New to the start up world or a seasoned entrepreneur in need of a refresher? Explore our formation topics to ensure your business is built for the long haul
Ready to start your own business? One of the hurdles faced by your mind is determining the legal structure your business should take? Right business structure is of prime importance to help your business soar in the right direction. In India, we have the following major business structures:
A corporate structure where one man holds and controls the entity. Best suited for a small investment business ideas. This type of organisation is suitable where the capital required is limited and the risk- involvement is not great.
If you have a group of interested like-minded people ready to start a business this could be a good option in your hand. Partnerships firms are ideal for comparatively small businesses. The partners have unlimited liability. Well, you can start as a partnership firm and when the market scenario seems economically viable and financially attractive for the investors, partners always have an option of converting their entity into a Company.
In case you are interested in setting up a partnership firm but do not want the unlimited liability to be extended to you, this may be the right option to end your search. Limited liability partnership is considered a separate legal entity thereby providing only limited liability on its partners being limited to the capital invested by them. Further, this structure has a less complicated formation process as well as a lot of taxation and compliance benefits over other entities.
A legal entity owned by atleast 2 shareholders who could be individuals or entities or combination of both . If you are not interested in inviting public to buy your shares and invest their money in this entity then this might be a right choice to make. While you may be the preference of investors as they enjoy less complexity in buying and selling shares.
A Company that is open for public subscription. There is no limitation on number of shareholders, their liabilities are limited to extent of the unpaid amount of the face value of the shares and the premium thereon, in respect of the shares held by them. Further, the liability of a Director / Manager of such a company can, at times, be unlimited.
Once you have determined the right type of structure of the legal entity you want to create it is important to determine the place of business where you would want to set up the company. One the place of business is decided, it is further required to choose a company name. Only if the company name is available with the Ministry of Corporate affairs would the same be approved and allotted to you. Therefore it is recommended to have minimum 5 names ready as a back up. Registrar of Companies as authorized for the respective place of business shall be submitted with requisite document for starting a company. Post incorporation of a business entity in India, some necessary registrations are required and mandated by law such as Permanent Account Number (PAN), GST Registration etc. Various business licenses depending on the structure of the legal entity and the business shall also be required.
It is important to determine the core team of your legal entity before starting your business. In case of partnership firm, number of partners, their respective capital contribution and the ratio of sharing of profits must be clearly determined. In case of a private limited company, amount of share capital, details of promoters of the company, details of initial investors/shareholders of the company, their respective shareholding, Board of directors and their respective responsibility etc must be pre-determined. After the requisite founders, promoters, investors and core management team has been determined, details of the same as and when required are provided to the respective government authority.
Employee Stock Options or ESOPs are the options given by a company to its employees to own a certain number of shares in the company at a pre-determined price. A company which intends to grant ESOPs must draft an ESOP scheme in sync with the provisions of the Act and the Rules as applicable on them. The Board approved ESOP scheme must define and describe the purpose of issuing ESOPs, eligibility criteria, process determined for deciding the eligibility, vesting period, conditions relating to vesting and exercise of the options including the pricing formula and the exercise price, size of company’s ESOP pool, tax liability, dispute resolution mechanism etc. The terms at which an ESOP is granted must be consistent with the ESOP scheme. ESOP is a great way to retain best of the human resources in a company on an almost non-cash compensation. ESOP may be granted to both resident and non-resident employee. Any creation and granting of ESOP attracts various compliance and authority intimation obligation.
Government of India has initiated an ease of doing business for corporate entities in India. This initiative has not only made it easier for the entities to comply through various laws, various filings have been brought in a consolidate form on an online platform, reduced time limit and number of documents for procurement of electricity, Unique Labour Identification Number for filing of filing of Single Unified Annual Return under 8 Labour Acts etc. Further, Government of India has also brought around a Startup India Scheme that helps the startup companies to get exemption from various taxations, various labour law compliances etc.
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