Bonus Included: Tax Guide involved in various Company Types

In today’s industry, freelancing, blogging and online businesses are booming.

According to Times of India, India ranks 2nd after the United States with nearly 15 million people working independently in various sectors such as IT, Programming,  finance, sales and marketing, designing, animation, videography, content and academic writing.

By 2020, 50% of workers are expected to go freelance.

And in the case of online businesses, many people are leaving their well-paid job and are going towards entrepreneurship journey.

Likewise many bloggers after month/s of blogging on their blog when they finally start earning money, they are unsure of what they can turn their passion into a legal company through registration.

Not just bloggers, there are many people who are confused about the required tax, company registration procedures which is important for earning money through online.

Whether it’s the freelancer or a blogger who wants to earn money online or an E-commerce Business Owner who wants to generate revenues by selling his products/services online, in order to help them, this article serves as a guideline for freelancers, bloggers, and online business owners who are unsure about the Legal, Tax and Company Registration choices.

I have tried to consider every nuance possible to guide Online Business enthusiasts while writing this article and tried to incorporate the Taxation involved with different types of Company. However, understand that every business has different requirements and needs validation from a Professional.

How Can a Freelancer, Blogger or Online Business Owners can form Legal Company In India?

Let’s understand this with a story.

Rahul, just graduated from college being awesome in web designing and programming wanted to do freelancing because 9 to 5 job is something that he didn’t wish to do. Soon he started freelancing on various online freelance sites.

At this stage, Rahul is self-employed and he is getting contracts worth few lakhs rupees.

Which type of company is preferable for freelancers?

For most Freelancers and online businesses when they are just starting out, either Sole Proprietorship or Partnership firm is enough. In our Story, let’s say the Rahuls Business name is Rahul Consultancy Services.

Rahul can operate as a Sole Proprietorship or Partnership business(in case he has a Business Partner) under his business name.

For a Sole Proprietorship Firm, Rahul will require either a Profession Tax or GST certificate or Trade License/Shop and Establishment Act License.

This will enable him to open a current account for his business.

If he doesn’t want a Current account in Bank then he can take MSME Udyog Aadhar License.

  • Partnership: Partnership means two or more persons have agreed to share the profits of the business. The drawback of the partnership is Unlimited Liability and in case if the partner leaves for some reasons, then you are liable for all the outsider’s liability which can be costly. The only advantage is its borrowing capacity and it is easy to change the legal structure later.

           So forming the partnership firm should be avoided.

Tip: This is preferable because Sole Proprietorship Registration requires less legal compliance and there are no government fees involved as compared to other legal structures in India.

So, Coming back to the story.

Now his work was appreciated, and he became the go-to man for major web-designing projects from big corporates. With this, his team strength grew and his revenues soared. Also, he couldn’t function as a Sole Proprietor anymore since more trust is established in LLP, OPC or Private Limited Company.

Like everyone, he was confused about the fact that, what is the process of registering a company and its name?

Rahul has 3 options :

Depending on the goal of business, one should opt for the company registration, considering Rahul’s freelance business goals.

Scenario 1: If Rahul has found a partner, reliable, trustworthy and ambitious like him.

  • Limited Liability Partnership: Limited Liability Partnership means some or all partners have limited liabilities. It is somewhat similar to Partnership, the difference is each partner is not responsible for the misconduct or negligence did by another partner.

           In this case, Rahul with his partner/s can go for LLP formation because it has limited liability and at the initial stage he does n’t want to spend much of expenses and follow a lot of compliances.

  • Private Limited Company: Private Limited Company can be formed with a minimum number of 2 members and a maximum number of 200 members and requires to follow a lot of compliance. For Rahul, a private limited company is only recommended if he wants to create a Trusted brand of his own and requires funding from the investors or wants to scale up his business to a much larger extent.

Scenario 2: If Rahul doesn’t have any partner

  • OPC: OPC has only one member. Rahul can go for OPC only if he “doesn’t want to involve others” and he is not expecting any funding from the investors.

As for the name, Rahul has to check under the trademark website or MCA website since the Name of the company has to be unique and should not infringe upon any existing business name.

Following are the features the name should possess:

  • Unique:  The name should be unique. Note the plural version is not accepted.
  • Short and Simple: The name of the company should not be too long.
  • Suffix: The name of the company should end with suffix.
  • Companies: The name of the company should not contain any financial names.

Conclusion:  If he is just starting out on his own in a very minimal cost then proprietorship is the best option for him. Rahul should not opt for traditional partnership because traditional partnership firms have unlimited liabilities. Rahul should opt for LLP if he wants to get projects from the freelancing sites and each of his team members will be partners in LLP.  If he chooses LLP and if his business goes well, he can then go for a private limited company to grow his company to a higher level.

Rahul chose LLP and finally, he is handling his company like a pro!

Same goes for aspiring bloggers and online business owners who want to start their company.

Let’s come to the Taxation Part.

 Scenario 1: If Rahul as an individual freelancer who is delivering awesome websites to his clients, what could be the best way to bill his clients and handle taxes?

In case Rahul expects turnover greater than 20 Lakhs (from 1st April 2019 the limit will increase to 40 Lakhs), then he needs to apply for GST Number. If he serves not only in his states but across India / outside India, then he needs to compulsorily get registered under GST even if turnover is below 20 Lakhs.

If Rahul deals with corporate clients,  getting a GST Number will also help his clients to avail credit of GST which they have paid to Rahul.

Apart from this, Rahul will also be required to register for Professional Tax and in case he has an office or a small shop/premise, then he will also be required to get Shop and Establishment license.

Scenario 2: Rahul chose LLP, now what are the taxes involved in this? Let’s understand with this table:

ProprietorshipLLPPrivate Limited Company
Expected Turnover25,00,0002500,0002500,000
Salary to Promoters/ Directors600,000600,000
Interest to Partners60,000(12%)
Income Tax2,62,500(Slabwise)252000(30%)225000(25%)
Dividend Distribution Tax(17.65%)119138

Total Income For Promoters:

ProprietorshipLLPPrivate Limited Company

From the table, we can see that from LLP promoter can earn more as compared to other legal structures!

This was for Freelancers & Bloggers.

Now Coming to Online Businesses, Licenses are important for running the business. Without License, it can lead to unnecessary penalties and lawsuits.

Shop Establishment Act is the most common and mandatory license if you have an office/shop etc.  Shop Establishment Act is for common for all the wholesale trade, retail, and almost all small businesses.  Also, it is important to get a Professional Tax and GST Registration.

Licenses vary from industry to industry.  For Food Industry, it is important to get an FSSAI License, Food Safety License, Health Trade License.

If you an importer of goods, then you will also need to take Import Export License.

Final Words

Before starting any online business, it is necessary to spend time in understanding all the necessary Legal requirements and Taxes involved in order to grow the business effectively. If possible, always take the help of Qualified Chartered Accountant or Legal Expert for proper guidance and support.

In case of any queries please leave the comment below, I will be very happy to help you out.

Subrato Mukherjee

I am Professional CA with experience of more than 10+ years. My aim is to help startups and companies to help in various financial needs which is needed to expand the business.

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Subrato Mukherjee

I am Professional CA with experience of more than 10+ years. My aim is to help startups and companies to help in various financial needs which is needed to expand the business.