So, you have this great idea. You have waited for a while to get some validation, gathered courage and finally, you have decided to take the plunge. You have either figured out who your co-founders are going to be, or you have decided that you are going to be a micropreneur and handle everything yourself.
Now what? Quit whatever you are doing and jump headlong into developing the product/service and then start marketing it? Wrong!
|Bomb Squad, Courtesy Reuters.|
Because a business is an inherently risky endeavor (stats put the failure rate at about 80%) that can potentially make you bankrupt. At the same time, one should also account for the best possible outcome (becoming the next Google/Amazon or whatever is your role model), in which case you will need a structured organization to get investors on board or issue equity. Separating your business as another legal entity is how you do this. A registered company is also a great credibility enhancer for your customers, creditors and investors.
Running the business as a sole proprietorship or a partnership firm lets you skip the formalities,time and money involved in getting your business incorporated. But this saving can prove very expensive in most of the cases.
Once you have decided to that you are going to create a separate legal identity for your startup, the first thing that you need to decide is whether it is going to be Private Limited Company (Pvt. Ltd) or a Public Limited Company.
For most startups, Private Limited is the way to go, as it necessitates fewer statutory compliances, and yet offers limited liability by separating the business as an individual legal entity. Maintenance cost is also far less than a public limited company. You can always convert to a Public Limited Company as and when the company grows to a size that warrants going public and raising funds.
Since 2009, another option has become available to small companies and startups, that of an LLP ( Limited Liability Partnership). An LLP can be described as hybrid between a company and a partnership, as it has elements of both a corporate firm and partnership firm.
Each business and management team has its own set of unique requirements and constraints and the solution suitable to one business may not apply to another. Thus, one has to carefully consider the following aspects before choosing from the aforementioned three options.
1) Extent of protection needed from legal liability.
2) Tax implications.
3) Cost of formation and annual expenditure.
4) Record keeping and compliance requirements.
5) Flexibility in management, change of ownership and acquiring funds.
6) Future needs.
7) Impact on credibility.
8) Need for disbursing equity to founders or ESOPs for employees.
It is natural that your current focus is on your grand idea and that you do not want to get into the nitty gritty of creating a legal identity for your business. Hiring a professional or a firm to do this for you is an obvious next step, but make sure that they have worked with similar startups before, and understand the unique needs of a startup.
Watch this space for more articles on best practices for startups.