Once the hard part is done, i.e. developing the idea or product/services for a Startup and arranging enough financial resources to get it off the ground, the immediate step taken next by many is the registration or incorporation of a private limited Company, almost as a mental reflex-choice.
Arguably, the choice for an entity type to register/incorporate is the most crucial decision for the immediate survival and efficient administration of any Startup, yet the same is made without much thought or critical analysis. This is possibly because the benefits of ‘limited liability’ etc. of a Company model are commonly known, add to that the influence of known professionals as well as the Founder(s)’ own future aspirations and the relative ease and lower costs of registering such Company (which sometimes lulls one into a false sense of security), all together make the choice seem an easy one to make.
No one size fits all
There are many entity types to choose from with relative advantages and disadvantages in different circumstances, all of which are too many to list or discuss via this article. However, this article does not recommend nor dismiss a particular entity type for any Startup, as it is important to understand that such choice must be guided by many relevant factors as may be applicable to the concerned Startup and/or its Founder(s).
Some of these factors could potentially include the following –
- What works best (administration, operations, control, growth, access to funds etc.)
- Rights and interests of the Founder(s)
- Obligations/liabilities imposed by investors/creditors
- Taxation benefits and obligations
- Source/application of revenue/funds etc.
- Resource limitations
- Applicable laws
- Governmental Policy, Scheme etc.
Business and Profession – Corporate Entities
- Private Limited Company
- One Person Company (OPC)
- Joint Venture Company
- Small Company/MSME etc
- Partnership/Limited Liability Partnership (LLP)
- Private (Business/Commercial) Trust
- Registered Society/Co-operative Society
Non-Profit Organisations and NGOs
- Section 8 Company (Non-Profit)
- Public (Charitable) Trust
- Registered (Charitable) Society
Foreign and Associated Entities
- Foreign Company
- Indian Subsidiary/WOS
- Branch Office
- Liaison/Representative Office
- Project Office
Homework before using e-Service Providers
Company (and LLP) registration was not too long back a complex, expensive and lengthy process for the common man, but has now become quite the opposite. This has been achieved largely by the initiatives taken by the Ministry of Corporate Affairs (MCA) administration through use of the e-medium (e-SPICe Forms for application and MCA e-portal for e-filing of the documents etc.) for such registration purposes, as well as the growing list of e-Service providers (many of which are also Startups) who act as agents for such processes, with varying degrees of warranty, efficiency and success.
e-Service providers are volume driven service-businesses and most either do not have the professional expertise to advice a Startup on the appropriate entity choice before registering the same or do not make such services available. Therefore, despite such use of technology and benefits of lower costs, the responsibility of the choice for an appropriate entity type for the Startup still remains with its Founder(s) as well as the consequences that follow once the choice is made.
Get Founding Documents Professionally Drafted/Vetted
Any legal entity ultimately chosen for registration or incorporation purposes, has certain ‘founding or constitutional documents’ (eg. ‘Memorandum of Association’ and the ‘Articles of Association’ for private limited Companies, Trust Deed/Instrument for Private or Public (Charitable) Trust etc.) that are of immense significance and a legal pre-necessity for registration. The Entity, its Founder(s) and other relevant third parties derive most of their rights, interests, powers as well as duties, liabilities and obligations from these documents.
When using e-Service providers or those lacking legal knowledge and/or expert drafting skills for the preparation of such documents during registration, there is a grave risk that ‘templates’ of such documents would be used to save costs and time spent preparing them, which for a particular Startup and its Founder(s)’ own unique circumstances, may not only fail to reflect the above said rights, interests etc., but may even fall foul of the applicable laws and/or subsequently lead to litigation as well as denial of benefits otherwise available to the Startup and/or its Founder(s).
It is therefore crucial that such documents are drafted carefully and skillfully, or if already drafted then the same are vetted, preferably by a professional, to ensure legal compliance as well an accurate reflection of the above said rights, interests etc. and mitigation of any potential disputes or litigation subsequently.
‘Pound wise and Penny wise’, seek Professional Help before registration
For one or more of the above discussed purposes or reasons, it is prudent that a professional be consulted to help choose or ensure that the choice of Startup entity as well as its ‘founding documents’ are appropriate for the Startup and for its Founder(s), as the potential professional fees for doing so would be a small fraction of the eventual registration costs and an even smaller fraction of the potential costs incurred for converting the same into another entity found appropriate, re-drafting such documents and/or litigation and dispute resolution exercises thereon.
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