Corporatization of Businesses – Need of the Hour By CS Dhaval Gusani

Dear Professional Colleagues, 

In the Budget of 2018, Government reduced the tax rate on domestic companies from 30% to 25%. Earlier, Government of India took a number of steps like Simplification of Company Registration process, Amendments in Companies Act, 2017, Simplification in DIN and Name Approval System for ease of doing business in India and to increase corporate structure entities.

Currently, following types of Businesses are present in India:

  1. Sole Proprietorship
  2. Partnership
  3. Limited Liability Partnerships
  4. Private Limited Company
  5. Public Limited Company
Fundamental issues of SMEs in India

Most of today's small and midsize businesses face the same age-old difficulties of financial crunch, quality control, manpower issues, justifying capital expenditure, negotiating favourable deals with suppliers, balancing quality & costs, and predicting market demand.

All these problems have one fundamental solution i.e “Corporatization”.

Though, traditionally the SME Community has never believed in the need for corporatizing primarily because they think that "My business is my best financial security and that it is the best investment as long as it is under my control."

Therefore, SMEs hitherto have been following the approach of re-investing the wealth created out of their businesses back into their business.

Merits of Corporate Structure

  • A company is a legal entity, distinct and independent of those persons who from time to time are its members.
  • The liabilities of the members are limited to the extent they have agreed to contribute towards the capital of the company or the amount of guarantee respectively undertaken by them.
  • Transferability of the company's shares provides liquidity to the investors in respect of their investment in the shares of the company.
  • The corporate form of business organization affords the opportunity for the professionalization of its management and entrusting the administration of its affairs to persons of professional competence and standing
  • Incorporation of a company provides better borrowing facilities as the company can raise large amount, on comparatively easier terms. Even banking and financial institutions prefer to render financial assistance to incorporated companies.
Drawbacks of Non-Corporate Business structure
  • Foreigners prefer to deal with the registered Company or LLP.
  • So, for export and import, Business must be registered with the company.
  • Lack of Funds as Bank and FIs are interested to grant loans to the companies.
  • Transfer of management not possible.
  • Quality of human resource is low as qualified people don’t prefer to work in Non-corporate businesses.
Taxation benefits to the company –

Give a Serious thought on it before making choice of the form of business!!!!
Recently in the budget of 2018, Government reduced the tax rate of domestic companies having turnover up to Rs. 250 crores from 30% to 25%. Earlier in the budget 2017, Government reduced the rate of tax on companies having turnover up to Rs. 50 crore now the limit is raised to Rs. 250 crore.
The entire world is gradually drifting towards one global market without any trade barriers between the countries. A small organization led by few partners or professionals cannot think of growth on large scale without corporatizing itself. Thus, Corporatization is the need of the hour.

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