Possible business structure for start-ups
A startup is not just about the right idea & having the courage to execute it. Well, yes that is the major part, but there are also many legal formalities that need to be taken care of. A business enterprise can be owned and organised in many forms.
Several inter-related and inter-dependent factors are to be considered while decided upon a business structure:
- The nature of business whether it’s one which involves providing direct services or requires pooling in of skills and funds.
- Scale of operation or the volume of business, size of market.
- The degree of control and privacy desired by the owner or founder.
- The capital and financial requirements.
- The amount of risks and liabilities involved and willingness of owner to bear them.
The structure of your business is critical, as it decides the rights and obligations of the founder, tax implications, benefits and other regulatory procedures in accordance with the law. Every business has different needs and goals and so does the type of registrations required. The form of business entity has many more implications that no-one would normally think. Generally entrepreneurs depend on agents or lawyers to get the registration and other legal necessities done, but one must always be aware of what’s going on.
The following are the types of business entities:
- Sole Proprietorship: It is a one-man organisation, where a single individual owns, manages and controls the business. Doing business as sole proprietorship requires no registration with the government, though you might require some business licenses, which depend on the kind of activity you are involved in. An owner is personally responsible for the debts and obligations of the business. The company has no legal existence separate from its owner. This form of organisation is suitable for businesses which involve moderate level of risk, small financial resources and capital investment.
- General Partnership: in general partnership, the partners collectively own the assets of the partnership and are each individually liable for the debts and liabilities of the partnership without any limit. Thus each partner is liable for the acts, pertaining to the partnership, of all other partners, this in turn means that all their personal assets are at risk. Partners are taxed individually on their shares. It is an appropriate form of ownership for medium sized business involving limited capital.
- Limited Partnership: It is a partnership that consists of one or more ‘general partners’ and ‘limited partners’. General partners actively manage the company, while the limited partners are passive investors. An LP has the protection of a registered company, where one partner is not liable for other partner’s negligent acts, and also the freedom of partnership. The general partners are comparatively more liable than the limited partners.
- Co-operatives: It is a voluntary organisation of ten or more members, the aim being to promote the welfare of all its members. Any member is free to leave the society and withdraw his capital at any time, after giving notice. The liability of every member is limited to the extent of his capital contributions.
- Private Limited Company: As provided under the Indian Companies Act, 1956, is a voluntary association where you may have 2-50 shareholders. Each having limited liability and the transfer of shares is limited to its members and cannot be offered to the public. A private company’s disclosure requirements are lighter; therefore its shares may not be offered to the general public and cannot be traded on a public stock exchange. It’s relatively less cumbersome to organise and operate it as it has been exempted from many regulations and restrictions to which a public limited company is subjected to. It is preferred by those who wish to keep control over the business within a limited group and maintain the privacy of their business.
- Public Limited Company: It is a limited liability company whose shares are freely sold and traded to the public, with a minimum share capital. It must have a minimum of seven members but there is no limit as regards the maximum number. The liability of a member of company is limited to the face value of the shares he owns.
- Public Sector Unit (PSU):A PSU may be a public limited company listed on stock exchange with major ownership by a state government or central government of India. Not really an option for most of the start-ups.
- Family business: Here the business is managed by the family members and is passed on generation to generation. It has existence only in some parts of India. All members of a Hindu undivided family do business jointly under the control of the head of the family, known as the ‘karta’. It comes into existence by the operation of the Hindu law, and the rights and liabilities are determined by the general rules of Hindu law.
You might like to hire legal help, to decide the best structure for your business. There are many ways to do a thing right, just choose one that you think is the best and then work out the defects. Each form has its own set of merits and demerits.