you look into registering an OPC.

1.12

Easy to Start

ǣ

There is no separate registration procedure for proprietorships. All you need is a government registration relevant to your business. Example: If you’re selling goods online, a proprietor would only need a sales tax registration. Therefore, starting up as a sole proprietor is relatively easy.

Questions For Practice

Ques 1: Discuss features of OPC. Hint: Refer Topic One Person Company (OPC) as discussed above.

Ques 2: Discuss features of Private Limited Company?

Hint: Refer Topic features of Private Limited Company as discussed above.

Setting up of Business Entities and Closure (SUBEC) | TEXTBOOK AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO NO. OF PAGES BINDING TYPE

: : : : : : :

N.S. Zad, Divya Bajpai TAXMANN July 2022 3rd Edition 9789356222922 346 PAPERBACK

Rs. : 550 | USD : 40

Description This book is prepared exclusively for the Executive Level of Company Secretary Examination requirement. It covers the entire revised syllabus as per ICSI. This book aims to systematically represent the subject matter so that students do not consciously have to mug up provisions.

The Present Publication is the 3rd Edition & updated till 31st May 2022 for CS-Executive | New Syllabus | Dec. 2022/June 2023 Exams. This book is authored by CS N.S. Zad & CS Divya Bajpai, with the following noteworthy features:

· · · · ·

Strictly as per the New Syllabus of ICSI ['Topic-wise' Tabular Presentation] of the subject matter [Easy to Understand Language] used throughout the book for easy learning [Examples, Comments & Explanatory Notes] for complicated provisions [Most Amended & Updated] This book covers the latest applicable provisions and amendments under the respective laws

·

Coverage of this book includes: Past Exam Questions, including the June 2022 Exam

·

[Topic-wise Past Exam Practice Questions] with Hints Detailed answers are provided in the 5th Edition of Taxmann's CRACKER for Setting up of Business Entities and Closure (SUBEC)

· ·

[Chapter-wise Marks Distribution] from Dec. 2014 onwards [Student-Oriented Book] The authors have developed this book, keeping in mind the

following factors: Interaction of the authors with their students, with specific emphasis on difficulties faced by students in the examinations Shaped by the authors' experience of teaching the subject matter at different levels Reactions and responses of students have also been incorporated at different places in the book

ORDER NOW