Do I need to register my business or can I just start operating?

Business registration is the process of registering a business entity with the government authorities. It must be noted that registration of a business is a mandatory compliance in some cases, while in others it might not even be required. The criteria to find in which category your business falls are to look at the structure and the model of the business you are operating, as each structure has its own legal compliances, tax liabilities, and exemptions.

1. Types of Businesses and their Registration Requirements

This section discusses in detail the businesses that can be operated without registration.

1.1 Sole Proprietorship: Sole proprietorship is the most convenient business structure. It is a business owned and run by a single person. Herein, the business has no separate legal entity than its owner, meaning the owner is personally liable for the liabilities incurred by the business. The sole proprietorship can be given effect without any formal registration. The tax requirements for a sole proprietorship under the Income Tax Act, 1961, coincide with that of the owner of the business, i.e., the income derived from sole proprietorship business would be calculated as the income of the sole proprietor/owner of the business.

1.2 Partnership Firm: A partnership firm is governed by the Indian Partnership Act, 1932 (hereinafter referred to as ‘IPA’) in India. It is a business structure where two or more persons agree to operate a business and share profits/losses derived from it. It can simply come into existence by a ‘Partnership Deed,’ i.e., a written agreement between partners specifying the details of the firm and terms and conditions with respect to the firm’s operations. It allows the partners to enter into transactions without registration of the firm. Ergo, the registration of the partnership firm is not a mandate under IPA; however, the consequences of the non-registration of the firm may compel the partners to get it registered. Section 69 of the IPA provides for certain limitations that result in the case of non-registration of the firm. These limitations often outweigh the initial convenience and can significantly hinder the firm's growth and stability. These are as follows:

(a) Inability to sue third parties. An unregistered partnership firm or a partner on behalf of the firm cannot file a lawsuit to enforce any right arising from a contract. Thus, the non-registration leaves the firms high and dry without any legal remedy in case of breach of contract with third parties, like suppliers, consumers, debtors, etc.

(b) Even in the situation of dispute between the partners themselves, a partner of an unregistered firm cannot file a lawsuit against the firm for enforcement of rights.

(c) Any suit or claim of set-off exceeding one hundred rupees in value cannot be claimed by the unregistered firm.

It shall be noted that even though an unregistered firm is incapable of suing the third parties, it does not limit the rights of the third parties to sue an unregistered firm.

1.3 Limited Liability Partnership: Limited Liability Partnership (hereinafter referred to as ‘LLP’) is an amalgamation of features of a partnership and a corporation. LLP provides the shield of limited liability to the partners without the complications of compliances associated with a corporation. In India, the framework of LLPs is governed by the Limited Liability Partnership Act, 2008. The concept and structure of LLP has emerged as a popular choice among various entities. It is a preferred business model. However, to operate an LLP, its registration is mandatory, vide Section 11 of the LLP Act. The registration process has been digitalized via the Ministry of Corporate Affairs portal.

1.4 Private Limited Company: It is a separate legal entity that is governed by the Companies Act, 2013. This structure of business is usually ideal for those businesses that have high turnovers. Private limited company requires mandatory registration. As per the Companies Act, for a company to come into existence, it shall be registered with the Registrar of Companies (RoC) under the Ministry of Corporate Affairs. Furthermore, it is required to formulate a Memorandum of Association (MOA) and Articles of Association (AOA) as a part of the incorporation process. Thus, a private limited company cannot operate without registration.

1.5 One Person Company: One Person Company (OPC) is a relatively fresh concept that was introduced in 2013 in the Companies Act, 2013. This business model allows a single person to incorporate a company and be its sole shareholder. An OPC cannot be operated without registration. Even though it is a modified version of sole proprietorship, features like the limited liability of the owner and the separate legal entity of the company set it apart and create the need for registration.

2. Advantages of starting a business without registration

Registration processes are often tiresome, prolonged, and complex. Starting a business might already be a big step, and registration might add on to the burden. Some of the advantages have been listed below:

a) Low cost is one of the primary advantages, as registration fees and accompanying costs might burn a hole in the pocket of the businesses, especially those that are still in the nascent stage.

b) Registration processes often consume a lot of time, and operating a business without registration might allow a quick start to the functioning of the business.

c) Thirdly, non-registration allows flexibility to change the operations of the business if it's not going in the right direction. Even though the same can be done after registration, it would require a renewal or a modification process.

3. Disadvantages of starting a business without registration

Registration of a business is always advisable, and non-registration in most cases brings undesirable consequences. Some of them have been listed below:

a) Non-registration often plummets the accountability of a business. The banks and financial institutions might find it hard to trust the unregistered business.

b) Not only banks but consumers too find the businesses without registration less trustworthy. This might impact the consumer base of the business.

c) Non-registration in the case of a partnership firm may lead to even harsher consequences, like disallowance of enforcement of rights in the contract.

In conclusion, registration requirements are heavily based on the structure of the business. Thus, in order to escape the registration requirements, one may continue the operations in the form of a sole proprietorship. Although a partnership firm is another solid choice, the repercussions associated with it put the partners at a huge disadvantage. Nevertheless, the decision to run a business without registration shall be taken by taking all the factors into consideration and the consequences that the same might ensue.