Small and Medium Businesses (SMBs) are emerging at a fast pace in India and are thriving amidst challenges. Indian economy is likely to become a $5 trillion economy by 2025, thereby establishing itself as one of the leading global economies of the world. The SME sector- regarded as the backbone of our economy is now given major impetus in order to further strengthen the sector. Today, Indian SMEs comprise over 95% of establishments and over 80% of jobs in manufacturing sector of the country. They are increasingly becoming ubiquitous and are impacting indices like poverty levels, shared prosperity and allocation of activity in the country’s economy.
Driven by this wave more and more individuals are initiating their small businesses which they’ve always dreamed. However, starting a business, however small, need to commence on the right foot in order to avoid legal, tax and financial problems. The following five tips will help the upcoming small-business owners launch their ventures successfully-
1. Create the Right Legal Structure
The first thing small-business owners should decide is whether to function as sole proprietorship or as corporate entity. “By design you start out your business operation as a sole proprietorship,” says Biswanath Bhattacharya, President Federation Of Small & Medium Industries (FOSMI). Sole proprietorship is in a way safe as it does not cost you any money as you don’t have to pay to making corporate documents and tax returns. Now if you should continue as a sole proprietor or go for a corporate entity depends on your business model and your personal risk taking ability.
“We always recommend the business owners to go for a corporate structure eventually because it gives them legal security,” says Bhattacharya. “The accountability that comes to you as a business owner is surprisingly high. You might face litigation or people may try to dun you for bills. If nothing else, a corporate structure protects your personal credit rating,” he added.
However, business owners should not run out and set up a corporate entity till they know they can be in business for long. Also cost must not be the key factor in organizing a business. Today, a number of online sources are there to help you create a corporate entity for just a few hundred dollars.
2. Pay Taxes — If You Must
Your business structure will determine your need and timing for paying taxes on your income. If operating as a sole proprietorship, you will not need to start paying taxes immediately. It is only when you make more than a certain amount that you’re supposed to file taxes.
3. Set Aside Self-employment Taxes
As an employee, your employer keeps back a certain percentage of your income to fund Social Security. You pay half and your employer pays for the other half. However, once you are a business owner or self-employed, you are accountable for the entire amount. The sensible way is to set aside funds to avoid getting stung during tax filing.
4. Think Hard About Whether Insurance is Necessary
Startups are generally hard pressed for cash and do not have money to spend on unnecessary insurances. “Insurance come into play once you hire your first employee. It is then that you’ll need a host of insurances,” says John Mayne a serial entrepreneur working in the insurance space. “Those working from home can face liability only if they lose office equipments in a fire. However, they can ensure beforehand whether their landlord’s/lady’s insurance covers that. Those functioning from outside their homes will need a basic insurance on the office and its assets,” he advised.
Products sells however, will have to evaluate their risk. If you sell mobile phones, your legal responsibility would, in all likelihood be limited to replacing faulty phones. If you mass-produce a food item, you have to take the responsibility caused by people getting sick on your food products. In the latter case, it is better not to self-insure that liability but to go for product liability insurance.
5. Make Sure You Get Paid
It is no good to be one’s own boss if one doesn’t get paid for the work. “It is a candid move to collect 10 to 20 % of your fee wherever possible,” shared Varun Manian, Chairman & Managing Director, Radiance Realty Developers India Ltd “The way your clients react to that will help you understand whether they’re capable for paying you,” he added.
Always use contracts, spell out clearly the exact deliverables and the amount of and the timing for payment, and also make sure that your clients acknowledge it. “Signing a contract gives out the message that you are serious in the business and that people need to take you sincerely,” notified Manian.