Unit-3: LEGAL ASPECTS FOR ENTREPRENEURS
Legal Aspects – Business Ownership, Sales and Income Tax and Workman Compensation Act. Clearances and permits required, formalities, licensing and registration procedures.
Legal Aspects – Business Ownership
When we start any business, we must follow some norms under company and as well we are abiding by government laws too. We go though many circumstances, and these rules, help us to grow. In business disputes, happens at the same time, we know what the laws are, where to approach, how to come over. Here legal aspect of business plays important role. Laws defines our boundaries, and show us what is within boundary, so as specific we know where and how to move, how to take steps legally. When we form any business first thing is how would be our company? Solo or partnership. But there are many other forms available, each type having legal aspect, so that in future company can fight back with their rights. We will see, basically, what are different types of business structure. Business ownership[1]
Business ownership refers to legal control over a business. It gives the owner the legal right to make certain business decisions.
Types of business ownership structures
• Sole Proprietorship
• Partnership
• Private limited companies (LTD)
• Public Limited Companies, PLC
• Not-for-profit organisation
• Cooperatives.
1. Sole proprietorship
This is the most common form of business ownership and the simplest. Sole proprietorship means that a business is owned and directed by one individual. This individual owns all the rights to run the business however they deem fit.
Advantages of a sole proprietorship
· All income earned belongs to the sole proprietor, who also owns all business assets.
· It is the simplest of all the business structures to set up.
· It provides the proprietor with flexibility in running the business.
· The sole proprietor gets to make all business decisions.
· Absence of corporate tax.
Disadvantages of a sole proprietorship
· The proprietor bears personal responsibility for all business debt and losses.
· There is little to differentiate between personal and business income.
· Raising capital is the responsibility of the sole proprietor.
2. Partnership
This business ownership structure means two or more people own a business. Partnerships are of two types, namely:
General partnership – this involves an investment from all partners, and all partners bear the responsibility for any debt incurred by the business. The partnership usually doesn’t need a formal agreement as it could be verbal between business owners.
Limited Liability Partnership, LLP – LLP provides protection for each partner against debt incurred by the other partner(s). It usually requires a formal agreement between partners to protect each from the actions of the others.
Advantages of partnership
· Business capital can be easily generated from each partner’s resources.· Profits from services offered by the business are shared between partners.· Ownership and decision making are shared by partners.· Greater capacity for loans.
Disadvantages of partnership
· Partners are responsible for losses or debt incurred by the business.· The risk of friction among partners can be high.· Partners can be held liable for the actions of other partners.
3. Private limited company/LTD
A private limited company – also referred to as LTD – is an incorporated business entity that is privately held and controlled. The ownership of the business is divided by shares in the company. Those who own the shares are known as shareholders.
This type of business ownership provides limited liability to the owners. Limited liability provides the shareholders’ personal assets with protection from liabilities incurred by the business.
Advantages of private limited companies
· Private limited companies provide limited liability to their shareholders.· Shares cannot be sold to the public (the current owners decide to whom they will sell them). Therefore, the company is protected from loss of ownership and control.· Due to incorporation, LTDs can continually exist even after the death of an owner.
Disadvantages of private limited companies· Shares can only be sold in-house, and can’t be traded with the public.· It is expensive to set up due to administrative and legal costs.· They must be registered with the company registrar.· Legal paperwork is necessary for starting up an LTD.
4. Public Limited Company/PLC
A public limited company – also known as PLC – is a business ownership style unique to the United Kingdom, although it is equivalent to what is known as corporations in other countries. A PLC is an incorporated business, meaning it exists legally as a separate entity from its owners. It also has limited liability, as it offers protection to its shareholders from business liabilities.
A PLC is managed by a board of directors and owned by shareholders. A PLC’s shares can be traded with the public on the stock exchange.
Advantages of limited liability companies
· Capital can be easily generated through trading shares publicly.· Owners have limited liability.· Publicly listing shares makes it easier to attract investors.
Disadvantages of limited liability companies· Anyone who can afford to buy a share can be a shareholder.· A board of directors is needed to run the organisation.· They are exposed to public scrutiny and regulations.· They may be at risk of a takeover if someone buys up a majority of the shares available.
5. Non-ProfitA non-profit organisation has been established for purposes other than profit generation. The organisation’s generated income does not go to the owners or members. Examples include Amnesty International and the Boy Scouts. Advantages of a non-profit organisation
· It easily attracts talent interested in the mission of the organisation.· Non-profit organisations are exempt from paying corporate income tax if they meet the necessary criteria.· Owners of the organisation are protected from personal liability.
Disadvantages of a non-profit organisation· Raising funding for projects can be complicated.· Non-profit organisations can face immense pressure from stakeholders.· The financial spending of the organisation is open to scrutiny from the public.
6. CooperativeA cooperative is a business structure whose owners are consumers of its services. It is operated to provide benefits to those people. It often aims to pursue economic, social, or cultural goals.
Examples of cooperatives include community-owned stores and farms such as Anglia Farmers or supporter-led sports clubs.
Advantages of cooperatives
· They are relatively easy to start.· Management style is democratic, with each member having voting rights.· Funding is internal; hence responsibility is shared among members.
Disadvantages of cooperatives· Independent of the amount invested, all members have equal voting rights.· There is a limit to sharing dividend payments.· There is the risk of rigid business practices.· Over-reliance on internally generated funds.
https://www.studysmarter.co.uk/explanations/business-studies/introduction-to-business/business-ownership/https://www.fundera.com/blog/government-regulations-on-businesshttps://www.thedailymba.com/2010/03/31/topic-22-legal-aspects-of-business/https://www.smallbusinessrainmaker.com/small-business-marketing-blog/7-legal-considerations-to-prioritize-when-starting-a-business
Sales and Income Tax and Workman Compensation Act.
Sales and Income Tax
The Sales Tax Rate in India stands at 18 percent. [source: Ministry of Finance, Government of India]
India Sales Tax Rate – GSTIn India, the sales tax rate is a tax charged to consumers based on the purchase price of certain goods and services. The benchmark we use for the sales tax rate refers to the most common rate for services. Revenues from the Sales Tax Rate are an important source of income for the government of India.[2]
List of countries by sales tax rate – Asia[3]
Details:Income TaxAn income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income).Taxation rates may vary by type or characteristics of the taxpayer and the type of income.
The tax rate may increase as taxable income increases (referred to as graduated or progressive tax rates). The tax imposed on companies is usually known as corporate tax and is commonly levied at a flat rate. Individual income is often taxed at progressive rates where the tax rate applied to each additional unit of income increases (e.g. the first $10,000 of income taxed at 0%, the next $10,000 taxed at 1%, etc.).
Workman Compensation Act.
Employee’s Compensation Act, 1923, or Workmen’s Compensation Act, 1923, ensures that workers are adequately compensated for injuries sustained in the line of duty.
The Workmen Compensation Act, 1923 is an enactment that was issued by the Government and was implemented by various State Governments which gives social security to workers. This security is offered by the law for people who work. The Act was formed after it was noted that laborers were getting more exposed to danger with the use of advanced and sophisticated machinery. The common law had it that the employer would only take up the compensation responsibility if it is found that the industrial accident was a result of his negligence. In India, the issue of compensating workmen after fatal and major accidents hit the road in 1884. It was then in 1885 that the factory and mining inspectors realized that the Fatal Accidents Act, 1885, was not enough to attend to the intended purposes. The State offered a hearing ear when members of the Legislative Assembly, employers’ representatives, workers and experts in medicine and insurance formed a committee that gave a report that led to the enacting of the Workmen’s Compensation Act in 1923.
The passing of the Act put a stop and offered a relief for workers who would have gone through court processes that are often expensive, an effort to seek compensation whenever they acquired an injury during employment.
Employer’s Liability for Compensation:To make the employer pay compensation, the death or injury suffered by the workman must be consequence of an ‘accident arising out of and in the course of his employment’ is dependent upon the following four conditions: (1) The casual connection between the injury and the accident (i.e., personal injury is caused to workman while on work); (2) The injury and accident caused during the course of employment; (3) The probability tenable to reason that the work contributed to the causing of personal injury; and (4) The applicant proves that it was the work and the resulting strain which contributed to or aggravated the injury.
Further readings:
https://www.policybazaar.com/corporate-insurance/articles/workmens-compensation-act-1923/
https://www.betterplace.co.in/blog/worksmen-compensation-act/
Clearances and permits required:Important Government Approvals Required for Business[4]
Doing business in India as a service provider or manufacturer or trader might require various government approvals. Not only for starting the business, but approvals are also required during various stages of the business lifecycle for undertaking certain activities.
Company or LLP RegistrationMost businesses in India are started as proprietorships or partnership firms, without any registration from the Central Government. The Ministry of Corporate Affairs regulates the registration of a company and LLP. It is advisable for Entrepreneurs who have plans for operating a business with an annual turnover of more than Rs.20 lakhs to obtain a LLP or Company registration. Once, a company or LLP is registered, the entity would have a separate legal identity and the promoters would enjoy limited liability protection. Further, the business would also become easily transferable and the entity would have perpetual existence. Hence, before starting a business, its best to consult and expert and register a company or LLP.
GST RegistrationAll types of entities and individuals who have an aggregate annual turnover of more than Rs.20 lakhs in most State and Rs.10 lakhs in Special Category States are required to obtain GST Registration. Further, any person supplying goods involved in intra-state supply is required to obtain GST Registration, irrespective of turnover. In addition to the above criteria, various other criteria has been provided under the GST Act, establishing the criteria for GST registration. It is important for all Entrepreneurs to understand the criteria’s and obtain GST registration within 30 days of starting a business.
Udyog Aadhar Registration This is a registration available for entrepreneurs who want to start and operate a small business – micro, small and medium enterprises. The eligibility criteria for obtaining Udyog Aadhaar registration is based on the investment in plant & machinery made by a manufacturing concern or investment in equipment made by a service provider. Once, Udyog Aadhaar registration is obtained for a business, it can enjoy various subsidies and schemes specially provided by the Government for helping small businesses in India.
FSSAI License or Registration “Food safety and standard authority of India”(FSSAI), is responsible to verify the safety and standardization of food products nationwide. Retail stores, restaurants, modern trade outlets, kiosks and consumers alike look for this five letter word in their food packets or containers.
Import Export CodeAny person involved in import or export of goods/services from India must obtain Import Export Code from the DGFT Department. To obtain Import Export Code, it is mandatory for the business to have a PAN and a Current Account in a bank.
Shop and Establishment Act License“The Shop and Establishments Act”, was created for regulating the conduct of business like the hours of work, child labor, payment of wages, safety and general health of the employees. Shop and Establishment Act license or registration is issued by the State Governments and varies from States. Hence, based on the State in which the business is situated, the concerned State Government authority must be approached for obtaining Shop and Establishment Act License.
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