Setting Up a Venture

 Setting Up a Venture 

1. Process Of Setting Up An Enterprise 

An enterprise is an industrial undertaking or a business concern or any other establishment which is engaged in production or procurement of goods or services to fulfil the demand of the customer, discussed in detail in Chapter 13. Setting up an enterprise is the whole process of converting an innovative business idea into a realistic project to be able to reap profits in the long run. Setting up an enterprise may not be as easy as it looks. It involves a lot of commitment, patience, proper planning and a regressive process to convert what is there in your mind into a realistic entity. 

A determined entrepreneur is the most crucial aspect of every successful business project. In order to set up an enterprise, a suitable project has to be chosen. It involves a systematic feasibility study, preparation of project profile, strategic planning, deciding upon the constitution of the entity, preparation of project report, obtaining registration and clearance from related departments, resource mobilisation, obtaining funds and final implementation of the project. Based on the selection of product/ service to be offered, a project feasibility study has to be conducted and a brief product profile is made on that basis. Depending upon the type of project, details like a suitable form of enterprise, location, investment involved are decided. In this chapter we will discuss various aspects of setting up of an enterprise in detail.

2. Forms Of An Enterprise 

To set up an enterprise, an entrepreneur has to decide upon the constitution of the enterprise at the initial stage of the project. There are various forms of an enterprise which can be chosen by the entrepreneur based on the selection of the intended project. Selection of a most conducive form of enterprise is important for the successful execution of the project. Let us discuss some broad categories of enterprises. 

2.1 Types of Organisations 

1. Sole Proprietorship 

Sole proprietorship is the simplest and oldest form of enterprise. It is also known as a sole trader or simply proprietorship. It is the type of business entity which is owned and run by one individual, which means 100 per cent ownership and profits stay with the owner and so the decision taking authority. In sole proprietorship there is no legal distinction between the owner and the business. Many businesses starts as a sole proprietorship and get converted into huge corporation later. Companies like Coca-Cola, Apple, Google, Amazon, and Disney started as sole proprietorships. 

Sole proprietorship is a popular business form due to its simplicity, ease of setup and comparatively less initial costs involved. A sole proprietor need only register his/her name to secure local license and can start his/ her business immediately.Taxation formalities for sole proprietorship is also very easy as the income generated during the course of business gets taxed only at the owner’s personal income tax rate with no major reporting requirements. 

Salient Features of Sole Proprietorship 

1. Single ownership 
2. No separate legal entity of the firm 
3. Unlimited liability 
4. One man control 
5. Undivided risk 

2. Partnership Firm 

As a business entity grows in size and scope of operations, it needs much more funds that may possibly be beyond the capacity of a single person.A group of persons can join their hands to form a partnership to fulfil the needs of organisation. Partnership, the form of enterprise, over comes the limitations of a one- person business such as need of more capital, better managerial skills and specialisation. 

The Partnership Act, 1932 defines partnership as,“the relation between persons who have agreed to share the profits of business carried on by all or anyone of them acting for all.” In other words, a partnership is a form of organisation in which there is two or more persons share the ownership and thereby profits or losses generated in the business entity. Persons who enter into a partnership agreement are called the partners.

As per section 464 of the Companies Act 2013, maximum number of partners can be 100 subject to the number prescribed by the government. However as per Rule 10 of the Companies (miscellaneous) Rules 2014, at present the maximum number of members can be 50. The partnership may come into existence either as a result of expansion of the sole proprietorship firm or by means of an agreement between two or more people to join hands to form a partnership firm. 

Salient Features of Partnership Firm 

1. Two or more persons enter into the partnership agreement, known as partners 
2. A written or oral agreement 
3. Legal aspects are governed by the Indian Partnership Act, 1932 
4. Mutual consent to join hands among the partners
5. Unlimited liability of partners 
6. No separate legal entity of the firm 

3. Limited Liability Partnership Firm 

A traditional form of partnership firm suffers the problem of unlimited liability. Liability of the partnership firms extends right upto their personal assets. This make regular partnership firms undesirable for most of the entrepreneurs. To settle up these issues a new form of organisation has been passed in January 2009 by the government of India, the Limited Liability Partnership to be governed under the Limited Liability Partnership Act, 2008. 

Limited Liability Partnership or LLP is a hybrid form of organisation which contains the features of both, the traditional partnership firm and company.It is an alternative corporate business form which offers benefits of limited liability to the partners at lower compliances costs. An LLP is a legal entity, liable for the full extent of its assets. However, the liabilities of its partners are limited. Further, no partner shall be liable on account of the independent or unauthorised actions of other partners in the firm. Thus, LLP allows individual partners to be shielded from liabilities created by another partner’s wrong business decisions or misconduct. 

Salient Features of Limited Liability Partnership Firm 

1. It is a corporate body which has its separate legal entity 
2. It enjoys the perpetual succession unlike traditional form of partnership 
3. It is governed by the Limited Liability Partnership Act, 2008. Also, the Partnership Act, 1932 is not applicable to it.
4. There has to be minimum of two persons for its incorporation. However, unlike partnership firm, there is no limit of maximum members.
5. Partners assume limited liability. 
6. If partners agree, LLP can have a common seal.

4. Joint Stock Company 

This form of organisation was evolved to overcome the weaknesses of proprietorship and partnership forms of businesses. A joint stock company or association is a group of individuals organised to conduct a business for a common motive of making profits. The individuals have a joint stock of capital represented by shares owned in the company. These shares/ stocks are transferable by the members without the consent of the group. 

A joint stock company can be formed under the Companies Act 2013. A registered company is incorporated as a separate legal entity, with a distinct name, common seals,and perpetual succession with the limited liability of individual share-holders or members. As an independent legal entity, the joint stock company enjoys the status of an artificial legal person, which means it can sue some other party or can be sued in its own name. 

Types of Joint Stock Company 

1. Private Company 

A private company is a company which has a paid up capital of one lakh rupees or above, as prescribed by its Articles of Association. However the Companies Amendment Act (2015) removes the minimum paid-up requirement. To form a private company, there must be at least two members. The maximum limit is of 200 members. Also, these members are restricted in their rights to transfer their shares, if any. A private company cannot invite to the public to subscribe for the shares or debentures of the company. 

ii. Public Company 

A public company is any company, which is 

1. Not a private company. 
2. Has paid up capital of minimum five lakh rupees and higher, as may be prescribed.
3. Is a subsidiary of a company which is not a private company. 

The formation of a public company requires at least seven members and can invite general public to subscribe for its shares and debentures, if required.Members are not restricted to transfer of their shares.

2.2 Choice of form of Company 

A prospective entrepreneur should properly analyse various form of organisation to identify the one that suits his/her business idea in the best possible way. The choice has to be made at the time of setting up the business entity. 

The choice could be derived by several factors including: 

1. Nature of business 
2. Size and scale of operation 
3. Capital requirement 
4. Degree of control desired by the promoter 
5. Degree of risk and uncertainty the owners are ready to bear 
6. Life span of the enterprise desired by the owners etc.

3. Steps For Setting Up Business Enterprise 

The procedure in setting up of a business unit is a time consuming, complex and complicated activity. It involves various steps, procedures and formalities. 

The following steps are involved in process of setting up a new business enterprise: 

1. Identification of business opportunity. 
2. Generation of business idea. 
3. Feasibility Study. 
4. Preparation of a business plan. 
5. Launching the enterprise. 

Step1. Identification Of Business Opportunity: 

This is the first step in setting up of a business unit Entrepreneur is an opportunity seeker. As observed by Albert Einstein “In the middle of every difficulty lies opportunity”. He perceives an opportunity and strives to translate the opportunity into an idea. Opportunities do not come suddenly. The entrepreneur must show alertness to grab opportunities when they come. The opportunities must be carefully scrutinized and evaluated. The process of identifying opportunity involves identifying the needs and wants of the customers, scanning the environment, understanding the competitor’s policy etc. 

To identify the right business opportunity, an entrepreneur needs to consider the following : 

• Identify Market Inefficiencies 
• Remove Key Hassles 
• Customers Desire to Experience Something New 
• Pick a Growing Sector/Industry 
• Product Differentiation 
• Cash Flow Considerations 
• Listen to your potential clients and past leads. When you're targeting potential customers listen to their needs, wants, challenges and frustrations with your industry. 
• Listen to your customers. 
• Look at your competitors. 
• Look at industry trends and insights. 

Step 2. Generation Of Business Idea: 

This is the most important function of an entrepreneur. 

The ideas that provide value for the customer, profit for the entrepreneur and benefit for society and can be transformed into products of services are called business ideas. Idea is generated through vision. Idea generation is a critical skill in entrepreneurship and involves insight, observation, experience, education, training etc. It involves lot of creativity on the part of entrepreneur and generally arises from an opportunity in the market. 

The various sources of information for business ideas can be personal experience, observing markets, prospective consumers, developments in other nations, government organizations and trade fairs & exhibitions. This can be done through environmental scanning and market survey. 

An entrepreneur is not someone with clever ideas but someone who has the ability to turn that idea into a real business. 

An entrepreneur conceives the idea of launching the project and program the structure of business. Converting a business idea into a commercial venture is at the heart entrepreneurship. The entrepreneur than undergoes detailed investigation of an idea. He analyse the idea to find out the feasibility whether the project is profitable of not. An entrepreneur must show the initiative to develop the idea and implement it in practical sense. 

Role of Innovation and Creativity: 

Innovation may be defined as exploiting new ideas leading to the creation of a new product, process or service. Innovation deals with coming up with creative idea and turning that idea into process. It may be defined as the process of doing new things or doing old things in new ways. Entrepreneurship is a source of innovation. 

Creativity means to come up with new ideas, concepts, process and products. In other words, it means the ability to bring something new in existence. 

Entrepreneurship process involves innovation and creativity. Entrepreneurs are innovators. They constantly develop new ideas, concepts and process to survive in a competitive business world. Entrepreneurship is an art of finding creative solutions to the problems. Innovation and creativity are essential for sustainable growth and economic development. 

Stages In Creativity Process 

In the nutshell we can say that, Ideas evolve through a creative process whereby a person with imagination germinates ideas, nurtures them and develops them successfully. 

Step 3. Feasibility Study: 

After the selection of a worthy idea, an entrepreneur undertakes various researches relating to market selection, competition, location, machinery and equipment’s, capital, customer preferences etc. to test the feasibility of the project. 

A feasibility study is an evaluation of a proposed project. It is the study of the project to find out whether the project is profitable or not. In other words, feasibility study involves an examination of the operations. Project has to be viable not only in technical terms but also in economic and commercial terms too. The objective of financial analysis is to ascertain whether the proposed project will be financially viable. 

Feasibility study is a detailed investigation of the proposed project to determine whether the project is financially, economically and technically viable or not. Feasibility Study contains the comprehensive, detailed information about the business structure, availability of resources and whether the business will run efficiently or not. 

Feasibility study is conducted in the following areas: 

1. Market/ commercial Feasibility: 

It involves study of market situation, current market, anticipated future market, competition, potential buyers, etc. 

2. Technical Feasibility: 

This study involves study of technological aspects related to the business, like location of the business, layout, infrastructure, plant and equipment, effluent treatment and discharge, foreign collaboration, transportation, resource availability etc. 

3. Financial Feasibility: 

Financial feasibility denotes the financial aspects of the business. This study helps to understand requirement of start-up capital, sources of capital, returns on investment, etc. It helps to assess the financial health of the business. 

4. Socio- economic Feasibility: 

This study is important to determine the extent to which the project is meeting its social economic objectives of development. It involves social cost-benefit analysis for testing national profitability. It helps to know the contribution of the project towards employment generation, income distribution, foreign exchange savings, development of backward regions, etc. 

 5. Preparation of Feasibility Report: 

Feasibility report is the final conclusion drawn about the business after conducting the feasibility study. The feasibility report includes the confirmation of the proposed project. It gives the detail about technical, economic and financial, environmental, socio-cultural and operational aspects of the project. 

It is a formal document prepared by the experts. It gives the information on the authenticity of the feasibility study. The feasibility report answer the question ‘the plan must be implemented or not’. 

The feasibility report contains information on: 

1. It helps him to determine the viability of the venture. 
2. It provides guidance to the entrepreneur in planning realistic goals. 
3. It helps to identify possible roadblocks. d. It is a pre-requisite to obtain finance. 

Step 4: Preparation Of A Business Plan: 

It this step an entrepreneur prepares a good business plan, the designs and creates the organisational structure for implementation of his plan. This plan is further used to achieve the realistic goals. A business plan, as defined by Entrepreneur, is a “written document describing the nature of the business, the sales and marketing strategy, and the financial background, and containing a projected profit and loss statement.” It serves as the blueprint for how you will operate your business. It is an effective means of defining your goals and the steps needed to reach them. 

Need and purpose of a business plan: 

A business plan spells out your purpose, vision and means of operation. It also serves as your company's resume, explaining your objectives to investors, partners, employees and vendors. It serves the following purposes: 

• Maintaining Business Focus. 
• Securing Outside Financing. 
• Understanding consumers and competitors. 
• Fuelling Ambitions and Mapping Growth. 
• Enlightening Executive Talent or to understand employee needs. 
• To assess feasibility of your venture. 

Contents Of A Business Plan: 

1. Executive Summary : 

Your executive summary should appear first in your business plan. It should summarize what you expect your business to accomplish. A good executive summary is compelling. It reveals the company’s mission statement, along with a short description of its products and services. It might also be a good idea to briefly explain why you’re starting your company and include details about your experience in the industry you’re entering. 

b. Company Description :

The next section that should appear in your business plan is a company description. It’s best to include key information about your business, your goals and the customers you plan to serve. Your company description should also discuss how your business will stand out from others in the industry and how the products and services you’re providing will be helpful to your target audience. 

c. Market Analysis :

Ideally, your market analysis will show that you know the ins and outs of the industry and the specific market you’re planning to enter. In that section, you’ll need to use data and statistics to talk about where the market has been, where it’s expected to go and how your company will fit into it. In addition, you’ll have to provide details about the consumers you’ll be marketing to, such as their income levels. Further information about markets, pricing systems, methods of distribution, sales forecast, etc. to be enclosed. 

d. Competitive Analysis :

A good business plan will present a clear comparison of your business to your direct and indirect competitors. You’ll need to show that you know their strengths and weaknesses and you know how your business will stack up. If there are any issues that could prevent you from jumping into the market, like high upfront costs, it’s best to say so. This information will go in your market analysis section. 

e. Description of Management and Organization :

Following your market analysis, your business plan will outline the way that your organization will be set up. You’ll introduce your company managers and summarize their skills and primary job responsibilities. If you want to, you can create a diagram that maps out your chain of command.Don’t forget to indicate whether your business will operate as a partnership, a sole proprietorship or a business with a different ownership structure. If you have a board of directors, you’ll need to identify the members. 

f. Breakdown of Your Products and Services :

If you didn’t incorporate enough facts about your products and services into your company description (since that section is meant to be an overview), it might be a good idea to include extra information about them in a separate section. Whoever’s reading this portion of your business plan should know exactly what you’re planning to create and sell, how long your products are supposed to last and how they’ll meet an existing need? It’s a good idea to mention your suppliers, too. If you know how much it’ll cost to make your products and how much money you’re hoping to bring in, those are great details to add. You’ll need to list anything related to patents and copyright concerns as well. 

g. Marketing Plan In your business plan: 

It’s important to describe how you intend to get your products and services in front of potential clients. That’s what marketing is all about. As you pinpoint the steps you’re going to take to promote your products, you’ll need to mention the budget you’ll need to implement your strategies. 

h. Sales Strategy :

In this section of business plan, one needs to decide, How will you sell the products you’re building? That’s the most important question you’ll answer when you discuss your sales strategy. It’s best to be as specific as possible. It’s a good idea to throw in the number of sales reps you’re planning to hire and how you’ll go about finding them and bringing them on board. You can also include sales targets. 

i. Manufacturing and Operational Plan :

In your business plan, the operations plan section describes the physical necessities of your business' operation, such as your physical location, facilities, and equipment. Depending on what kind of business you'll be operating, it may also include information about inventory requirements, suppliers, and a description of the manufacturing process. An operations plan is helpful for investors, but it's also helpful for you and employees because it pushes you to think about tactics and deadlines. 

j. Financial Projections :

In the final section of your business plan, you’ll reveal the financial goals and expectations that you’ve set based on market research. You’ll report your anticipated revenue for the first 12 months and your annual projected earnings for the second, third, fourth and fifth years of business. The following schedules and statements to be included: Start up projections, income statement, cash flow statement, balance sheet and break even analysis. 

k. Appendices and Exhibits :

 In addition to the sections outlined above, at the end of your business plan, include any additional information that will help establish the credibility of your business idea, such as marketing studies, photographs of your product, permits, intellectual property rights such as a patent, credit histories, resumes, marketing materials, and/or contracts or other legal agreements pertinent to your business. 

Step 5: Launching the enterprise and managing the business:

At this step the entrepreneur fulfill some legal formalities. He hunts for suitable location, design the premises and install machinery. All the statutory formalities are to be met. 

1. Acquiring license. 
2. Permission from local authorities. 
3. Approvals from banks and financial institution. 
4. Registration etc. 

Once the project is set up, the entrepreneur must try to achieve the target of a business plan. 

This involves setting up of an appropriate business process. Only proper management can ensure achievement of goals. The entrepreneur must be capable of turning his ideas into reality. He should also have the foresight to anticipate changes to avail of opportunities and meeting threats likely to arise in the near future. 

4. Problems in setting up of a business 

The factors that affect the growth of business are explained below in detail: 

1. Lack of legal knowledge: 

The entrepreneur should have adequate legal knowledge to handle legal affairs efficiently. Lack of legal knowledge on the part of entrepreneurs may affect smooth conduct of business. He should have knowledge regarding Factories Act, Wages & Salaries Act, and Workers Compensation Act etc. 

2. Lack of experience: 

An entrepreneur should have enough experience to manage the business efficiently. Lack of adequate experience may create major problems and adversely affect the experience. The major hurdles that the new entrepreneurs face are the availability of resources to carry out such a business. The most important is the allocation of funds that comes in the form of money to research and development. 

3. Lack of finance: 

Finance is the life blood of every business. To start up a new venture requires adequate capital. It is required to meet business expenses like purchase of raw material, payment of wages and salaries; payment of interest on loans etc. Lack of finance can create hurdles in setting up of a business unit. 

4. Lack of technology: 

Technology is never constant, it keeps on changing. Sophisticated technology helps in increasing the production capacity and quality of the products. Lack of suitable technology can hamper the reputation of the firm. Adoption of suitable technology can prove beneficial to the business success and vice versa. 

5. Problem of human resource: 

Organisation is made up of people and people make an organisation. A firm requires skilled, qualified and talented employees. Lack of competent staff is another major issue for a business unit. 

6. Problem of data: 

Entrepreneurship is based on research work. The Entrepreneur need to conduct a survey for gathering information regarding market condition, competition, technology, consumer etc. the data collected may not be accurate and precise. At times it is incorrect and outdated. This hampers the survival of a business. 

7. Problem of marketing: 

The Entrepreneur should have marketing knowledge. This helps to face cut-throat competition in all sectors. Lack of marketing efforts and knowledge with respect to product, pricing, distribution and promotion hampers the Entrepreneurial growth. Prepared by: Anu Priya Arora Department of commerce

5. Formulation Of Project Report 

A project is a temporary, unique and realistic business idea which is converted into a feasible and achievable plan. It is time-bound to achieve a set of prespecified objectives. Risk and uncertainty are the integral part of a project. All projects have to pass through different phases in its lifespan. These phases are broadly classified as conception phase, definition phase, planning and organising phase, implementation phase and clean-up phase. 

Project report is an important document that describes the basic blueprint of the project. It summarises the variety of activities to be undertaken during the course of action.This report helps in effective decision making and procuring funds from the market. The project report contains all relevant information required for the business idea evaluation and project appraisal. Thus, preparation of project report is of a great significance for the entrepreneur. It essentially serves two crucial purposes. 

1. As a clear road map describing the direction of enterprise 
2. To attract the potential lenders and investors 

The Planning Commission of India duly provides guidelines for the preparation of the project report. The project report broadly covers the following aspects of the proposed project:

5.1 Content of Project Report 

1. General Information: 

The project report must contain a brief analysis of the industry it belongs to. It should also contain details related to the type of proposed entity, its size, company profile, product/service profile, constitution of the company etc. 

2. Product Profile: 

This section talks about the basic specification and features of the product. It should contain the product details like name of product/service, type of product/service, variants available, a brief description of the product/service etc. 

3. Promoter Profile: 

It contains the promoters’ details like their name, age, educational qualification, address, contact details etc. 

4. Project Description: 

The project report must contain a brief yet complete profile of the project the entrepreneur intends to work on. It includes a brief feasibility report, a brief description of technology/process selected for the project, capacity of the project, intended level of production to be attained etc.

5. Location of Unit: 

The project should contain details like exact location of the unit,whether the property is leased or self-owned and locational advantage. 

6. Market Survey: 

This section of the project report talks about the finding of the market survey conducted by the promoters to analyse the response of the targeted customer group towards the product/service intended to be introduced. 

7. Funds requirement: 

The project report must contain details of the funds required. It includes quantum and type of funds required like working capital, fixed capital, sources of funding identified etc. 

8. Other operational requirements: 

This section of the project report contains all other aspects which have not been covered in the previous heads viz. raw material cost, requirement of human resources and other operational costs.

6. Legal Compliances For Setting Up A New Business 

The legal compliances that are supposed to be adhered to, depend on the form of organisation which has been opted by the entrepreneur. Each form of organisation is governed by their respective Indian legal Acts. A brief discussion of such legal compliances is given below. 

1 Obtain Registration 

The sole proprietorship does not have too many legal formalities. MSMEs usually choose to register with local/district industries centre for obtaining various facilities and incentives. In case there is more than one person involved, one can opt for setting up a partnership firm. In these firms, partners’ personal assets are also held responsible as their liabilities are unlimited. So, it might be risky. However, partnership firms are governed by the Indian Partnership Act, 1932 and the partnership deed which contains terms and conditions of the partnership contract. 

Often, the requirement of huge capital and managerial aspects can make it convenient to setup a Limited Liability Partnership (LLP) or a joint stock company, as applicable. The LLPs are governed under the Limited Liability Partnership act, 2008 whereas companies are registered with the Registrar of the Company (RoC) and the cooperative entities are registered with the registrar of cooperatives. In India companies are governed by the Companies Act 2013. 

However, irrespective of form of the enterprise chosen, a number of clearances and approvals are required from concerned authorities.

2 Application Formalities 

An application is a prescribed format for registration of an enterprise in which all the required details have to be duly filled and submitted along with the following documents: 

1. A copy of provisional registration certificate (PRC) 
2. A detailed project report 
3. Certified copies in support of educational qualification, experience, and other information as applicable to various forms of entity 
4. Applicable earnest money deposit

3. Registration of MSMEs (UAM) 

Udyog Aadhaar Memorandum (UAM) is a one-page registration form which constitutes a self-declaration format under which the MSME will self-certify its existence, bank account details, promoter/owner’s Aadhaar card details and other minimum information required. There is no fee for filling the Udyog Aadhaar Memorandum. Once the UAM is submitted, Udyog Aadhaar Number (UAN) is sent through e-mail. 

It is a simplified government registration forum that provides a unique number along with a recognition certificateto certify small/medium business. 

Udyog Aadhaar Registration Process 

1. Visit the official website: Udyog Aadhaar Registration portal (http:// www.udyamregistration.gov.in) 
2. Enter your personal Information It requires the 12 digit Aadhaar number along with your name and click on, “validate and generate OTP.” You will receive the OTP on your registered mobile number. Enter the OTP on the portal and select social category you belongs to. 
3. Fill details about the enterprise 
4. Fill the correspondence details 
5. Fill the carry-forward information 
6. Fill the bank details 
7. Opt for the classification of you enterprise from being a service entity of manufacturing entity
8. Details of total investment 
9. Select the District Industry Centre and accept the declaration

Documents Required for UAM Registration 

• Name and Aadhaar number of the business owner (as mentioned in the Aadhaar card) 
• Document required as proof for SC, ST and OBC social category 
• Name of your organisation or enterprise 
• Previous registration details of your enterprise 
• Type of organisation that you own 
• Current address and account details 
• NIC Code or National Industrial Classification Code 
• The total number of workers employed at your organisation 
• Current activities of your firm 
• Email ID and mobile number of the entrepreneur 
• PAN number and the total investment made in the organisation by the entrepreneur