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WHAT DOES IT REALLY COST TO START A BUSINESS?

WHAT DOES IT REALLY COST TO START A BUSINESS?

INTRODUCTION

It depends on what should be the cost of each business. If we are starting a business, then all these things will be required in it which are given below. 

FACTORS GOVERNING THE DECISIONS FOR SUITABLE FORM OF ORGANISATION

1. Nature of Business Activity

This factor significantly influences the choice of ownership structure. In the realm of small trading businesses, professions, and the provision of personal services, sole proprietorship prevails. Examples abound, including Laundromats, beauty parlors, repair shops, consulting agencies, small retail stores, pharmacies, dental practices, accounting firms, boarding houses, restaurants, specialty shops, jobbing builders, painters, decorators, bakers, confectioners, tailoring shops, small-scale shoe repairers, and manufacturers, to name a few.

Partnership becomes a fitting option in cases akin to those where sole proprietorships is appropriate, particularly when the business is set to operate on a slightly larger scale with the assistance of one or more co-owners. Moreover, partnerships prove advantageous for small-scale manufacturing activities. Sectors such as finance, trade, and real estate, albeit on a smaller scale, also find partnership a suitable organizational form. Financial businesses like tax advisory, accounting firms, stockbrokerage companies, and consulting agencies, among others, find this structure advantageous. Service-oriented enterprises like hotels and lodges, trading enterprises such as wholesale and retail businesses, and small-scale manufacturing endeavors, including modest drug manufacturers, can all be undertaken in the form of a partnership.

Similarly, certain types of businesses, such as large chain stores, multiple retail outlets, super-bazaars, engineering industrial endeavors with substantial capital and working capital demands, and software industrial activities, typically adopt the corporate structure of companies.

For individuals who aspire to establish a business entity vested with legal recognition and corporate attributes, while retaining sole ownership and control, the option of forming a One-Person Company (OPC) becomes relevant. OPC represents a relatively new concept in India, blending characteristics of sole proprietorship and the corporate form of business. This innovative concept offers significant advantages to sole proprietors and entrepreneurs. OPCs maintain the essence of a sole proprietorship, endow the sole proprietor with limited liability protection, and establish a legal entity distinct from its owner.

Alternatively, when two or more individuals collaborate to initiate a business entity, the Limited Liability Partnership (LLP) structure under the Limited Liability Partnership Act, 2008, comes into play. LLPs have gained popularity in recent times. A primary advantage of this entity is that any liabilities, if incurred, are borne by the entity itself and do not extend to the individual partners, in contrast to the traditional partnership structure under the Indian Partnership Act, 1932, where joint and several liabilities of the partner(s) constitute a key feature. In an LLP, a partner’s liability is limited to the extent of their contribution to the LLP, except in cases of deliberate fraud or wrongful acts of omission or commission by the partner themselves. Essentially, what’s at risk for the partner is their investment in the business, along with any personal guarantees they may have provided. However, these forms of business organization are generally well-suited for the service industry and situations where heavy external financing is not a primary requirement.

 

One-Person Companies (OPCs), LLPs, and limited companies all enjoy the status of a distinct business entity in the eyes of the law, creating a clear separation between the personal assets of the investor and those of the business. Consequently, in these forms of business organizations, the personal assets of the owner(s) are shielded, allowing owners to establish business credit, secure loans, and raise capital with confidence.

2. Scale of Operations

The second factor influencing the choice of a business organization pertains to the scale of operations. The appropriate form of business organization is contingent upon the magnitude of business activities.

  • Small-Scale Operations: When the scale of business operations is small, options such as sole proprietorship or a One Person Company (OPC) are suitable choices. These structures are well-matched to businesses with limited scope and scale.
  • Modest-Scale Operations: For operations that fall within a modest range—neither excessively small nor exceedingly large—partnership or a limited liability partnership (LLP) is often the preferred choice. This offers flexibility and shared responsibility.
  • Large-Scale Operations: In the case of extensive and large-scale operations, the corporate form of a company is highly advantageous. It provides the necessary structure and resources to manage substantial business endeavors.

As an illustration, in compliance with the provisions of the Micro, Small & Medium Enterprises Development (MSMED) Act of 2006, Micro, Small, and Medium Enterprises (MSMEs) are categorized based on certain criteria. These classifications are as follows:

  • Micro Enterprise: Investment in plant and machinery or equipment does not exceed one crore rupees, and turnover does not exceed five crore rupees.
  • Small Enterprise: Investment in plant and machinery or equipment does not exceed ten crore rupees, and turnover does not exceed fifty crore rupees.
  • Medium Enterprise: Investment in plant and machinery or equipment does not exceed fifty crore rupees, and turnover does not exceed two hundred and fifty crore rupees.

The scale of business operations is closely linked to the size of the market area served, which, in turn, is determined by the demand for goods and services. When the market area is relatively small and localized, businesses may opt for structures like sole proprietorship, OPC, or partnership. Conversely, when the demand originates from a larger geographic area, structures such as partnership (including LLP) or a company may be more suitable due to their capacity to accommodate greater operations.

3. Capital Requirements

Capital constitutes one of the pivotal determinants influencing the selection of a specific ownership organization structure. The capital needed is intricately tied to the nature of the business and the extent of its operations. Businesses with substantial capital needs, such as iron and steel plants or large-scale infrastructure projects, are best structured as companies. Depending on the magnitude of the capital required, they may be established as public companies, and in certain instances, they might take the form of publicly listed companies by sourcing funds from the public and securing listings on stock exchanges.

Businesses with minimal capital requirements, such as retail stores or personal service enterprises, are ideally structured as sole proprietorships or partnerships. Beyond the initial capital essential for business commencement, future capital needs for modernization, expansion, and diversification play a pivotal role in determining the choice of organizational form.

In the case of a sole proprietorship, the proprietor has the option to secure additional capital through borrowing, credit-based purchases, or personal investments. However, financial institutions and suppliers tend to scrutinize the proprietor’s personal financial resources before granting loans or extending credit.

Partnerships often find it relatively easier to raise funds, as the combined resources and creditworthiness of all partners are pooled into a single enterprise. Companies typically excel in attracting capital because investors are assured of limited liability, the company’s operations are transparent and publicly accessible, and ownership can be easily transferred to other investors.

4. Managerial Ability

For a sole proprietor, mastering all functional aspects of a business can be challenging. Additionally, the scale of the business may not justify the engagement of professional management.

In contrast, other organizational structures like partnerships and companies benefit from a division of labor among the partners or stakeholders. This division enables specialization in specific areas, ultimately leading to improved outputs and more informed decision-making. However, it’s worth noting that this specialization can occasionally result in conflicts stemming from differing viewpoints.

The corporate form of organization stands out as a superior choice when operations are widespread, complex, and demand professional management at multiple levels.

5. Degree of Control and Management

The level of control and management an entrepreneur desires to exert over their business significantly influences the choice of organizational structure.

In sole proprietorship and One Person Company (OPC), ownership, management, and control are seamlessly integrated. As a result, an entrepreneur enjoys absolute control over their business affairs.

In a partnership, the management and control of the business are collectively shared by the partners, with specific rights, duties, and responsibilities typically outlined in the partnership deed. Partners generally have an equal say in the management of the partnership business, unless they mutually agree on a different allocation of responsibilities. Even then, they remain legally accountable to each other.

Conversely, in a company, there exists a separation between ownership and management. The management and control of the company’s business are entrusted to the Board of Directors, typically elected representatives of the shareholders.

Therefore, an individual who seeks complete and direct control over their business is inclined toward a proprietary organization, such as sole proprietorship or OPC. If they are open to sharing control with others, the partnership structure may be preferred. However, in scenarios where the business activities are extensive, require professional management for day-to-day operations, and necessitate a corporate framework and management structure, the company form of organization becomes the more suitable choice.

6. Degree of Risk and Liability

The magnitude of risk and the willingness of owners to assume it play a pivotal role in the selection of an appropriate business organizational structure. The level of risk associated with a business hinges on various factors, including the nature and scale of the enterprise. Generally, smaller businesses entail lower levels of risk.

Consequently, a sole proprietorship carries a relatively modest degree of risk when compared to partnerships or companies. However, it’s important to note that in a sole proprietorship, the sole proprietor is personally liable for all the debts of the business, potentially jeopardizing their entire personal assets.

In a partnership, partners share both individual and joint responsibility for the liabilities of the partnership firm. This shared liability can expose partners to significant risk.

Companies and Limited Liability Partnerships (LLPs) possess a notable advantage in terms of risk management when compared to other forms of business organizations. Creditors have the ability to seek payment of their claims only up to the extent of the assets held by the company or LLP. Consequently, while a shareholder, member, or partner may risk losing the entirety of their investment in the company or LLP, they cannot be compelled to contribute additional funds from their personal finances to settle the business debts of the company or LLP.

7. Stability of Business

  • The stability of a business constitutes another pivotal factor influencing the selection of an ownership organization. Owners typically favor business stability because it aids in attracting capital providers seeking the security of their investments and consistent returns. Furthermore, stability is instrumental in recruiting competent employees and managers who seek job security and opportunities for career advancement.

    From this perspective, sole proprietorships are inherently less stable, even though there is no legal time limit imposed upon them. The illness or demise of the owner can disrupt business operations and, in the case of the owner’s death, may result in the permanent closure of the business.

    Partnerships also exhibit a degree of instability, as they can be dissolved by factors such as the death, insolvency, mental incapacity, retirement, admission, expulsion, or withdrawal of one of the partners.

    In contrast, companies and LLPs enjoy the highest level of business stability due to their status as artificial or legal entities. The life of a company or LLP is not contingent upon the lives of its members or partners. Members or partners may come and go, but the company or LLP can persist indefinitely unless it is formally wound up or dissolved.

8. Flexibility of Administration

  • Whenever possible, the chosen form of organization should be conducive to administrative flexibility. The flexibility of administration is closely intertwined with the internal organization of a business, encompassing the way in which organizational activities are structured into various departments, sections, and units, each delineated with clear definitions of authority and responsibility.

    In the case of a sole proprietorship, for example, the internal structure is straightforward, allowing for minimal inconvenience and loss when effecting changes in its administration. A similar degree of flexibility is often found in partnership businesses.

    However, in the case of a company, administrative flexibility is comparatively limited. This limitation arises due to the extensive scale of company activities, which are typically characterized by rigid structuring. Consequently, significant alterations to the existing line of business activity, such as a transition from cotton textiles to sugar manufacturing, may not be permissible under the law unless expressly provided for in the “objects clause” of the company’s Memorandum of Association.

    Therefore, in terms of flexibility, sole proprietorship enjoys a distinct advantage over other organizational forms.

9. Division of Profit

  • Profit serves as the driving force behind private businesses and exerts significant influence on the choice of a specific form of business organization. An entrepreneur with the desire to retain all the profits generated by the business will naturally lean towards sole proprietorship, recognizing that, in this structure, personal liability is also unlimited.

    However, for those willing to share the profits, the partnership form of organization becomes an appealing choice. In a company, profits are distributed to shareholders in proportion to their shareholding, subject to decisions made by the Board of Directors. Importantly, the liability of shareholders in a company is limited, offering them a level of protection.

    The rate at which dividends are distributed is determined by the Board, although it must be approved by the shareholders. Furthermore, companies may opt to reward shareholders by issuing bonus shares. In the case of listed companies, equity shares are tradable on stock exchanges, affording shareholders the flexibility to exit the company at their own discretion and as per market conditions.

10. Costs, Procedure and Government Regulation

Different forms of business organization entail varying procedures for establishment and are governed by distinct laws that significantly impact the immediate and long-term operations of a business enterprise. From this perspective, sole proprietorships emerge as the easiest and most cost-effective to initiate. They are not subject to any single specific government regulation but instead rely on various state and central laws to establish valid proof of existence, such as the Shops and Establishment Act. What is crucial in this context is the technical competence and business acumen of the owner, along with fulfilling tax obligations.

Partnerships also boast a relatively simple initiation process. Even though a written document is not always obligatory, an oral agreement can be equally effective. However, in practice, a written partnership deed is typically executed, as it is required for firm registration and for tax authorities. Additionally, the procedure for dissolving a partnership is relatively straightforward.

The company form of business organization is notably more intricate to establish. It is created and dissolved in accordance with legal provisions and operates under the explicit regulations of the law. Forming a company entails navigating through a series of legal formalities, which can sometimes result in substantial expenses. Moreover, there are numerous requirements to be met for the dissolution of companies. Failure to meet financial obligations can lead to insolvency or liquidation for the company.

For instance, the expenses incurred in drafting the Memorandum of Association, the Articles of Association, issuing a prospectus, and managing share capital can be quite substantial. However, these costs tend to be relatively lower for private companies. Additionally, companies are subject to a multitude of anti-monopoly and other economic regulations to ensure that they do not impede public interest.

ADVANAGES OF START BUSINESS

Running a business can offer various advantages, including:

  1. Financial Independence: Owning a business allows you to generate income and potentially build wealth independently, rather than relying solely on a salary.
  2. Control: Business owners have control over business operations, strategies, and decision-making, which can be empowering.
  1. Flexibility: You have the flexibility to set your own work hours and potentially enjoy a better work-life balance.
  1. Creativity: Running a business allows you to express your creativity and innovation in developing products or services.
  1. Job Creation: As your business grows, you may provide job opportunities and contribute to the local economy.
  1. Profit Potential: A successful business can yield significant profits and financial rewards.
  1. Personal Fulfillment: Many entrepreneurs find great satisfaction in building and growing their own businesses.
  1. Tax Benefits: Depending on your location and business structure, you may benefit from tax advantages and deductions.
  1. Legacy Building: A successful business can become a legacy for future generations.
  • Learning Opportunities: Owning and operating a business provides continuous learning experiences, helping you develop a wide range of skills.

DISADVANTAGE OF START BUSINESS

Running a business offers numerous advantages, but it also comes with its fair share of disadvantages and challenges. Some of the disadvantages of running a business include:

  1. Financial Risk: Business owners often invest their own capital and may also borrow money to start and operate the business. This financial risk can lead to personal financial losses if the business does not succeed.
  2. Uncertainty: Business environments are dynamic and subject to change. Economic downturns, changes in consumer preferences, and unexpected events like natural disasters can impact a business’s stability.
  1. Work-Life Balance: Entrepreneurs and business owners often work long hours, especially during the initial stages of the business, which can lead to a poor work-life balance and burnout.
  1. High Responsibility: Business owners are responsible for all aspects of the business, including decision-making, finances, marketing, and operations. This can be overwhelming and stressful.
  1. Regulatory Compliance: Businesses are subject to various laws and regulations, which can be complex and time-consuming to navigate. Failure to comply with these regulations can result in fines and legal issues.
  1. Competition: In most industries, businesses face competition from other companies, which can make it challenging to stand out and attract customers.
  1. Cash Flow Issues: Managing cash flow can be a constant challenge, with periods of revenue fluctuations, delayed payments, and unexpected expenses.
  1. Employee Management: Hiring and managing employees can be challenging, including issues related to hiring the right talent, retaining employees, and addressing HR and labor-related matters.
  1. Market Changes: Consumer preferences and market trends can change rapidly, requiring businesses to adapt quickly or risk becoming obsolete.
  • Stress and Pressure: The pressure to succeed, meet financial obligations, and make critical decisions can lead to high levels of stress and anxiety.
  • Lack of Security: Unlike a traditional job, running a business does not provide the security of a steady paycheck, paid benefits, or retirement plans, especially in the early stages.
  • Legal Liability: Depending on the business structure, owners may have personal liability for business debts and legal issues.

WHY YOU CHOOSE AURIGA ACCOUNTING FOR RUNNING THE BUSINESS?

Auriga Accounting is an accounting and financial services provider that can assist businesses in various ways to streamline their financial management and support their operations. Here are some ways in which Auriga Accounting can help in running a business:

  1. Bookkeeping and Accounting: Auriga Accounting can handle bookkeeping tasks, ensuring accurate and up-to-date financial records. This is essential for making informed financial decisions and maintaining compliance with tax regulations.
  2. Tax Planning and Compliance: They can help businesses with tax planning, ensuring that they take advantage of tax deductions and credits while staying compliant with tax laws.
  1. Financial Reporting: Auriga Accounting can generate financial reports, such as profit and loss statements, balance sheets, and cash flow statements, which are crucial for assessing the financial health of a business.
  1. Payroll Services: Managing payroll can be complex. Auriga Accounting can handle payroll processing, including calculating wages, taxes, and ensuring timely payments to employees.
  1. Budgeting and Forecasting: They can assist in creating budgets and financial forecasts, helping businesses set financial goals and plan for the future.
  1. Business Advisory: Auriga Accounting can offer financial advice and guidance, helping businesses make strategic decisions to improve profitability and efficiency.
  1. Audit Support: For businesses facing audits, Auriga Accounting can provide support in preparing documentation and responding to audit requests.
  1. Financial Software Setup: They can help set up and configure accounting software, making it easier for businesses to manage their finances efficiently.
  1. Compliance and Regulation: Staying compliant with financial regulations is critical. Auriga Accounting can help ensure that businesses meet all legal and regulatory requirements.
  • Cost Analysis: They can perform cost analysis to identify areas where businesses can reduce expenses and improve profitability.
  • Business Valuation: For businesses looking to buy or sell, Auriga Accounting can provide valuation services to determine the fair market value.
  • Financial Strategy: They can assist in developing financial strategies tailored to the specific needs and goals of the business. 

NOTE –Auriga accounting company is registered only for Rs 999, this cost is such a cost in which every person can register his business very easily and at the same time he can do the business immediately and unit counting. Call and connect with Auriga Accounting.