1. Creating a Business Plan

Cover PageEvery Business Plan should have a cover page, which includes:

The Company's name, address, telephone, fax, e-mail and website address, if any. The name and designation of the contact person - who should be one of the top

executives of the enterprise and one who is familiar with and was part of the team that formulated the business plan and will be able to answer any queries relating tothe business plan.

Names of organizations from where funding is being sought. The Company's logo - every company being established should have a logo in place,

which could be an image, design or picture representing the company's ideology pictographically.

Table of ContentsOnce the cover page has been made, a formal table of contents must be written for easy navigation to the rest of the plan, by numbering each section.

Executive SummaryThe executive summary is the most important part of a business plan, especially to the investors. Most investors do not go beyond the executive summary, as they have too many plans to read. So make sure that your executive summary is able of conveying clearly and succinctly exactly what you want your investors to read.

The summary should include:

Kind of Business - a brief description of the industry your firm is focusing on. Profile of the company's management - listing the names of top executives and their

qualifications and industry experience. Financial requirements - briefly state how much finance is required. Also make sure

you indicate the degree of flexibility you are willing to show in case the investor suggests any changes in your plan. This will allow the investor to consider your plan with few changes rather than rejecting your plan outright due to rigidity on your part.

Budget allocations - the financial section of the business plan should be able to explain how you will be using the finance.

Objectives - The business plan should present in a well defined format the short term and long term objectives of the new business venture.

The objectives can be broadly divided into quantitative and qualitative objectives.

Market Analysis - The business plan should be able to convince the investor that the entrepreneur understands the prevailing competitive environment and is able to prove that his/her product/service is a niche product or service with substantial prospects for growthand capable of attaining a competitive position in the market.

Environmental Influences - Demonstrate your knowledge and competence by evaluating the impact of the environmental influences such as political, economic, technological, socio-

demographic and ecological factors that affect your area of business.

Development and ProductionDetail the stages of development and production of your product/service, spelling out how time and money will be allocated at each stage.

Resource RequirementAnalyse the type of resources required at each stage of production such as financial, human, physical, technological, etc.

Quality - Discuss the quality control measures to be put into place by your firm to ensure the quality of the product/service.

Marketing - Once again underscore the market potential for your product by describing your product's exclusivity, describe how it will exploit your competitors weaknesses.

Identify the target market which should be substantiated by a thorough market research.

Once the target market has been identified, focus on the communication strategy including advertising, branding, packaging etc. Like always list the costs involved for each segment of marketing.

Sales Forecast - Sales forecast is primarily dependent on three factors - size of the market, fraction of the market you will be able to capture as a result of your marketing strategy and the pricing strategy.

Financial Plans - A new venture must show projected profit and loss statements and cash flow statements.

Human Resources - Make an organisation chart with details of key executives and profiles ofindividuals likely to be hired.

Form of Business - Describe the legal form of your business - whether it is a sole proprietorship or a partnership, public limited co. etc.

Critical Risks - As a legal and moral obligation, the entrepreneur must, in the business plan, envision risks the investor would be undertaking in case he makes a choice to invest in your business. This will protect you from civil and criminal liability.

Conclusion - Briefly once again point out the highlights and key features of your business plan.

Also mention the time schedules against each stage of your venture. Along with your business plan make sure to support your document with flow charts, photographs, market surveys, sample brochures, advertisements, tax returns, resumes of board members, letters of recommendations etc. All this should form a part of appendixes.

SummaryThe essential elements of the plan are generally recognized. The preliminary sections set the stage for the reader. Make the first impression professional, concise, and informative because the reader may spend only a few minutes reviewing each plan. The major sections of

the business plan describe the new venture's strategy, operations, marketing, management, financial plan, and ownership structure. These sections need to be as detailed as possible and internally consistent. The concluding sections provide details on timing, schedules andmilestones, and a summary. The appendix contains reference material for documentation.

Each plan must be well written and organized, and it must anticipate the many questions that the reader will have about the business. No plan, however, can answer all questions that may arise. It is important, therefore, that entrepreneurs be familiar with all the details so they can respond to potential unanswered questions and critiques.

2.Making a Product ChoiceAfter choosing the form of the business organisation the next start up problem is the choice of the particular product or service to be manufactured by the firm. It is an important decision because rest of the challenges of setting up a business are based on thetype of the product the firm wants to produce. This decision can be taken through a comparative analysis of the several products or services that the firm can provide. The analysis involves assessing the size and structure of the market for the products; determining the future demand pattern for each of them; comparing their competitive positions in the market; graphing the life cycle of each product; finding the shelf life ofeach product. The ease of availability of raw materials, technology for production as well as the manpower are other important determinants. Government policies and regulations can also help the entrepreneur in taking the decision. Central Government and the State Governments provide incentives for manufacture of certain products by small scale units. The most important promotional measure being the reservation of several products for exclusive manufacture by small scale industries. Large/Medium units can, however, manufacture such   reserved items provided they undertake to export 50% or more of their production. Also, there are some agencies and organisations which provide entrepreneurs with the necessary information required in making a product choice. The Commissionerates orDirectorates of industries of different States provide guidance to the entrepreneurs with respect to the particular State. An entrepreneur can also study the industry clusters of India to get an idea about the type of products best suited for production in particular areas

a.Choosing a Product

Since making a choice of the right product is a difficult decision for an entrepreneur, there are many organizations and Institutes existing at both the Central and State level which can help him/her obtain an idea about the products and

services that can be produced.

b.Industry Specific Agencies

In order to stream line the procedures for setting up of an industry and to give technical and financial assistance to entrepreneurs, various promotional industry specific agencies and organisations have been set up by the Central as well as the State Governments. These organisations undertake monitoring, research, market - development, export promotion or such other work for a particular industry.

Secretariat for Industrial Assistance (SIA) has been set up by the Governmentof India in the Department of Industrial Policy and Promotion in the Ministryof Commerce & Industry to provide a single window service for entrepreneurialassistance, investor facilitation, receiving and processing all applications which require Government approval, conveying Government decisions on applications filed, assisting entrepreneurs and investors in setting up projects (including liaison with other organisations and State Governments) and in monitoring implementation of projects. It also notifies all GovernmentPolicy decisions relating to investment and technology and collects and publishes monthly production data for select industry groups.

In most of the States the organisations present to assist and promote industries are:-

o Investment Promotion Agencies (IPA)o State Industrial Development Corporations (SIDC)o Small Scale Industries Development Corporations (SSIDC)o State Financial Corporations (SFC)o District Industries Centres (DIC)o Single Window Service and Escort Service

Several state Governments have set up single window services (SWS) and investor escort services (ES). SWS aim at providing the investors a single point of contact to meet all regulatory requirements and get the required approvals. ES is targeted at large and medium sized projects and one individual is assigned from one of the State Government agencies to the investor. ES seeks to help the investor in information collection, identification of project sites, arranging feasibility studies, clearance of the project by financial institutions, etc.

c.Products for Small Scale Units

In India, the present policy of encouraging growth of small scale industries is based on several promotional measures, one of which is reservation of products for exclusive manufacture in the small scale sector. Large/Medium units can, however, manufacture such reserved items provided they undertake to export 50% or more of their production. The reason for special emphasis on this sector is that it plays a vital role in the growth of the country. It contributes almost 40% of the gross industrial value added in the Indian economy. The opportunities in the small-scale

sector are enormous due to the following factors:-

Less Capital Intensive Extensive Promotion & Support by Government Reservation for Exclusive Manufacture by small scale sector Funding - Finance & Subsidies Machinery Procurement Raw Material Procurement Manpower Training Technical & Managerial skills Tooling & Testing support Reservation for Exclusive Purchase by Government Export Promotion Growth in demand in the domestic market size due to overall economic growth Increasing Export Potential for Indian products Growth in Requirements for ancillary units due to the increase in number of

greenfield units coming up in the large scale sector. Small industry sector has performed exceedingly well and enabled our country to achieve a wide measure of industrial growth and diversification

Criteria For Reservation

Reservation of items for exclusive manufacture in SSI sector is statutorily providedfor in the Industries (Development and Regulation) Act, 1951. The issue of reservation/de-reservation of product is examined on a continual basis by an Advisory Committee on Reservation constituted under the Act, which is presently headed by the Secretary (SSI) as Chairman. The Reservation Policy has two objectives:-

Ensure increased production of consumer goods in the small scale sector. Expand employment opportunities through setting up of small scale industries.

The overwhelming consideration for reservation of an item is its suitability and feasibility for being made in the small scale sector without compromising the quality aspect. Accordingly:-

List of 14 items de-reserved on 10th October, 2008 List of 79 items de-reserved on 5th February, 2008 125 Items Dereserved on 13th March, 2007

d.Major Industry Clusters of India

Within the SSI sector, an important role is played by the numerous clusters that have been in existence for decades. The SSE clusters in India are estimated to have a significantly high share in employment generation. It is estimated that 400 modernSSE and 2000 rural and artisan based clusters exist in India. These contribute upto 60 percent of India's manufactured exports.A Cluster is generally identified by the product (or product range) and the place where it is located. A complete industry or a sector (like the leather sector) cannot be referred to as a Cluster. The process of cluster development usually consists of the following steps :-

Selection of a Cluster Development Agent Diagnostic Study Preparation of Action Plan for intervention Approval of the project and release of funds through leveraging Implementation of Trust Building between Cluster Actors and Cluster Development

Agent, and also among Cluster Actors Monitoring and Evaluation Self Management Phase

It is on the basis of the availability of the basic raw materials, etc. required forsetting up of a particular industry that certain States and districts are known for a specific group of industries. For example, the knitwear cluster of Ludhiana, Gems and Jewellery clusters of Surat and Mumbai, clusters of Chennai, Agra and Kolkata for leather and leather products, etc. Accordingly, there exists a List Of SME Clusters in India.

Several institutions in India have taken up Cluster Projects besides various government initiatives. UNIDO Cluster Development Programme (CDP) aims to contributeto the overall performance and collective efficiency of the small and medium enterprise clusters for sustainable development by assisting selected local communities of firms and associated institutions in the clusters. This entails the implementation of cluster support initiative in selected pilot clusters as well as assistance to central and local institutions in their programmes of cluster modernisation and restructuring.

3.Setting Up Infrastructure

A new business enterprise after deciding upon the location of the industry, needs to set upthe basic infrastructural facilities for commencing its operations. It includes, purchasingthe land for the construction of the industry. The site must be well connected to the nearest transport network i.e. rail, road or port. Besides, the availability of the basic amenities like, water, power supply is equally essential. Also, setting up of a good telecom facility for the industry is necessary for the growth and expansion of the business.

The State Government offers incentives like land and building tax concessions, providing land at cheaper rates through the State Government Agencies to new and existing entrepreneurs. It also offers concessions in water tariff, power subsidy, subsidy on generating sets, transport subsidy, incentive for pollution control and quality equipment depending on the location, size of investment and category of the industry.

After all these requirements are met the commercial production of the product can commence.

a.Land and Construction of Building

Once the location for the setting up of the industry is finalised, the entrepreneur shall approach the concerned authority (Municipality, Public Works Department) for acquisition of the plot of land.

Before construction of the factory or industry, whether small, medium or large, approval of plant layout and machinery drawings has to be obtained

from the concerned authorities. It is only once these approvals are obtained that the structures may be raised according to the plan.

Once a suitable industrial plot for the unit is secured, the next task is construction of the building. It involves :-

Architectural design of the building : that of finding a suitable architect to design the outlay of area and factory.

Design of factory building has to be in consonance with the type of industry.

Have an appropriate plant layout. If you are setting business at home,plan the area, which is to be used as your production centre or office, judiciously. You may like to take help of a professional to ensure that the area is utilized optimally.

An architect's estimate of building construction is essential for loanapplications. Further, architect's certificate for money spent on building is needed for disbursement of loans.

Appointment of engineers and contractors Supervision of the construction work

The State Government offers incentives like land and building tax concessionsto new and existing entrepreneurs.

b.Getting Utility Connections (Water and Power)

Among the utilities, of prime importance are power and water. Other utilitiesthat might be required are steam, compressed air, fuel. Assess your requirement of such utilities, make arrangement to get these and ascertain the cost of consuming these.

Power Supply

Find out the power supply requirement of the industry. Locate the nearest substation from where you will get power supply.

Also find out the power tariff rate and the duration for which required supply will be available. Power connections are generally of either LT (Low Tension) or HT (High tension) type. If connected load is up to 75 HP, LT connection is provided. For connected loads of 130 HP or higher only HT connection is provided.

A formal application needs to be made in a specific form to the concerned State Electricity Boards. An electrical inspector is deputedfor evaluation of application to factory site, after which the load issanctioned. In areas of power shortage, it is advisable to augment thepower supply with a captive generating set.

After obtaining the power feasibility and sanction certificate, the power supply may be given to the industry.

Water Supply

Find out the water requirement of the industry.

Check out what is the best possible source of the required water supply i.e. river, canal, tube well and how far is it from your land.

Check the quality of water (PH, hardness) and does it meet you specific requirements.

Rate/ water charges applicable as well as the common storage facility. Find out who is the operating authority (Public Works Department,

Estate-Corporation, and Municipality) of the area. Water connection is obtained by applying in advance in formal forms.

The State Governments of different States offers a number of incentives and concessions like water tariff, power subsidy, subsidy on generating sets, etc. to new entrepreneurs.

c.Getting a Telephone and Internet connection

Telecommunications is well recognized as the means for accelerating the economic growth in all the regions of a nation, including the remote and inaccessible areas in the country. In the present age of information technology, internet has become a medium for accessing information on any topic you can imagine, like for buying products and services i.e. for business purposes at the click of a mouse or a key. Hence these have become the basic infrastructure requirements for a business organization.

4.Naming and Registering a BusinessIn India, incorporation of a company is governed by the Companies Act 1956. It is the most important piece of legislation that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. It applies to whole of Indiaand to all types of companies, whether registered under this Act or an earlier Act. But it does not apply to universities, co-operative societies, unincorporated trading, scientific and other societies.

The Act is administered by the Central Government through the Ministry of Corporate Affairsand the Offices of Registrar of Companies, Official Liquidators , Public Trustee, CompanyLaw Board, Director of Inspection, etc. The Registrar of Companies (ROC) controls the task of incorporation of new companies and the administration of running companies.

The Official Liquidators who are attached to the various High Courts functioning in the country are also under the overall administrative control of the Ministry. The set-up at the Headquarters includes the Company Law Board, a quasi-judicial body, having the principal Bench at New Delhi, an additional principal bench for Southern Region at Chennai and four Regional Benches located at New Delhi, Mumbai, Kolkata and Chennai. The organisation at the Headquarters also includes two Directors of Inspection and Investigation with a complement of staff, an Economic Adviser for Research and Statistics and other Officials providing expertise on legal, accounting, economic and statistical

matters.

The four Regional Directors, who are in charge of the respective regions, comprising a number of States and Union Territories, interalia, supervise the working of the Offices of Registrars of Companies and the Official Liquidators working in their regions. They also maintain liaison with the respective State Governments and the Central Government in matters relating to the administration of the Companies Act, 1956.

Registrar of Companies (ROCs) appointed under Section 609 of the Companies Act, covering various States and Union Territories, are vested with the primary duty of registering companies floated in the respective States and the Union Territories and ensuring that suchcompanies comply with the statutory requirements under the Act. Their offices function as registry of records relating to the companies registered with them.

For registration and incorporation of a company, an application has to be filed with Registrar of companies. Application for registration of a company accompanied by the selected names, Memorandum of Association and Articles of Association and other necessary documents is to be filed with the Registrar of companies of the State in which the company is proposed to be incorporated.

Under the Companies Act, an entrepreneur can form two types of companies, namely a private company or a public company.

A Private Company is one, the articles whereof contains the following restrictions:-

Restricts the minimum paid up share capital to such an amount as may be prescribed but which shall not be less than rupees one lakh;

Restricts the rights of members to transfer its shares, if any; Limits the number of its members to fifty excluding the past or present employees of

the company who are members of the company; Prohibits any invitation to the public to subscribe for any shares or debentures of

the company; Does not invite or accept any deposits from persons other than its members,

directors or their relatives

Also, the minimum number of members in a private company is two and such a company must have the words 'Pvt Ltd' as the last part of its name.

A Public Company, as defined in the Companies Act, has the following features:-

Its shares are freely transferable; There is no ceiling on its membership; It can invite general public to subscribe to its shares; It has a minimum paid up capital of Rs. 5 lakhs or such higher paid up capital as

may be prescribed; It is a private company which is a subsidiary of a public company.

Also, the minimum number of members in a public company is seven and such a company must have the word 'Ltd' as last part of its name.

Procedures for Registration of a Business List of offices of Registrar of Companies

Registration Forms FAQs by Ministry of Corporate Affairs Guidelines by the Ministry of Corporate Affairs Instruction kit for filling eForms

5.Choosing a Form of Business Organization

A business enterprise can be owned and organized in several forms. Each form of organization has its own merits and demerits. The ultimate choice of the form of business depends upon the balancing of the advantages and disadvantages of the various forms of business. The right choice of the form of the business is very crucial because it determines the power, control, risk and responsibility of the entrepreneur as well as the division of profits and losses. Being a long term commitment, the choice of the form of business should be made after considerable thought and deliberation.

The choice of the form of business is governed by several interrelated and interdependent factors :-

The nature of business is the most important factor. Businesses providing direct services like tailors, restaurants and professional services like doctors, lawyers are generally organised as proprietary concerns. While, businesses requiring poolingof skills and funds like accounting firms are better organised as partnerships. Manufacturing organisations of large size are more commonly set up as private and public companies.

Scale of operations i.e. volume of business ( large, medium, small) and size of the market area (local, national, international) served are the key factors. Large scaleenterprises catering to national and international markets can be organised more successfully as private or public companies. Small and medium scale firms are generally set up as partnerships and proprietorship. Similarly, where the area of operations is wide spread (national or international), company ownership is appropriate. But if the area of operations is confined to a particular locality, partnership or proprietorship will be a more suitable choice.

The degree of control desired by the owner(s). A person who desires direct control of business, prefers proprietorship, because a company involves separation of ownership and management.

Amount of capital required for the establishment and operation of a business. A partnership may be converted into a company when it grows beyond the capacity and resources of a few persons.

The volume of risks and liabilities as well as the willingness of the owners to bearit, is also an important consideration.

Comparative tax liability

a.Sole Proprietorship

A sole proprietorship is the oldest and the most common form of business. It is a one-man organization where a single individual owns, manages and controls the business. Its main features are :-

Ease of formation is its most important feature because it is not required togo through elaborate legal formalities. No agreement is to be made and

registration of the firm is also not essential. However, the owner may be required to obtain a license specific to the line of business from the local administration.

The capital required by the organisation is supplied wholly by the owner himself and he depends largely on his own savings and profits of his business.

Owner has a complete control over all the aspects of his business and it is he who takes all the decisions though he may engage the services of a few others to carry out the day-to-day activities.

Owner alone enjoys the benefits or profits of the business and he alone bearsthe losses.

The firm has no legal existence separate from its owner. The liability of the proprietor is unlimited i.e. it extends beyond the

capital invested in the firm. Lack of continuity i.e. the existence of a sole proprietorship business is

dependent on the life of the proprietor and illness, death etc. of the owner brings an end to the business. The continuity of business operation is therefore uncertain.

Advantages

Ease of formation Maximum incentive for work Secrecy of business Quick decisions and flexibility of operations

Disadvantages

Limited capital Limited managerial ability Limited life Unlimited liability

Hence, this form of organisation is suitable for the businesses which involve moderate risk, small financial resources, capital requirement is small and risk involvement is not heavy like automobile repair shops, small bakery shops, tailoring, etc. It accounts for the largest number of business concerns in India.

b.Private Limited Company

A private limited company is a voluntary association of not less than two and not more than fifty members, whose liability is limited, the transfer of whose shares islimited to its members and who is not allowed to invite the general public to subscribe to its shares or debentures. Its main features are :-

It has an independent legal existence. The Indian Companies Act,1956 containsthe provisions regarding the legal formalities for setting up of a private limited company. Registrars of Companies (ROC) appointed under the Companies Act covering the various States and Union Territories are vested with the primary duty of registering companies floated in the respective states and the Union Territories.

It is relatively less cumbersome to organise and operate it as it has been exempted from many regulations and restrictions to which a public limited company is subjected to. Some of them are :-

it need not file a prospectus with the Registrar. it need not obtain the Certificate for Commencement of business. it need not hold the statutory general meeting nor need it file the

statutory report. restrictions placed on the directors of the public limited company do

not apply to its directors. The liability of its members is limited. The shares allotted to it's members are also not freely transferable

between them. These companies are not allowed to invite public to subscribe to its shares and debentures.

It enjoys continuity of existence i.e. it continues to exist even if all its members die or desert it.

Hence, a private company is preferred by those who wish to take the advantageof limited liability but at the same time desire to keep control over the business within a limited circle and maintain the privacy of their business.

Advantages

Continuity of existence Limited liability Less legal restrictions

Disadvantages

Shares are not freely transferable Not allowed to invite public to subscribe to its shares Scope for promotional frauds Undemocratic control

c.Partnership Firm

Partnership is defined as a relation between two or more persons who have agreed to share the profits of a business carried on by all of them or any of them acting for all. The owners of a partnership business are individually known as the "partners" and collectively as a "firm". Its main features are :-

A partnership is easy to form as no cumbersome legal formalities are involved. Its registration is also not essential. However, if the firm is not registered, it will be deprived of certain legal benefits. The Registrar of Firms is responsible for registering partnership firms.

The minimum number of partners must be two, while the maximum number can be 10 in case of banking business and 20 in all other types of business.

The firm has no separate legal existence of its own i.e., the firm and the partners are one and the same in the eyes of law.

In the absence of any agreement to the contrary, all partners have a right to participate in the activities of the business.

Ownership of property usually carries with it the right of management. Every

partner, therefore, has a right to share in the management of the business firm. Liability of the partners is unlimited. Legally, the partners are said to be jointly

and severally liable for the liabilities of the firm. This means that if the assets and property of the firm is insufficient to meet the debts of the firm, the creditors can recover their loans from the personal property of the individual partners.

Restrictions are there on the transfer of interest i.e. none of the partners can transfer his interest in the firm to any person(except to the existing partners) without the unanimous consent of all other partners.

The firm has a limited span of life i.e. legally, the firm must be dissolved on the retirement, lunacy, bankruptcy, or death of any partner.A partnership is formed by an agreement, which may be either written or oral. When the written agreement is duly stamped and registered, it is known as "Partnership Deed". Ordinarily, the rights, duties and liabilities of partners are laid down in the deed. But in the case where the deed does not specify the rights and obligations, the provisions of the THE INDIAN PARTNERSHIP ACT, 1932 will apply. The deed, generally contains the following particulars:-

Name of the firm. Nature of the business to be carried out. Names of the partners. The town and the place where business will be carried on. The amount of capital to be contributed by each partner. Loans and advances by partners and the interest payable on them. The amount of drawings by each partner and the rate of interest allowed thereon. Duties and powers of each partner. Any other terms and conditions to run the business.

Advantages Ease of formation Greater capital and credit resources Better judgement and more managerial abilities

Disadvantages Absence of ultimate authority Liability for the actions of other partners Limited life Unlimited liability

Partnership is an appropriate form of ownership for medium sized business involving limited capital. This may include small scale industries, wholesale and retail trade; small service concerns like transport agencies, real estate brokers; professional firms like charted accountants, doctors' clinic, attorney or law firms etc.

d.Public Limited Company

A public limited company is a voluntary association of members which is incorporated and, therefore has a separate legal existence and the liability of whose members is limited. Itsmain features are :-

The company has a separate legal existence apart from its members who compose it. Its formation, working and its winding up, in fact, all its activities are strictly

governed by laws, rules and regulations. The Indian Companies Act, 1956 contains theprovisions regarding the legal formalities for setting up of a public limited company. Registrars of Companies (ROC) appointed under the Companies Act covering the various States and Union Territories are vested with the primary duty of registering companies floated in the respective states and the Union Territories.

A company must have a minimum of seven members but there is no limit as regards the maximum number.

The company collects its capital by the sale of its shares and those who buy the shares are called the members. The amount so collected is called the share capital.

The shares of a company are freely transferable and that too without the prior consent of other shareholders or without subsequent notice to the company.

The liability of a member of a company is limited to the face value of the shares heowns. Once he has paid the whole of the face value, he has no obligation to contribute anything to pay off the creditors of the company.

The shareholders of a company do not have the right to participate in the day-to-daymanagement of the business of a company. This ensures separation of ownership from management. The power of decision making in a company is vested in the Board of Directors, and all policy decisions are taken at the Board level by the majority rule. This ensures a unity of direction in management.

As a company is an independent legal person, its existence is not affected by the death, retirement or insolvency of any of its shareholders.

Advantages

Continuity of existence Larger amount of capital Unity of direction Efficient management Limited liability

Disadvantages

Scope for promotional frauds Undemocratic control Scope for directors for personal profit Subjected to strict regulations

e.Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP) is a new corporate structure that combines the flexibility of a partnership and the advantages of limited liability of a company ata low compliance cost. In other words, it is an alternative corporate business vehicle that provides the benefits of limited liability of a company, but allows itsmembers the flexibility of organising their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm.Owing to flexibility in its structure and operation, it would be useful for small and medium enterprises, in general, and for the enterprises in services sector, in particular. Internationally, LLPs are the preferred vehicle of business, particularly for service industry or for activities involving professionals.LLP is governed by the provisions of the Limited Liability Partnership Act 2008, thesalient features of which are as follows: -

The LLP shall be a body corporate and a legal entity separate from its partners. Any two or more persons, associated for carrying on a lawful business with a view to profit, may by subscribing their names to an incorporation document and filing the same with the Registrar, form a LimitedLiability Partnership. The LLP will have perpetual succession.

The mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between partners or between the LLP and the partners subject to the provisions of the LLP Act 2008 . The act provides flexibility to devise the agreement as per their choice.

The LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP which may be of tangible or intangible nature or bothtangible and intangible in nature. No partner would be liable on account of the independent or un-authorized actions of other partners or their misconduct. The liabilities of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall beunlimited for all or any of the debts or other liabilities of the LLP.

Every LLP shall have at least two partners and shall also have at least two individuals as Designated Partners, of whom at least one shall be resident inIndia. The duties and obligations of Designated Partners shall be as providedin the law.

The LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of affairs. A statement of accounts and solvency shall be filed by every LLP with the Registrar every year. The accounts of LLPs shall also be audited, subject to any class of LLPs being exempted from this requirement by the Central Government.

The Central Government has powers to investigate the affairs of an LLP, if required, by appointment of competent Inspector for the purpose.

The compromise or arrangement including merger and amalgamation of LLPs shallbe in accordance with the provisions of the LLP Act 2008.

A firm, private company or an unlisted public company is allowed to be converted into LLP in accordance with the provisions of the Act. Upon such conversion, on and from the date of certificate of registration issued by theRegistrar in this regard, the effects of the conversion shall be such as are specified in the LLP Act. On and from the date of registration specified in the certificate of registration, all tangible (moveable or immoveable) and intangible property vested in the firm or the company, all assets, interests,rights, privileges, liabilities, obligations relating to the firm or the company, and the whole of the undertaking of the firm or the company, shall be transferred to and shall vest in the LLP without further assurance, act ordeed and the firm or the company, shall be deemed to be dissolved and removedfrom the records of the Registrar of Firms or Registrar of Companies, as the case may be.

The winding up of the LLP may be either voluntary or by the Tribunal to be established under the Companies Act, 1956. Till the Tribunal is established,

the power in this regard has been given to the High Court.

The LLP Act 2008 confers powers on the Central Government to apply provisionsof the Companies Act, 1956 as appropriate, by notification with such changes or modifications as deemed necessary. However, such notifications shall be laid in draft before each House of Parliament for a total period of 30 days and shall be subject to any modification as may be approved by both Houses.

The Indian Partnership Act, 1932 shall not be applicable to Limited LiabilityPartnerships

6.Choosing the Location of the Industry

Every entrepreneur is faced with the problem of deciding the location for his/her factory or plant. Location of the business is the most important factor influencing its success or failure. It is a long-term decision which should take into consideration not only the present requirements of the organisation but also its future expansion plans. Errors in location may be very difficult and expensive to rectify. Location of a plant has a bearing on the layout of machinery and equipment as well as on the process of production. The objective of a locational plan is to find out the optimum or best location for the particular plant. Such a location not only results in lowest cost per unit but also facilitates orderly growth of the firm. Hence, the most advantageous location is that at which the cost of gathering material and fabricating it plus the cost of distributing the finished product to the customers will be at a minimum. It is not necessarily the most favourable location but rather the site at which all the considerations are optimised. There is no ideal location for all firms or even for one firm at all times. The choice of location depends on several important factors. It is influenced by the kind of products being manufactured, costs of production and distribution. The location of the plant should also be able to meet the environmental guidelines and other regulations set by the Government specific to a particular industry. The choice of an optimum location requires judicious balancing of all these factors

a. Selection of the Region

b. Selection of the Exact Site

c. State wise Industry Opportunities

7.Pricing your ProductFixing the right price for a product is the most difficult task as it affects the volume ofsales of the product of the firm as well as the profits of the firm. Although non-price factors have become more important in recent decades, price remains one of the important elements in determining the market share and profitability. Prices are set by a firm by taking into consideration factors like costs, profit targets, competition and perceived value of products. Taking into account the various factors, the steps generally followed insetting the price of a product are :-

Setting the Pricing Objective of the Firm

It is the most important step as it varies from firm to firm. Setting a lower price may attract more customers and thus fetch a larger market share for the firm's product. But

charging a higher price might reflect a high quality and prestige product.

Determining the Demand for the Product

Demand for the product sets a ceiling price. Penetration pricing is used when the product has a highly elastic demand and there is strong competition in the market. Under this policy, prices are fixed below the competitive level in order to obtain a larger share of the market. Once your product is in demand or is accepted in the market, the price of your product is increased. But when the demand for the product with respect to price is more inelastic, higher prices are charged for the product. This policy is generally followed during the initial stages of introduction of the new product.

Estimating the Costs and Profits

Costs set a floor price. Amount spent and return expected is the key factor in deciding theprice. The various costs involved in producing the product must be covered in pricing the product. On a long term basis also the price must take into consideration the costs of doing business. This also includes sales forecast and profit margin.

Determining the Competition for the Product

Competitors prices and the price of substitutes provide an orientation point. The number ofcompetitors for the product in the market as well as the policy followed by them is also animportant factor. Competitive pricing is used if the market is highly competitive and the product is not differentiated from that of the competitor's.

Considering the Governmental Regulations

Government policies and incentives are also taken into account. Prices are also affected byvarious tax liabilities which a company and the product is subjected to. It includes, excise duty, sales tax and local taxes like octroi.

Sales tax is levied on the sale of moveable goods in India at the rates which vary depending upon the type and nature of goods and the State in which sale has taken place. The Central and State Government are both empowered to impose sales tax. The Central Sales tax deals with transactions in the nature of inter-state sales. While the State sales tax deals with intra-state sales.

Octroi is a tax levied on the entry of goods into a municipality or any other specified jurisdiction for use, consumption or sale. Goods in transit are exempted from it.

Selecting a Suitable Pricing Method/Policy

Right price for the product can be determined through pricing research and by adopting test-marketing techniques. The various pricing methods are:-

Perceived value pricing:- in which a firm sets its price in relation to the value delivered and perceived by the customer. Perceived value is made up of several elements like buyer's image of the product performance, warranty, trustworthiness, esteem, etc. Each customer gives different weightage to these elements. Some may be price buyers, others may be value buyers and still others may be loyal buyers. If

either the price is higher than the value perceived or the price is lower than the value perceived, the company will not be able to make potential profits.

Value pricing:- in which companies develop brand loyalty for their product by charging a fairly low price for a high quality offering.

Going rate pricing:- is followed if it is difficult to ascertain the exact costs involved and the competitive response. Hence, firms base their price on competitor'sprice by charging the same, more or less than the major competitor.

Introducing a product at a premium price:- When a product is innovative and competition is low or non-existent, this policy can be applied. Thus profits are optimised. But when competition arises prices are lowered.

Ethical pricing: - Price is fixed keeping the welfare of the society in mind. For many life saving drugs, this particular policy is used. The product is sold at the lowest possible price with either a very reasonable margin or no profit at all. Profit may be earned from other products.

Full Line pricing:- If you are selling a range of particular product for example pickles, then you price the product in a particular range, this way you may earn more profit in one flavour and less on the other. But, you cannot sell only the one that gives you maximum profit, or else a customer may switch over to another brand where he would be able to exercise an option for other flavours.

The Central and State Governments have passed certain legislations in order to control production, supply, distribution as well as price of a number of commodities. The EssentialCommodities Act,1955 is one such important legislation. Under the Act, the State Governments/UT Administrations have issued various control orders to regulate various aspects of trading in essential commodities such as foodgrains, edible oils, pulses, kerosene and sugar etc. The Central Government regularly monitors the action taken by StateGovernments/UT Administrations to implement the provisions of the Act.

The Government is empowered to enlist any class of commodity as essential commodity as wellas regulate or prohibit the production, supply, distribution, price and trade in any of these commodities for the following purposes :-

Maintaining or increasing their supplies. Equitable distribution and availability at fair prices of the commodities concerned. Securing any essential commodity for the defence of India or the efficient conduct

of military operations.

The list of commodities declared as “essential” under the Essential Commodities Act, 1955 is reviewed from time to time in the light of changes in the economic situation and particularly with regard to their production and supply.  For example, keeping in view production and demand of some of the commodities, it was felt that these could be removed from the list of essential commodities. Hence, with effect from 15.2.2002, Government removed 11 classes of commodities in full and one in part from the list of commodities declared as essential under the Essential Commodities Act, 1955. Similar efforts are underway to delete more commodities from the purview of the Act in order to facilitate freetrade and commerce, for which alternative legal mechanism is being worked out for protection of consumers interest etc.

The list of commodities declared essential under the Essential Commodities Act, 1955 (As on

15.12.2004):-

A. Declared under Clause (a) of Section 2 of the Act

1. Cattle fodder, including oil cakes and other concentrates.

2. Coal, including coke and other derivatives.

3. Component parts and accessories of automobiles.

4. Cotton and woollen textiles.

5. Drugs.

6. Foodstuffs, including edible oilseeds and oils.

7. Iron and Steel, including manufactured products of Iron & Steel.

8. Paper, including newsprint, paperboard and strawboard.

9 Petroleum and Petroleum products.

10 Raw Cotton, either ginned or unginned and cotton seed.

11. Raw Jute.

B. Declared as essential through notifications under sub-clause (xi) of clause (a) of Section 2 of the Act

12. Jute textiles.

13. Fertilizer, whether inorganic, organic or mixed.

14. Yarn made wholly from cotton.

15. (i) seeds of food crops and seeds of fruits and vegetables, (ii) seeds of cattle fodderand (iii) jute seeds

The Act has been amended from time to time. The Essential Commodities (Special Provisions) Act, 1981, makes certain special provisions by way of amendments to the Essential Commodities Act,1955, for a temporary period for dealing more effectively with persons indulging in hoarding and black marketing of, and profiteering in, essential commodities and with the evil of vicious inflationary prices and for matters connected therewith or incidental thereto.

Also, the Government has set up a Price Monitoring Cell (PMC) in the Department of ConsumerAffairs to monitor and analyse price data and trends of availability of essential commodities. The Economic Adviser in the Department of Consumer Affairs heads the cell and a Deputy Economic Adviser assisted by Assistant Economic Advisers and Deputy Directors looks after the work of the cell. The fifteen essential commodities for which the cell

monitors the prices are Rice, Wheat, Atta, Gram Dal, Tur ( Arhar ) Dal, Sugar, Gur, Groundnut Oil, Mustard Oil, Vanaspati,Tea, Milk, Potato,Onion and Salt.

Information on retail prices is received on daily basis from 18 centres of the country. Similarly, information on wholesale prices is received from 37 centres of the country on weekly basis. Accordingly, the price monitoring cell issues the following reports on daily and weekly basis:-

Retail Prices – Daily Wholesale Prices – Weekly

The objective of such price and distribution controls is:- promotion of equity or distributive justice; ensuring the quality of goods and services; prevention of monopolistic, restrictive and unfair trade practices that are hindering public interest; augmentation of the supply; ensuring availability of essential goods at reasonable prices to the vulnerable sections in all areas; control of inflation and deflation; etc.

8.Regulatory Requirements

Once an entrepreneur has taken all the important decisions relating to starting a business,he/she has to take into account the basic regulatory requirements which are to be followed for setting up the organisation. The most important regulation is the Companies Act,1956, which regulates all the affairs of a company. It contains provisions relating to the formation of a company, powers and responsibilities of the directors and managers, raising of capital, holding company meetings, maintenance and audit of company accounts, powers of inspection and investigation of company affairs, reconstruction and amalgamation of a company and even winding up of a company. The Ministry of Corporate Affairs, earlier known as Department of Corporate Affairs under Ministry of Finance, is primarily concerned with administration of this Act as well as other allied Acts and rules & regulations framed there-under.

The next important regulation relates to environment. The environmental regulatory requirements envisage a wide legislative framework covering every aspect of environment protection like air, water, noise, forest conservation, wildlife protection, etc. Also, separate set of laws and rules for emission of hazardous wastes have been enacted. The Ministry of Environment and Forests (MoEF), is the nodal agency for regulating all such environmental aspects. It undertakes conservation & survey of flora, fauna, forests and wildlife; prevention & control of pollution; afforestation & regeneration of degraded areas. Every industry has to abide by all such guidelines and parameters for environmental protection because only this will ensure its sustainable progress and growth.

a. Environmental Regulations

b. Companies Act

9.Financing a Start Up Business

One needs money to make money. Finance is the lifeline of business. A business firm requires finance to commence its operations, to continue its operations and for its expansion and growth. There must be continuous flow of funds in and out of business. Sound plans, efficient production and marketing are all dependent on smooth flow of finance. Hence, a financial plan needs to be prepared, which indicates the requirements of finance, sources for raising the finance and the application of funds. Financial planning for starting a business begins with estimating the total amount of capital required by the firmfor the various need of the business.

The financial plans of an enterprise should be formulated by taking into consideration the following factors :-

The financial objectives of the company Nature and size of the business The image and credit-worthiness of the enterprise Growth and expansion plans Capital market trends Government regulations

a.Types of Financial Needs

Financial Needs of a Business may be Classified into two on the basis of the Extent of Permanence :-

Fixed Capital

The funds required to purchase fixed or durable assets are known as fixed capital or long term capital. The fixed or durable assets include land, buildings, machinery, equipment andfurniture etc. The nature and size of the business generally determines the amount of fixedcapital needed. For e.g. manufacturing activities require large investments in plant, machinery, warehouses and others. While, trading concerns need relatively lesser investmentin such assets. These assets continue to generate income and profits over an extended period of time. Also, funds which are once invested in fixed assets cannot be withdrawn andput to some other use.

Working Capital

Money invested in short term assets or current assets is known as working capital. It includes purchase of raw materials, payment of wages and salaries, rent, fuel, electricity and water, repairs and maintenance of machinery, advertising, etc. Besides, sale of goods on credit leads to the holding of debtors balance and bills receivable, which may also be regarded as current assets. The requirement of finance for all these purposes arises at short intervals. Working capital is also known as Circulating capital or Revolving capital because funds invested in such assets are continuously recovered through realisation of cash, and again reinvested in current assets. The amount of working capital required depends mainly on the nature of the business, the time required for completing the manufacturing process, and the terms on which materials are purchased and goods sold. For e.g. trading companies require more working capital than manufacturing companies.

On the Basis of Period of Use, the Financial Needs of the Business may be Classified into

:-

Long-Term Capital

Long-term capital is required for a longer period i.e. five years or more. The fixed assetsas well as the permanent part of the working capital is financed by it.

The important sources of long-term finance are :-

Issue of shares Issue of debentures Loans from financial institutions Reinvestment of profits

Short-Term Capital

Short-term capital is required for a shorter period i.e. less than a year. It involves financing the current assets and meeting day-to-day expenses.

The important sources of short -term finance are :-

Banks Trade credit Installment credit

Medium-Term Capital

Medium-term capital is required for a period of 2 to 5 years. It involves financing certainactivities like renovation of buildings, modernisation of machinery, heavy expenditure on advertising, etc.

The important sources of short -term finance are :-

Issue of shares Issue of debentures Borrowing from banks and other financial institutions Reinvestment of profits

The funds raised to meet both the long-term and short-term capital requirements may take the form of :-

Ownership Capital

It is the amount of capital invested in a business by its owners. It is on the basis of theamount invested that the owners become entitled to the profits of the business. Under sole proprietorship, the individual owner normally invests capital from his own savings. In partnership, each partner contributes capital as mutually agreed among partners. While companies raise capital by issuing shares. The investors who contribute towards the share capital of a company become its owners by virtue of their share holdings. The rate of return on owners investment depends on the level of profits earned and are entitled to receive dividend out of these profits. Ownership capital is generally used as permanent

capital or long-term capital.

Borrowed Capital

The financial requirements of the business are often met by raising loans. Borrowed money involves a fixed obligation to pay interest and repay the principal amount as and when due.In a sole proprietary business the proprietor can borrow money on his personal security or on the security of his existing assets. A partnership firm can raise loans on the personal security of the individual partners. Companies can also borrow either by issuing debenturesor bonds, or raise direct loans. Money may be borrowed for short-term and long-term i.e. tofinance fixed assets as well as current assets.

10. Sourcing Process, Raw Materials, Machineries and Equipments

Once the firm has decided on the foremost issues of which product it wants to produce and the location of the industry, the next important step is to select appropriate technology and equipment to produce the same. In addition to this, the source of raw material has to be decided upon. The requirements of all these can either be met through domestic sources or can be imported subject to the regulatory requirements of the Government. The regulatoryrequirements pertaining to the import procedures vary depending on the item of import. In case of raw materials, the Export Import Policy of the Government regulates imports. However, in the case of technology, the Foreign Direct Investment (FDI) Policy and the Foreign Technology Transfer Agreements govern the imports.

The firm should do a careful cost and benefit analysis before going ahead with the process of placing the orders to minimize the production costs and hence increasing the profit margins. Various sources of Capital should be explored and the cost of capital should be analysed cautiously.

Process Selection

Once the choice of the product is made, selection of the right process technology becomes important. The process technology required may be :-

Indigenously developed:- In India, technologies are being developed at CSIR and Defence Research Labs. There are some intermediaries like APCTT (Asian and Pacific Centre for Transfer of Technology), TBSE( Technology Bureau for Small Enterprises) which can help you to locate the relevant technologies. Besides there are some In-house R & D centres of companies which develop technologies and sell them to interested parties. Indigenously developed process know-how has intrinsic benefits like appropriateness, relative inexpensiveness and possibility to work with technology developer.

Imported :- For some complex products, process know-how has to be imported. In such cases agreements for technology transfer should be made with due care in order to safeguard nation's interest. Government of India facilitates foreign technology induction both through FDI and through foreign technology collaboration agreements. FDI and Foreign technology collaboration agreements can be approved either through the automatic route under the powers delegated to the Reserve Bank of India or

otherwise by the Government.

For more details visit our Section on "Doing Business Abroad"

While choosing the process technology, the following considerations are essential :-

The level of skilled workers or complex machines required by the process. The quantity of water and / or power required. If any process or product patent is needed in order to utilize the selected process

technology. Any special Pollution or Environmental regulation is to be followed. The appropriateness of the technology to the Indian environment and conditions.

Raw Materials

Raw Material procurement and planning are critical to success, of a start-up unit. The raw materials required may be:-

Domestically available (within the country):- As we know that our country is a resource rich country with abundance of specific raw materials in different States. (For details, please refer to 'Investment opportunities and incentives' section). Accordingly appropriate suppliers of raw materials have to be selected.

Imported from abroad:- For importing the raw materials the Government rules and regulations have to be followed. The imports are regulated by the Foreign Trade (Development and Regulation) Act, 1992. The Act provides for the appointment by the Central Government, of a Director General of Foreign Trade for the purpose of the Act. The DGFT shall advise Central Government in formulating export and import policy and implementing the policy. (For details, please refer to 'Legal Aspects' section).

Whatever be the source of raw materials it must be bought from reputed dealers and agenciesonly. Before ordering, compare the prices and get quotation from at least 3-4 places and also check whether price is inclusive or exclusive of transportation costs. While receivingthe delivery, check the quality and quantity of the materials.

Proper planning is essential because non-availability of the required raw material may result in production hold-ups, idle machinery and manpower. On the other hand if too much is ordered too soon considerable amount of working capital gets locked up. All this will lead to increased production costs. But proper inventory management can lead to manageable cash flow situations. For imported raw material whose lead time are large, proper planning is all the more essential.

Machinery and Equipments

The next important step is choosing and ordering of right machinery and equipments. The machinery and equipments required may be either domestically available or imported from abroad. For importing machinery and equipments, the Government rules and regulations have to be followed. The imports are regulated by the Foreign Trade (Development and Regulation)Act, 1992. The Act provides for the appointment by the Central Government, of a Director General of Foreign Trade for the purpose of the Act. The DGFT shall advise Central Government in formulating export and import policy and implementing the policy. (For details, refer to 'Legal Aspects' section).

Generally, technology or process provides with the necessary specifications relating to machinery and equipment required. Otherwise, an extensive techno-economic survey of the available machinery and equipment may be carried out. International trade fairs and engineering fairs are good places to look at available options. The entrepreneur may also consult experts, dealers / suppliers as well as users, prior to making a selection of equipment and machinery. Many entrepreneurs buy second hand machines and equipments. But this leads to the problem of prevalence of outdated production and management methods hindering the efficient operation of business units. The advice of SISI and NSIC can also be sought.

There are 30 Micro,Small and Medium Enterprises Development Institutes (MSME-DIs) and 28 Branch MSME-DIs (formerly SISIs) set up in State capitals and other industrial cities all over the country. The main objective of National Small Industries Corporation Limited (NSIC) is to provide machinery and equipment to small industrial units offering them long repayment period with moderate rate of interest.

It has been found that small industrialists are unable to install modern machinery and equipment due to lack of investable funds. Hence many schemes and incentives are available to assist them. Now, small scale firms can acquire industrial machinery, office equipment, vehicles, etc, without making full payment through hire purchase. With the help of assets acquired through hire purchase, they can produce and sell. From the earning of production, they can make payments in installment. Ultimately the ownership of assets can be acquired.

National Small Industries Corporation (NSIC) provides machinery and equipment to small scale units on hire purchase basis and on lease basis. NSIC follows the following Hire Purchase procedure and Hire Purchase Scheme for financing plant and machinery to small scale units:

The hire purchase application is to be made on the prescribed form. The Director of Industries of the State under whose jurisdiction the applicant

falls, forwards the application to the head office of the NSIC at Delhi with his recommendation and comments.

All applications for indigenous or imported machines are considered by acceptance committees comprising of the representatives of the Chief Controller of Imports, Development Commissioner, Small Scale Industries and other concerned departments.

Decisions of these committees are conveyed to the parties concerned with copies to the regional offices of the NSIC and the concerned Directorate of Industries.

It is open to an applicant whose case has been rejected to get his application reviewed by a high powered committee.

Once the hirer completes all these formalities, instructions are sent to the suppliers to dispatch the consignment (duly insured for transit risk) to the hirer and to send the R/R or C/R as the case may be, to the regional office.

The NSIC after ensuring that the hirer has paid all dues, releases the R/R or C/R tohim for taking delivery of the machines.

In case of imported machines, the procedure is slightly different in as much as the shipping documents are sent to the clearing agents for clearing the consignment fromthe Customs and dispatching it to the hirer.

11. Hiring Human Resource

Human Resource is also an important determinant of business location and functioning. Factors such as the availability of labour of different skill levels, productivity and cost

of labour, flexibility of labour, attitude and behaviour patterns of labour, nature of trade unionism etc. are important to a business. The whole process begins with the task of hiring manpower for starting a business for filling the present and prospective vacancies in the company. The objective of hiring manpower is to procure the right number of employees, with the required qualifications to do the right type of jobs. The hiring process involves four main steps i.e. manpower planning, recruitment, selection and placement. Each of these steps and sub-steps help the employer obtain more and more information about the candidates and thus help in obtaining the best possible manpower for the firm. This function must be performed carefully because any error committed at the timeof hiring manpower may prove to be very costly for the firm both in the short as well as long term. These costs will be in the form of waste of time, money and energy in repeated hiring process. The training costs incurred on them will go waste. The efficiency of the organisation will go down due to hiring of unsuitable candidates. At the same time the rateof absenteeism and labour turnover will be higher. Hence, an effective hiring procedure includes the answers to the following questions :-

What are the requirements of the jobs to be filled? What kind of persons are needed? How many persons are needed? What sources of recruitment may be utilised? What steps should be taken to select the right type of candidates for employment?