The first question that almost every startup face with is- When to incorporate their startup?
You should start incorporating as soon you are ready with the team to develop your product. The sooner, the better.
Incorporating the company ensures the smooth running of your startup. It will surely cost you some money but it will make the foundation of startup strong.
– It minimizes adverse tax consequences.
– It builds credibility in your venture
– It provides protection against personal liabilities
– It eliminates the fights between the founders regarding the equity.
The equity should be decided fairly and every founder should agree on that. Once your co-founders agree on the equity share in writing. It will avoid most of the fights.
Never rely on your investor to fund you for incorporation. This step should be done before you approach any partner or investor. And investors only invest in incorporated entities.
The next question which arises is – Should you form a Proprietorship, LLP, Private limited or some other entity?
Let’s explore each one by one and decide which one suits you.
A proprietorship firm is a business which is owned by a single person. It is generally suitable for small shops with less capital requirement. Proprietorship firms are easiest to start and have minimum paperwork requirement for getting started. Profits are considered as personal income and their is flexibility to operate.
On the other hand, there are some shortcomings of proprietorship. It has limited capital and limited time.
A Partnership is a business structure in which two or more individuals own and operate a business. Profit is shared between the partners. Partnership registration is relatively easy. It is generally adopted by medium sized businesses. Effective tax is 30.9% on income of the partnership. It has limited time and unlimited liabilities.
Limited Liability partnership is suited for firms where fundraising is not required like Consultancy services. LLP gives the double advantage of both a Company and a Partnership in a single form of organization where any one partner is not responsible or liable for another partner’s misbehavior or disregard. The partners have limited liability in this sense. It can’t be converted into Private limited in future.
The idea of One Person Company (OPC) is a single person company. It’s easy to setup and maintain than private limited. It is preferred when only one person is there to manage and control the company. it ensures protection to the owner by limiting his liability.
Private Limited Company:
Private limited company is mainly chosen by entrepreneurs. It offers many exciting policies which promote the growth of startups. It has certain advantages.
- Limit the risk of personal assets
- Easy to raise funds – preferred by investors
- Flexible and transparent than other options
- Easy to attract foreign investors
Choose the type which best serves you and fulfills your purpose and then hire a company secretary. Look for someone who has experience with startups. Best of luck!