CashCow Chapter 4.4 – Setting up a Business Entity

Now you have a fair idea about choosing between a side hustle or side business and the mindset it requires

You can start with a side hustle or a side business based on your availability of time and money that you can risk. Both hustle or business will have to be managed along with your regular job.

You should remember that even if you have started offering your skills as a side hustle eventually you will need to scale up in the coming days to a point where your hustle will be converted into a side business.

Once your side hustle business starts generating regular revenues, you would need to think about a business setup for income tax purposes.

You can take the advantage of all the means that the government has provided legally and ethically to save taxes, i.e you need to get prepared, plan and optimize for taxes.

For example, you can show payments made to writers and freelancers as expenses and deduct them from your income which will reduce your tax liability.

Other expenses that you can deduct are domain expenses, hosting renewal costs, laptop/PC cost and tool costs that you use in running your online business.

You need not worry about forming a legal entity from day one. Just start your side hustle and use your savings account for expenses and receipts.

When your hustle starts generating a regular stream of cash flows then you need to think about creating an entity.

You can run your business as

  • Proprietorship
  • Partnership firm
  • Private Limited or LLP

#1. Proprietorship

If you are a sole owner, then you can run your side business or hustle as a sole proprietorship and there is no registration required. You can give any name to your business and can start a website.

You can use your home address as your business address and the income from your sole proprietorship business would be added to your personal income under the head “Income from business” for tax purposes.

You will be solely responsible for all the profit and losses from the hustle/ business and are free to deduct business expenses like travel and food. 

You are also allowed to adjust for business losses in future business profits if you make it in the initial phase.

You will have to pay income tax using your personal PAN number at the end of the financial year.

Here you can take advantage of the presumptive taxation clause, that exempts small businesses from maintaining books or records and treat a certain percentage of your gross receipts as income.

Under Presumptive taxation, if your sole proprietorship is

Professional – then 50% of your revenue are treated as expenses and you need to pay taxes on the rest 50% of the revenue

For Business – 8% (6% for the digital transaction) of the gross receipts are treated as income and you need to pay taxes on that income.

For example, if your revenue from your affiliate business is Rs. 50 Lakhs and all your dealings are through digital means then 6% of it (i.e. Rs. 3 Lakh) will be your taxable income from the business on which you need to pay taxes.

Or you can take the long route of maintaining a book of accounts, deducting expenses and then computing profits which will be a tedious task.

As a proprietor, you need to club your business income with your salary and other income, if any, and then pay taxes as per the income tax slab rates.

HUF Account for Business

If you do not want to club your business income with your salary income then you can form a Hindu Undivided Family (HUF) account.

As per the Income-tax Act, HUF is treated as a separate entity having its own PAN number and a bank account.

All the revenues and the expenses from a side hustle or side business like from blog, affiliate marketing or online stores can be considered under the HUF account.

For example, you can show your salary of Rs. 10 Lakh under your personal account and Rs. 5 Lakh from affiliate marketing under the HUF account. This way you can claim deductions and pay taxes on both accounts independently.

The presumptive taxation scheme is also applicable to HUF. Where you are relieved from maintaining the book of accounts. 

You can directly treat 8% (6% for the digital transaction) of the gross side business receipts as the HUF income and then pay tax on it.

But, the HUF route is only available to Hindu, Sikh and Jain families residing in India.

#2. Partnership Firm

Doing business under the partnership is helpful when the other partner brings in a complementary skill set that can be combined with your existing skills to run the business.

For example, suppose you have marketing skills but do not have writing skills then you can form a partnership with a person who has writing skills. 

Both of you can jointly run a blog or a content marketing agency business in partnership.

You can still take advantage of presumptive taxation even when running the business under a partnership firm.

For example, if the revenue figure is Rs. 50 Lakhs and your taxable income are Rs. 3 Lakhs then you need to pay 30% tax. Here, the tax rate is flat and there are no income tax slabs.

On the other hand, you can maintain books of accounts as a regular business, account for expenses, compute profits and then share profits with your partner.

The profits shared will be treated as your income and will be clubbed with your salary and other income, (if any) and will be taxed according to income tax slab rates.

#3. Private Limited or LLP

You should think of incorporating a private limited company or LLP only when your online business has grown large enough with revenues in crores and you have more people working for you.

But do not think of this option at the beginning, as it is easier to operate under the above two options.

The moment you form a company, you have to comply with various statutory obligations under the Companies Act 2013 which will create an extra headache for you.

Your Options

Looking at all the entity types that you can form for your side hustle/ business you can choose anyone out of the four options available that suits your business needs.

Business Setup options grid

If your business operations are such that your expenses are more and your income is less than what is calculated as per the presumptive taxation scheme then you can maintain books of accounts and then compute your taxes accordingly. But that will be a rare scenario.

But if your side business is generating good revenues, then you can opt for a presumptive taxation scheme whether you are operating as a proprietor or as a partnership firm.

Now you are ready to set up your side business and earn money.

Next, we will start the last module of the “CashCow Course” i.e Tax saving.

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