As a part of our entrepreneurs training workshops of Nurture Talent Academy, I have traveled over 10 cities in less than a year. A question I am asked in all the forums by budding entrepreneurs is how to start a company? There are many ways to answer this question, and let me give my views below:
- Do you really need a company?
Before trying to establish a company in the process of starting a business, it is always important to question yourself on the need to do so.
For example, if you wish to start a blog or a website, you can register it in your own name and see the first level response of consumers. Early stage businesses may take easily 3-6 months to get their first customers (for instance, a product or technology startup). Some considerations which should be kept in mind while taking this decision are:
- Customers – do my customers care if I run a company or are they just happy with our product or service?
- Employees – your potential employees may prefer working for a company rather than for an individual or vice versa.
- Partners/Co-founders – in case you are starting as a team of founders, you may be better off formally starting a company, rather than having a fluid set of promises to each other.
- Type of Entity
From a legal point of view, a company can be shaped as any of the following entities:
- Proprietorship: This is the most common form of company. The owner/founder/entrepreneur is the sole proprietor of the firm, and holds 100% of the company. The benefit of starting as a proprietor is that it is easy and quick to start this type of entity and also to close the firm in case things are not working out! The simplest procedure to form a proprietorship firm is to get a 50 Rs rubber stamp made and apply to bank for a current account in the name as feel appropriate for your business. Nowadays, banks ask for KYC documents (know your customer), which include your PAN Card, letter of undertaking (every bank has a different format) and place of business.Â On the riskier side, the owner and the firm are the same – if the firm is involved in cheating, cheque bouncing or any liability, then the owner’s personal assets can be attached to recover the same! Also, angel investors or venture capitalists do not invest in this kind of entities.
- Partnership: In case of 2 or more founders being a part of the firm, partnership is a viable option to start with. The responsibilities, risks and rewards are shared between the partners of the business in the proportion mutually decided. A simple way to start a partnership firm is to sign and register a mutual “partnership deed”, which lists down the terms and conditions in which partners will do business. The bank procedure is the same as for a proprietor firm. The risk of business gets divided between all partners, compared to a proprietorship firm. However, in this case again, investors do not invest in this type of entities.
- Private Limited: This is the entity in which the firm is separate and the promoters are separate. Legally speaking, the private limited company has its own ‘life’, is owned by at least two shareholders, and has its own assets and liabilities. There is a minimum “authorized share capital” of 1 lakh, usually as entrepreneurs contribution, required to start a private limited company, which is the maximum liability the promoters have in case of defaults etc. The company is governed by Memorandum and Articles of Association, which is a document to define what business it does and related details. Venture capitalists can also buy shares/equity in the company in lieu of their investments. The procedure to start a private limited company includes getting direction identification number, digital signatures for directors, getting PAN/TIN number of the company, opening company account with bank and registering the MoA/AoA. Typically, all the procedures require about 6-8 weeks for closure and some help from your local accountant.
- Limited Liability Partnership: This is a new form of company, which has come in India last year. The benefits of LLP are faster, quicker and the unlimited liability risk of a proprietorship is not there in a LLP. However, there are certain conditions like deliberate fraud which can potentially affect all partners in LLP.
- Tax Matters
Depending on the type of business, tax registrations are required irrespective of the type of entity formed. For example, if your service business is expected to achieve over 10 lakh turnover, then service tax registration is compulsorily and then you have to collect and deposit service tax. Value added tax is applicable in case of all product companies. Excise tax is applicable for all manufacturing companies. Import export code is required in case you are earning export revenues. Other licenses will be specific to businesses like shops and establishment license, professional tax etc. Other tax considerations while arriving at the type of entity is income tax and dividend distribution tax, which the company and the promoters have to pay depending on what bracket they fall in.
With the direct tax code coming into effect next year, things may change, but at an early stage of business, my advise to all entrepreneurs has been to focus on customers and building the business rather than trying to “optimize” the taxes. Just pay taxes on time and you will be saving yourself lots of time and trouble!
Amit Grover, founder of Nurture Talent Academy, is an individual with a passion for entrepreneurship. He is an IIT Delhi and IIM Indore alumnus and has previously worked with Infosys, Asian Paints and Onida. He is also associated with Mumbai Angels, and has led over 20 early stage investments in last 3 years.