Recently, Government reduced the tax rate on domestic companies from 30% to 25% to increase corporatization of businesses in India. Earlier, Government of India took number of steps to increase corporate entities like Simplification of Company Registration process, Amendments in Companies Act, 2017, simplification in DIN and name approval system, Startup India and Make in India schemes etc etc.
Currently, following types of Businesses are present in India:
- Sole Proprietorship
- Partnership
- Limited Liability Partnerships
- Private Limited Company
- Public Limited Company
Fundamental issues of SMEs:
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 favorable deals with suppliers, balancing quality and 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:
The biggest merit of corporate structure is to have limited liability of member. In partnership or sole proprietorship firm where partners have unlimited liability i.e. if the assets of the firm are inadequate to pay the liabilities of the firm, the creditors can require the partners to make good the deficit from their personal assets.
In a company, a member is liable to pay only the uncalled money due on shares held by him when called upon to pay. Thus, there is no further liability, once the members have paid all their dues towards the shares held by them in the company and nothing more, even if liabilities of the company far exceed its assets.
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 as 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 doesn’t prefer to work in Non-corporate businesses.
Taxation benefits to the company:
Recently in the budget of 2018, Government reduced the tax rate of domestic companies having turnover upto Rs. 250 crores from 30% to 25%. Earlier in the budget 2017, Government reduced the rate of tax on companies having turnover upto Rs. 50 crore now the limit is raised to Rs. 250 crore.
Conclusion:
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. Corporatization is the need of the hour.
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