Earlier, in our article ‘Intro to the forms of business’, we spoke about the forms of business structures, wherein we have developed an understanding on the basis of all types of business structures that will assist in making an informed decision before turning any idea into reality for a higher probability of a successful stint.
Given the importance of selecting the right business structure, we would like to focus your attention on the following unregistered business structures:
Different Types Of Un-Registered Business Structures
By becoming part of an unorganized business environment, the simplest form of business structures is unregistered business structures. Through the simplest form of business structures, we will mean that such structures can be incorporated with a minimal level of labeled compliance.
Such business structures are tagged along with more cons than pros which are as follows:
1. Pros of Unregistered Business Structures
- Effective management and greater control;
- Lower degree of compliances;
2. Cons of Unregistered Business Structures
- Unlimited Liability of the Promoter/ Owner;
- Minimal sources of funding with a no chance of investments by any other entity i.e. can be funded majorly through the owner’s fund or unsecured and secured loans only;
- Objects pursued shall be limited in nature, like the proprietor cannot do a business of granting and receiving deposits etc.
- May achieve stagnancy at a very early stage due to minimal sources of financial growth.
Below is a look at the forms of unregistered business structures and the necessary structural procedures associated with their creation:
a. Sole Proprietorship
A sole proprietorship, as the name suggests, is a type of business structure/form where there is no distinction between the owner and the business. Such a form of enterprise is owned and managed by an individual and is a more common form of enterprise in the unorganized universe of India.
Starting a business as a sole proprietor is comparatively easier and is subject to lesser rules and regulations than any other forms of business. A sole proprietorship can begin in a few days with almost insignificant costs and can be formed according to the following process:
- Deciding the objects and a legal name for the business;
- Procuring stamps in the name of the business;
- Opening a bank account in the name of the business;
- Any other registrations shall be subject to the objects of the business.
Since the proprietorships are identified from its owners, it may be important to note that all the registrations for the business may be made in the name of the owners. And any income arising from the business through sole proprietorship shall be added to the income of the individual owner which shall be taxed in his/her personal tax returns.
b. Unregistered Partnership
An Unregistered partnership is a partnership of two or more legal entities jointly own, operate and manage the business, wherein the partners hold unlimited personal liability for the debts from the business. A Partnership firm acts through its partners with no minimum capital requirements.
The Partnerships are governed by the Partnership Act, 1932 through a partnership deed, whether oral or written, and has a legal identity separate from its partners for the purpose of preparing the financial statements, filing tax returns and associated compliances. The profits of the partners in the partnerships are calculated in accordance with the partnership deeds created in accordance with the mutual agreements between the partners.
From the above, we can conclude that the partners can enter into an arrangement through an oral or a written partnership deed. In India, many people are legally operating partnerships successfully through an oral partnership deed, but it is a good practice, and it is advisable to create a written partnership deed in order to evade disputes and longevity.
Followings are some of the important considerations while drafting a written partnership deed:
- Initial Capital Contributions;
- Main object of the Partnerships;
- Profit Sharing Ratio;
- Provisions related to the capital withdrawal and Salaries of the partners;
- Compliances procedures in the event of retirement/ death of any partner;
- Event based dissolution procedures;
- Other Important covenants depending upon the objects of the partnerships;
The process of incorporating a unregistered partnership is similar to the proprietorship with a differentiation with respect to the post formation registrations such as making an application for Opening a bank account, Permanent Account Number (PAN), Tax Deductions and Collection Account Number (TAN) etc.