FORMALITIES FOR SETTING UP OF A SMALL

BUSINESS ENTERPRISE

By
Prof. N. N. Panda
GIACR Engg. College, RAYAGADA
The formalities for setting up of a small business
enterprise is given in the figure given below –

1. Selection of a Project
In order to set up of a small scale industry, a
suitable project has to be decided upon. This
involves selecting a product or service, and a
location for the unit. Based on these selections,
a project feasibility study has to be made and
then a brief profile has to be prepared for the
proposed project.
Project selection is the initial decision which an
entrepreneur has to make. Project selection and
preliminary activities involves the followings –

a. Product or Service Selection

b. Location Selection
c. Project Feasibility Study
d. Business Plan Preparation
e. Prepare Project Profile
a. Product or Service Selection

The entrepreneur has to decide on a suitable product or a

service based on which a project can be started. He has
to consider various factors before deciding on a suitable
project. The main factors are as follows –
--Background and experience of the entrepreneur(s).
--Availability of technology and know-how for the project.
--Marketability of the product/service.
--Investment capacity.
--Availability of raw materials.
--Availability of plant and machinery.
--Availability of sufficient infrastructure.
Make a careful analysis of the product or service you are
choosing. A good entrepreneur always examines the pros
and cons before setting up a business. There are many
organizations which are in possession of information on
business opportunities. You can contact these organizations
to get idea about a product/service.
--District Industry Centre
--Technical Consultancy Organizations
--Centres for Entrepreneurship Development
--Small Industry Service Institutes
--National Industrial Development Corporations
--Small Industries Development Bank of India
--Commissioner of Cottage Industries
--Entrepreneurship Development Institute of India
b. Location Selection

One of the major decisions an entrepreneur has to make

is about the location of the project-where to set, the unit.
Some of the major aspects to be considered before
deciding on the location of the project are
--Proximity to market
--Availability of raw materials
--Availability of transportation and communication
facilities
--Availability of incentives
--Government policy
--Availability of infrastructure
 General Points Industrial Position
Location Land availability and price
Nearest large city Source of water supply, quality and
Connection to nearest major cities distance
Distance from the other markets Power supply
Composition of industrial development Effluent treatment and disposal
Distance from major raw material Approach road/internal roads and street
sources lighting
Availability of manpower Bank Facility
Law and order situation in the area Typing / photocopying
Facility of electrification and fabrication
Painting and gas supply
Warehousing facility
Postal, telegram and communication
facility
Financial Position Social Position
Investment subsidy Housing
Income tax concessions Education
Sales tax exemptions Health
Promoters’ contributions
Other tax concessions
c. Project Feasibility Study
The important facets of a project feasibility
study are as follows.
--Market analysis
--Technical analysis
--Financial analysis
--Economic analysis
--Ecological analysis
d. Business Plan Preparation
A business plan is a document where you plan
your business to have an organized and effective
response to a situation which may arise in
future. Business plan is not just for a start-up
company but also for those which are growing.
It can be used to establish realistic goals or
targets to achieve and determine current
position.
A good business plan contains the following –
--Determines where the company needs to go
--Forewarns of possible roadblocks along the way
--Formulates responses to contingencies
--Keeps the business in track to reach its planned goals

While making a business plan keep the following things

in mind.
--Keep target audience in view
--Strategy-core of a business plan
--Think competitively throughout
--Be realistic
--Involve people
--Factual and succinct
e. Project Profile – A project profile gives a
bird’s-eye view of the proposed project. This
may used for obtaining the Provisional
Registration Certificate(PRC) from the District
Industries Centre and for making, applying for
Industrial Areas Development Board for land or
State Small Industries Development
Corporation(SSIDC).
2. Decide on the Constitution – Many first time
entrepreneurs do not have a clear perspective of
the issues, legal or otherwise, involved in
choosing one or the other form of business. This
often results unavoidable mistakes, which later
cost time and money to rectify. In India setting
up a private limited company is most popular
choice among entrepreneurs.
To start an industry, the promoters have to
decide on the constitution of the unit. The
following are the various alternatives.
---Sole proprietorship
---Partnership
---Company
---Cooperative
3. Registration
Obtain SSI Registration – Small scale and ancillary
units that is undertakings with investment in plant
and machinery of less than Rs. 1 crore should seek
registration with the Director of Industries of the
concerned State Government. Entrepreneurs
desiring to start a small scale industry have to
initially obtain a Provisional Registration Certificate.
Once the unit goes into production, the PRC has to
be converted into a Permanent Registration
Certificate.
Provisional Registration Certificate – It is the initial
registration for starting a small scale industry. It
enables the entrepreneur to initiate necessary steps
to bring the unit into existence. A PRC is necessary
for applying for infrastructure facilities, finance, and
so on.

The PRC will be normally issued immediately, across

the table on submission of the application. The
initial validity of the PRC is for two years and it can
be renewed subsequently, if needed.
Permanent Registration Certificate (PMT) – An
SSI unit can get PMT when it goes into
commercial production. In the initial stages it
would have obtained a PRC and it would be
converted to PMT when the unit goes into
production. The PMT registration will help SSI
units in several ways, listed below.
--To apply for scarce raw materials
--To get working capital from backs and financial
institutions
--To obtain central excise duty concessions, etc
De-registration
A small-scale unit can violate the regulation in
the following ways which will make it liable for
de-registration.
---It crosses the investment limits
---It starts manufacturing a new item or items
that require an industrial license or other kind of
statutory license.
---It does not satisfy the condition of being
owned, controlled, or being a subsidiary of any
other industrial undertaking
4. Clearance from Specific Departments
Several clearances are required from different
authorities depending on the type of industry
and the location of the unit.
The following are the specific clearances usually
required depending upon the types of units
---Agricultural land conversion
---Urban and ceiling clearance
---Building plan approval
---Factories Act
---Trade license
---Pollution Control Board clearances
---Sales tax registration
---Central excise registration
---Bureau of Indian Standards (BIS) certificate
---Fruit Products Order (FPO) license
---Food Adulteration Act license
---Power loom registration
---Electronics industries registration
---Drugs and cosmetics
---Approvals of hotels
---100% export-oriented unit
5. Arrange for Land/Shed
For any industrial project, a suitable industrial
site or a ready industrial shed is required. The
promoters of the units could consider taking an
industrial site and constructing a shed as per
their requirements. Alternatively, they could
consider taking a ready industrial shed on or on
ownership basis.
Industrial Land
Once the location of the unit is decided, the land for
the project could be conveniently taken from the
State Industrial Areas Development Board. However,
private land could also be purchased, but it has to be
converted for industrial purpose and other necessary
legal/formalities will have to be completed.

Industrial Shed
For setting up an SSI unit, the promoters could
consider using a ready industrial shed. This could be
on rent or on ownership basis. Rental sheds have to
be arranged from private owners.
6. Arrange for Plant & Machinery
The plant and machinery required for the
project could be purchased from recognized
manufactures/dealers. The plant and machinery
could also be taken on a hire purchase scheme
operated by the National Small Industries
Corporation (NSIC).
The entrepreneur has to select and buy the required
plant and machinery from recognized and approved
manufacturers or dealers. Banks and State Financial
Corporations maintain a list of approved machinery
suppliers. The entrepreneur is advised to refer to
such list before deciding on the supplier.

The entrepreneur should compare the quality,

performance, and service terms, price, and other
details of the alternate plant and machinery that may
be available in the market. Detailed quotations
should be taken for preparing the project and also for
submission to SFC along with the loan application.
7. Arrange for Infrastructure

The main infrastructure facilities required for a

SSI unit are land or shed for the project, power
connection, water supply, and telephone facility.

Single Window Agencies (SWAs) are set up at

district level for the benefit of small scale
industries.
The assistance given by the SWA is as follows.
--Grant of land in industrial areas and allotment of
sheds in the industrial estates for all tiny and small
scale units
--Grant of power up to the limit prescribed by the
State government
--To review and recommend sanction of term loans
and working capital loans by SFC and commercial
banks within the district
--Grant and disbursement of all incentives
--General review the position regarding problems
faced by entrepreneurs within the district
After deciding the location and site, three
important factors have to be kept in mind before
purchasing/leasing the land.
a. Availability of basic amenities like power,
water
b. Connectivity to nearest rail, or port
c. Price of the land
8. Prepare Project Report
The project report is a document created through
systematic recording of all the details about a
project, with an analysis and validation of
data/information. This is the most important
document of any project. The project report must
imbibe the following characteristics.

--Standard format
--Completeness of data
--Proper definitions of assumptions
--Imparting of data/information from reliable
sources
--Emphasis on the main objectives of the project
--Scientific analysis of the data
--Preservation of confidential data/information
--Effective presentations
--Cost effectiveness
--Timeliness
Before preparing a project report, some homework
on the following points is very necessary.
--Idea about the new task
--Promoter’s bio-data
--Organization chart
--Process chart
--Technical details
--Manpower requirements
--Availability of raw materials
--Technical collaborations
--Other financial details
Contents of a Project Report
--Executive Summary
--Company details
--Operational details
--Project details
--Project cost
--Means of finance
--Project status
--Profitability and risk analysis
--Company vis-à-vis related industry
--Employment generation
--Conclusion
--Annexure
9. Apply and Obtain Finance
There are various sources of funds. They are as
follows
--Share Capital
--Internal accruals
--Deposits – own/public
--Debentures
--Short-term borrowings
--Long term loans
--Bridge Loans
--Working capital loans like cash credit
Arranging Finance
To start and set up business, all SSI units need
monetary support. Before seeking funds, estimate the
cost including that of working capital required for
minimum of six to eight months and always keep a
provision for buffer. Financial assistance in India for SSI
units is available from a variety of institutions. The
important ones are as follows.
--Small Industries Development Bank of India
--State Financial Corporations
--National Small Industry Corporation
--Commercial/Cooperative Banks
--District Industry Centre
--All India financial institutions such as IDBI, IFCI and ICICI
10. Implement the Project & Obtain Final
Clearances
The entrepreneurs will have to take necessary
steps to physically implement the project after
obtaining the various licenses, clearances,
infrastructure facilities and so on. The following
are the major activities that the entrepreneurs
have to undertake for implementing the project.
Construct Shed – If the entrepreneurs have
taken a readymade shed from the State Small
Industries Development Corporation or have
made arrangements for rental shed/premises,
then they need not go through this step.
However, if they have obtained land in an
industrial estate or have made arrangements for
vacant land privately, then they have to take
steps to construct the shed for their industry.
Order for Machinery –Entrepreneurs should take
steps to order the necessary machinery,
equipments and so on, through dealers or make
arrangements to get them on hire purchase through
NSIC or any other suitable organization.

Recruit Personnel – Depending upon the size of the

industry and type of product, the entrepreneurs will
have to hire different types of personnel for the
industry. Certain managerial and technical
personnel may be required in the initial stage of the
project.
Arrange for Raw Materials – Entrepreneurs should
plan for required raw materials as soon as they
proceed to implement the project. During the
implementation of the project, they should finalize
the source of raw materials and quality and quantity
requirements for the project.

Marketing – Entrepreneurs would have already put

thought to the market for their project and the
marketing plan that they desire to take up for the
products. They have to undertake the necessary
groundwork of contacting prospective customers and
preparing necessary plans for marketing.
Erection and Commissioning – Once the building
is ready and the necessary plant and machinery
arrived, the entrepreneur have to take steps to
erect the machinery in a proper plan.
Sometimes sophisticated machinery is supplied
along with the service of erection. In such cases,
the erection and commissioning will be
undertaken and completed by the machinery
suppliers.
Obtain Final Clearances – Entrepreneurs are
required to take several final clearances when
the unit is ready for commissioning or as soon as
it goes into production. Accordingly,
entrepreneurs are advised to refer to the various
preliminary clearances they have obtained from
different departments/organizations and take
necessary steps to obtain final clearances.