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We Can Definitely Learn Quite A Few Things By Observing Business Practices In India

We can definitely learn quite a few things by observing business practices in India
If you are in one of developed countries and if you tell your friends that you are going to start a business, most of them would tell you to think twice. This is because most new businesses in developed countries would fail within the first three to five years, and this is supported by statistics. India has a very poor infrastructure and also its political and economical environment is not as stable as that in developed countries; therefore, your intuition tells you that even more new businesses would fail in India. However, the situation is quite the opposite; most of new businesses manage to survive in India. It is rather surprising, but if you look at various aspects of the business operation, you would logically conclude that new businesses in India are much more likely to survive than new businesses in developed countries.

One of characteristics of new businesses in India is that they start with very small capitals or none whatsoever. New businesses spend what they can spend to start; in other words, they have very little or no debt at the beginning. Since there is very little or no debt, new businesses have no obligation to make payments to any lenders; this dramatically increases their chances of survival. On the contrary, new businesses in developed countries often take huge debts to start. It is partly necessary but it is also partly a common practice, although new businesses do not necessarily have to follow the common practice. For example, it is very common for new businesses to heavily invest in new pieces of office furniture, while they are totally unnecessary in most cases.

As I look at individual businesses in India closely, I find that many businesses in India have very low operating costs. I see used computers everywhere. I see old furniture everywhere. Most offices do not spend a whole of money to make them look pretty. Most offices do not spend money for decorations. For example, a friend of mine (in India) runs a printing business; the business produces customized business cards, letterheads, envelops, calendars and booklets. Its office has no landline phone; it has no computer. The office only has bare necessities. This obviously keeps the business’ operation cost very low. On the other hand, many new businesses in developed countries keep their operating costs much higher than necessary. For example, a friend of mine in US used to run a business from his apartment; it was a small business, yet he had a number of equipments, each of which costs thousands of dollars. He had a couple of cell phones, a couple of laptops and a couple of desktop computers. The operating cost was a lot higher than necessary. (He went out of business and the high operation cost was one of reasons.)

Family structure in India is very strong, and this is quite helpful for new businesses. It is difficult for new businesses to find trustworthy people who can help them; it is even more difficult for them to find free help. Since family structure in India is very strong, they can often get help from their family members in many cases. Family members help other family members’ new businesses for free even. This is not exactly the case in developed countries. Family structure is relatively weak, and it is very difficult to get help from family members.

While the political and economical environment in India is not as stable as that in developed countries, there is actually one political advantage. Rules and regulations in India are relaxed when it comes to providing protections and benefits to employees; also licensing costs and other regulatory compliance costs are very low. This makes the recurring cost very low, and this increases new businesses’ chances of survival. While many of developed countries offer very generous social programs, they also put heavy burdens on businesses such as the financial burden of providing protections and benefits to employees. This raises the recurring cost, and this makes new businesses to survive even more difficult.

While we cannot easily change laws, rules and regulations, we can lower our operating costs. We can also start new businesses using whatever money we have instead of borrowing heavily. We can definitely learn quite a few things by observing business practices in India.

Setting Up Your Business Entity

Do you remember getting started in your brand new business venture? Besides testing the market, deciding on a product or service, there was this decision regarding entity selection. Before the early 1990′s, there was the corporation (C or S), the partnership in its many forms, and the sole proprietorship. With the advent of the Limited Liability Company or LLC, choosing an entity form has become more interesting and thought provoking.

The C corporation is a taxable entity in and of it self. The C corporation is a tax designation that simply segregates a regular corporation fro the subchapter S corporation. Owners of a C corporation will ultimately decide whether the entity will pay income tax or the ownership group will pay income tax as individuals. In the closely held business world, owners in the C corporation are also the management team which is very different from most publicly held businesses. It is not uncommon for the owners in a closely held C corporation to strip the earnings out of the business to avoid paying corporate level income tax. The C corporation is an entity that can produce double taxation in the sense that it is possible to leave earnings in the entity, subjecting them to tax, and then later distributing them to the ownerhsip group, or shareholders, to be taxed again. Careful management of this issue can serve to avoid double taxation. The C corporation is a great source for providing fringe benefits to the shareholders of the entity unlike the other entity forms. Careful consideration should be given to this point when making an entity selection decision. In addition, there can be many advantages for first starting a business as a C corporation entity, including code section 1202 stock. This code section allows for the exclusion of 50% of the proceeds from the sale of the company’s stock. However, this exclusion is subject to the alternative income tax (a later discussin for my faithful readers). An important characteristic of 1202 stock is that one can sell C corporation stock and invest in another C corporation’s stock with the proceeds, and avoid paying income taxes currently on the transaction. As noted, careful planning is essential.

The S corporation, for income tax purposes, is typically a flow through entity. This means that earnings at the corporate level flow through to the shareholders to be taxed at their individual income tax rates. In a subchapter S corporation, these flow throughs are not subject to the employment taxes (SE tax) which could save significant tax dollars. Fringe benefits can not be paid and deducted for more than 2% shareholders of the S corporation and 1202 stock provisions will not apply. The S corporation does work very nicely where the business is extremely profitable and there is fear that there will be unreasonable compensation charges if the company were operating as a C corporation. There are instances when Internal Revenue will claim that wages paid to the shareholders in a C corporation consititute dividend payouts rather than deductible compensation. Dividends represent double taxation as they are taxed once at the C cororation level and again at the shareholder level.The S corporation eliminates this problem for the most part as the shareholders can set their compensation levels reasonably and allow the rest of the earnings to flow through. The S corporation can also be good for the sale of a business. Depending on one’s time horizon and structuring of the sale, the S corporation can provide for capital gain treatment if the business’ assets are sold rather than its stock (as compared to 1202 stock treatment of the C corporation).

The limited liability company (LLC) is an interesting entity choice. It works wonders for multiple businesses and can provide for significant tax savings when fully understood. The LLC can be taxed as a sole proprietorship, a C corporation, an S corporation, or a partnership. It is a versatile format for running one’s business. My personal preference is that new entities be formed as partnerships with our spouses. Imagine that I am a real estate broker. My earnings are subject to the self-employment tax. If my income is $60,000, my SE tax will be $9,180 ($60,000×15.3%). If my wife owns the business with me jointly in a partnership, she will not owe the SE tax on her half of the earnings (assuming she owns 50%) because she does not participate in the business on a full time basis. She is but a passive investor. By operating my business in this manner, my SE tax is cut in half to $4.590. This is a significant savings. I recently helped a client save $8,000 in taxes by forming this entity structure with his wife.

My favorite entity of all, when dealing with multiple entities, inldues a management company (C or S corporation) over seeing the LLC’s which own the different activities. This way, I can say that all earnings of the LLC,s are not subject to SE tax. I can demonstrate that the SE tax will be paid at the management corporation level. The LLC’s will pay management fees to the governing corporation where SE tax will be paid through W-2 compensation paid to the shareholder or shareholders. Whether the management company is a C corporation or S corporation depends on issues mentioned above. If I want fringe benefits, the C corporation is the proper choice. If wish to save even more money on SE tax, The S cororation will be my entity of choice (beware of getting too greedy as IRS is cracking down on S corporations with low salaries to owners). Because of this structure of LLC’s and the management company, I am not concerned about unreasonable compensation issues as I can control the amount of management fees that get back to the management company. All other earnings will flow through to the partners’ returns from the LLC’s and will not be subject to the SE tax.

Small Business Grants For Starting Up!

Small business grants are not just given away by government agencies or private institutions for helping you start your business. There needs to be a particular interest in your project in order for them to provide the funding that you need. And it’s not enough to have a good idea in order to obtain finance for it; you need to have a well made business project to convince them of your eligibility.

No Credit Or Income Requirements?

Though there is no need to reimburse the money on government grants, claims that state that there is no credit or income requirement in order to get approved for a government grant are far from being truth. Truth is that the requirements for approval are not present in the same sense as on private or federal loans but there is still a qualification process.

You may wonder then, what is needed in order to qualify for a government grant. The idea is that you’ll need to show that your business project is viable, and thus, you’ll need to show that you can be trusted which implies having a fair credit score and the ability to generate a proper income to show proof of the business viability.

Presenting a Viable Business Project

What you need to understand is that prior to requesting a government grant, you’ll need to prepare a presentation of your business project. This obviously implies having a project and not just a mere idea. There must be certain degree of research done with market analysis to prove the viability of the business and the income generation capacity.

Though the money doesn’t need to be returned, the government agency is interested in investing the money in a project that will endure in time and that will keep generating job positions and revenues thus boosting the economy and the welfare of the nation. The particular requirements of each government grant need to be consulted with the government agency that provides them.

Getting Approved For a Government Grant

The key to getting approved for a government grant is to present an appealing business project that shows great feasibility and relates to those fields that the government is interested in promoting. If you don’t meat the requirements for a government grant approval, there is not much you can do about it. Yet, if you do qualify, it is important to be well informed prior to applying in order to take the proper steps and avoid getting declined due to bureaucratic reasons.

If you can’t qualify for a government grant, don’t despair and use the opportunity to consult about government business loans that are sometimes offered with subsidized interest rates and very affordable payments.