Crafting Your Dream from the Ground Up
The current state of the Indian startup ecosystem is a matter of intense speculation and interest. Once a thriving hub for VCs and serial investors, it has faced recent challenges. Despite this, it remains vibrant with investors exercising more caution due to the global economic slowdown and constant geo-political tensions. While exercising caution, investors are looking for the next big innovation.
If you are one of those bright minds knocking on the doors of VCs and struggling to bootstrap to give wings to your idea, there’s something you need to start with before putting your foot out. Let us dive into this dynamic ecosystem, and help you get an idea of legal structures available for your startup. Though it might seem like bookkeeping— it’s about laying a strong foundation for your business’s future.
Sole Proprietorship: The One-Man Army
Most entrepreneurs start their journey by managing everything – from front desk operations to making highlevel executive decisions. If you are one among them, then you want to start small and simple. A sole proprietorship is something you should consider, especially if you wish to deal with minimal regulatory hiccups.
- Minimal Regulatory Hiccups – No formal registration of the company is required.
- Personal Assets Liability – Your assets are at risk if the business fails.
- GST Registration – Only required if your turnover exceeds Rs 20Lakh
A sole proprietorship is an unincorporated business, and the proprietor pays personal income tax on the profits earned.
Partnership: Teaming Up for Success
Maybe you and your college mate might have shared an exciting idea in the past. Now given that you both are settled in life and see the great commercial potential of your idea, you might want to turn it into an exciting value added product. This calls for partnership. A partnership company is the best way to share responsibilities and leverage individual skill sets. The “Partnership” structure paves the way for resources, talent, and other variables to be pooled into the company, giving it the much-needed initial push. Setting up a partnership involves:
- Partnership Deed – A partnership deed should be drafted in advance that defines roles, profit-sharing, and dispute-resolution mechanisms
- Registration – Approach Registrar of Firms and apply for registration
- Obtaining GST and PAN – Obtain GST and PAN Card numbers on the name of the company. These are essential for legal and taxation purposes.
Limited Liability Partnership (LLP): Best of Both Worlds
Treading can be quite tricky, especially when it comes to regulatory and legal compliance. And no entrepreneur would want to spend weeks and months leaving his business away, trying to resolve compliance issues. Parallelly, risking personal assets comes with a heavy emotional tag. A limited Liability Partnership (LLP) structure comes with the flexibility of a partnership and the benefit of limited liability protection.
- Obtain DIN and DSC – Obtaining Director Number and Digital Signature Certificate is mandatory
- Reserve LLP Name – You need to reserve a unique name for your company
- Documents – File all the necessary incorporation documents
For small businesses that need a formal legal structure without being burdened by extended compliance, LLP is a perfect choice.
Private Limited Company: Attracting Investors
For entrepreneurs, sharing the podium with other unicorn startups is a dream come true. Often innovative and disruptive products require business structures that support rapid scaling and attract significant investment. Likewise, certain business structure offers distinct advantages if the business is prioritising rapid expansion and growth.
Entrepreneurs looking to attract and seek investment from investors, especially from venture capitalists, should opt for the Private Limited Company legal structure. Why Private Limited Company Structure?
- Greater Credibility – often the most preferred legal structure by VCs and investors
- Limited Liability – protects personal assets
- Raising funds – makes it much easier to infuse funds into the startup What about registration?
- Obtain DIN and DSC – Mandatory for the directors of the startup
- Name registration – A new and unique company name must be chosen
- Incorporation – File all the necessary incorporation documents
Private Limited involves a more complex setup with high compliance costs. But these turn out to be small prices to pay that bring benefits of scalability and investor confidence.
Public Limited Company: Going Big
For those with grand visions of raising capital from the public, a public limited company is the way to go. This structure not only allows you to raise funds via public offering (IPO – Initial Public Offering) but also brings enhanced credibility and limited liability. The flip side? Stringent compliance requirements, constant surveillance by the financial watchdog, and compliance-related costs. Follow the same initial steps as a private limited company but prepare for additional SEBI approvals while going for an IPO.
Public Limited Company: Going Big
An OPC is a unique blend of sole proprietorship and private limited company, tailored for solo entrepreneurs seeking to seek limited liability protection. This structure is ideal for small businesses where the founder wants to retain full control without the complexities of a traditional company setup. To establish an OPC, obtain DSC and DIN, reserve your name, and file incorporation documents. GST registration follows if applicable.
Choosing the Right Path: Key Considerations
Your choice of legal structure should align with your business goals, risk tolerance, and compliance capabilities.
Here are some key considerations:
- Growth Ambitions: Private Limited and LLP if you aim for rapid expansion and external funding,
- Risk Management: LLP or Private Limited to protect personal assets
- Ease of Operation: Sole proprietorship or partnership for simplicity and minimal regulatory burden
- Fundraising Needs: Private Limited to attract investors
