How should you design your start up company

How should you design your start-up company?

India ranks amongst the Top 5 “start-up countries� in the world.

The Indian government's initiatives such us the 'Start up India, Stand up India' campaign as well as 'Make in India' are aimed to give momentum to the industry and encourage entrepreneurship.

On an average three to four start-ups are being set up in India every day.

Bangalore as the IT capital of India is home to a majority of these startups. It is ranked 15 globally amongst all cities for the number and quantum of investments being made in start-ups.

A question that is there in every entrepreneur's mind is how to design a start-up company?

How to legally structure the start-up is as important as is focusing on the business plan, product, customer acceptance, pricing and capital needs.

It is equally important to make an informed decision on the appropriate legal entity.

The key elements that strengthen the foundation of a start-up can also be critical in determining investment opportunities and the prospective investor base.

These could be – (a) Determining scalability of your business, (b) Attracting investments – domestic or offshore; (c) Regulatory issues and compliances.

One of the business objectives of the start-up will also be able to raise funds from time to time.

Given that funding is such a key aspect for many “young start-ups”, it is important to realize that at which point your start-up must move to a private company structure.

Time is an important factor for start-ups.

While it is possible to convert one legal entity/ structure into another, the process is usually time consuming and can be avoided, especially when you would rather focus and spend that time on business growth.

The legal entity you choose for your start-up today will save you time and money in the future.

Let us take a closer look at the options available to design the legal structure of your start-up

1. One person company (OPC) Role: One person acting as owner and director Ideal for: small businesses Legal and regulatory rules: Person setting up POC must be a citizen and resident of India Attracting investments from others: • Easier than sole proprietorships • Financial institutions may lend, on a case by case basis • Foreign investment is permitted • Security for any funds raised may require incurring personal liabilities

1. One person company (OPC)

Advantages:

Disadvantages: •

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Minimum regulatory requirements and compliances Must be a private company

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Cost of setting up OPC is higher as compared to sole proprietorship OR partnership firm Maximum paid-up capital INR 50 lacs Maximum turnover INR 2 crores

2. Sole proprietorship Role : One person ownership Ideal for : small businesses, consultancy, brokerage firms etc.

Legal and regulatory rules : • No initial minimum capital mandatory • Minimum compliances and disclosure Attracting investments from others: • Typically through friends and family and other informal channels • Foreign investments by NRIs/PIOs are permitted in most sectors – investments in such cases can be made on a non-repatriation basis only. Repatriation basis requires RBI approval.

2. Sole proprietorship Advantages:

Disadvantages:

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Minimum regulatory requirements and compliances Low cost of setting up

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Unlimited personal liabilities Scalability of business and getting funding are challenging Limited geographical outreach

3. Partnership firm Role: Two or more persons acting as partners of the firm.

Ideal for: Legal, Accounting, Consultancy etc.

Legal and regulatory rules: • No initial minimum capital mandatory • More than a sole proprietorship and OPC but lesser than a limited liability partnership (LLP) and a private company Attracting investments from others: Foreign investments by NRIs/PIOs are permitted in most sectors – investments in such cases can be made on a non-repatriation basis only.

Repatriation basis requires RBI approval.

3. Partnership firm Advantages: • Works well with several key members – rights and liabilities can be agreed on an individual basis.

• Low cost of setting up • Governed by a partnership deed entered into between all partners

Disadvantages: • Unlimited personal liability • Personal assets can be attached to repay any debts • Partner and Partnership firm are not separable from each other • Transfer of ownership is challenging

4. Limited Liability Partnership ( LLP) Role: Two or more persons acting as designated partners of the LLP Ideal for: Legal, accounting, Small scale media ventures, advertising Legal and regulatory rules: No initial minimum capital mandatory Attracting investments from others: • Foreign investments are permitted and are liberalized from time to time • Investor base is limited • Downstream investment is permitted only in sectors in which 100% FDI is permitted without any approvals or conditions

4. Limited Liability Partnership ( LLP) Advantages:

Disadvantages:

• Regulated but not as strictly as companies • Liability of partners limited to their capital contribution • 2 persons act as “designated partners” • Governed by a contract between the partners provides for the role, responsibilities, rights and liabilities

• Transfer of ownership is challenging • High cost of setting up when compared to OPC, Sole proprietorship and Partnership • Existing agreements have to be amended to reflect addition of any new designated partner

5. Private Company Role: • Founder is the promoter of the company • 2 or more members required at all times Ideal for: All types of businesses Legal and regulatory rules: Mandatory minimum initial capital contribution if Rs 1 lac • Legal, secretarial, accounting and audit costs on an ongoing basis • Attracting investments from others: Preferred entity for foreign investments • Downstream investment restrictions are very limited and overall limited restrictions • Investor base is maximum (second only to public/listed companies)

5. Private Company Advantages: • Well regulated – ease of doing business with third parties is higher • Memorandum and articles of association required • Depending on the sector, this is usually the best option

Disadvantages:

• Initial capital contribution of Rs 1 Lac may prove to be expensive for some start-ups • Highest cost of setting up when compared all above 4 options • Liabilities and penalties for noncompliance of on-going filings and disclosures within the filings.

• Compliances and compliance costs are high

Thank you