Updated: Dec 19, 2021
Do you know that India has the second-highest number of unregistered businesses in the world with an estimated 127 unregistered businesses to every registered business? Isn't that number is too big and needs serious attention.
If you are starting a new venture or looking to grow your business, you may be considering starting a company. Although registering a company can seem like a big step, there are also many benefits of registering many benefits.
Limited Liability Protection
One of the biggest advantages of a registered business (private limited company or limited liability partnership (LLP) or one-person company) is that it affords limited liability protection to its members. Hence, the promoters of the business would not be personally liable for the liabilities of the business. Doing business always involves the risk of running into losses and having limited liability protection would ensure that the entrepreneur can take risks without the fear of losing everything.
Transferability or sharing of ownership of a business is a major hurdle in unregistered business entities. Proprietorships cannot be transferred as they are an extension of the proprietor and it is also hard to define the assets belonging to an unregistered partnership firm. On the other hand, is a registered business entity like a company or LLP, the business is considered a separate legal entity with assets and liabilities that are distinct from its promoters. Hence, transferring or sharing the ownership of a registered business is easy.
Opening Bank Account
The process for opening a bank account for a proprietorship or partnership firm is a cumbersome process, as the business entity has no legal proof of existence. Hence, in the case of a proprietorship firm or unregistered partnership firm, must establish the existence of a business through various tax registrations in the name of the firm to open a bank account. On the other hand, for a company or LLP, the Ministry of Corporate Affairs establishes the existence of the business by way of a certificate of incorporation and memorandum of association. Hence, the opening of a bank account is not easy without submitting a copy of the certificate of incorporation and memorandum of association.
Funding for the Business
Funding in the form of debt or equity is an important requirement for any business. For unregistered business entities like a proprietorship firm or partnership firm, it is not possible to syndicate equity funding. Also, starting a proprietorship firm or partnership firm for a business that has plans for syndicating equity funding would be a mistake. As most banks and financial institutions prefer to lend to registered business entities. Hence, it recommends highly to register a business if there are plans for raising debt or equity funds in the name of the business.
Meeting Buyer Criteria
Most large businesses that have supplier selection criteria, tend to prefer to do business with a registered business entity than an unregistered business entity. Hence, registering a business can make the business eligible to meet buyer criteria, participate in tenders and meet various requirements set by buyers or customers.