How to select the ideal business structure for your startup

How to select the ideal business structure for your startup

Company formation & registration

Gaurav Yadav

Gaurav Yadav

3 Oct 2019, 16:59 — 7 min read

Background: Selecting an appropriate legal structure is one of the most important decisions for an entrepreneur at the time of startup. Gaurav Yadav lists out the parametres on which to select a legal entity as well as features of each of them.

 

In India, the entrepreneurial spirit is strong. However, often people look to start a business without knowing whether that business model is suitable for their venture or not. Around 90% startups fail within the first three years of establishment. The ones that survive are primarily due to a strong business idea as well as a sound business structure.

Here are the parametres on the basis of which you must select a business model.

  1. Equity
  2. Investment
  3. Public Issue (raise funds from General Public)
  4. Expansion limit
  5. Ownership
  6. Legal status and liability

Private Limited Company 

  • A Private Limited Company is governed by section 2 (68) of Companies Act 2013 and relevant rules.
  • It is a form of business in which a small group of people manages this type of entity privately without any Public interference.
  • The document in which the constitution of a private limited company is written is known as "Memorandum of Association (MOA) and Articles of Association (AOA).
  • To form a Private Limited Company the requirement is of minimum 2 Directors and 2 Shareholders/Subscribers.
  • A Private Limited Company can have a maximum of 200 shareholders as per Companies Act 2013.
  • A Private Limited Company issues its share through private placements.
  • The incorporation of Private Limited company is hassle-free with a very low cost of incorporation.
  • It does not raise fund from the public through public issue and it cannot issue prospectus to the general public.
  • It cannot be listed on the National Stock Exchange or can't sell its shares to the general public through Stock Exchange Platform.

 

Also read: How to register Private Limited Company in India

 

One Person Company (OPC) 

  • Section 2 (62) of Companies Act, 2013 and relevant rules govern OPC registration in India.
  • OPC is a form of business in which one person acts as a promoter, director and also member/shareholder of the company.
  • It is an extended version or form of sole proprietorship firm with the features of a Private Limited company or Partnership firm with the feature of Limited Liability.
  • There is no requirement of minimum paid-up capital in OPC registration.
  • OPC requires minimum one member and one nominee who carries out business after deceased of its sole member.
  • It cannot be listed on the National Stock Exchange or can't sell its shares to the general public through Stock Exchange Platform.
  • OPC doesn't need to hold Annual General Meeting and has many more exemptions in Companies Act, 2013.
  • The cost of compliance is low for OPC registration.
  • It cannot raise funds from the public through public issue and it cannot issue prospectus to the general public.
  • OPC has minimum one director and maximum 15 directors.
  • The perpetual succession is very low because if the nominee is denied to become a member of the company then it's automatically dissolved.

 

Also read: How to register a Proprietorship Company in India?

 

Public Limited Company 

  • A Public Limited company is governed by section 2 (37) of Companies Act 2013 and relevant rules.
  • A Public Limited company uses the word 'Limited (Ltd)' at the end of its name.
  • It can be listed on the National Stock Exchange or can sell its shares to the general public through Stock Exchange Platform.
  • It raises funds from the public through public issue or it can issue prospectus to the general public.
  • Public Limited Company can have a minimum of 3 directors and maximum 15 directors.
  • A Public Limited company has no maximum limit of shareholders as per Companies Act 2013.
  • To form a Public Limited Company, there is a requirement of minimum 3 Directors and 7 Shareholders/Subscribers.
  • A Public Limited Company issues its shares through private placements as well as a public issue.

 

Also read: SME IPO: An overview

 

Limited Liability Partnership (LLP) 

  • It's a form of business, which is governed by the Limited Liability Partnership Act, 2008.
  • LLP has a separate legal entity and it's a combination of company and Partnership Firm.
  • The document in which the constitution of LLP is written is known as "LLP Agreement"
  • LLP must have a minimum of 2 partners and there is no limit on maximum partners.
  • It cannot raise fund from the general public through open offer or prospectus or public issue.
  • LLP is extended version or form of Partnership firm and having all features of partnership firm except unlimited liability i.e. separate legal entity, LLP can sue anyone and it can be sued but not its partners 
  • The word 'LLP' is mentioned at the end of the entity name. if it's registered as LLP.
  • LLP registration is less complex than registration of Partnership firm under the Partnership Act.
  • In LLP one partner is not liable for the actions of other partners (individual protection), but in a Partnership firm, every partner is liable for the actions of other partners

 
Also read: How to register an LLP in India?


Conclusion

  • OPC, Proprietorship Firm is best for small business because they have a very low cost of compliance in comparison to other forms of business but OPC has limited liability and separate legal status.
  • A Private Limited company is best for a startup which has an expansion plan but doesn't want to raise funds from general public through public offer or prospectus or stock exchange and they also want to manage their company privately without any public interference.
  • LLP is the business form with features of a private company as well as a partnership firm and it's used generally by professional (CS, CA, CWA and Doctors etc) and it's easy to dissolve
  • Public Limited Company is used by those businesses who want to raise funds from the general public through public offer or prospectus or stock exchange and want to carry out business by engaging a large group of people.

 

Every business form has its pros and cons so one must choose a structure after careful deliberation.

Also read: Top registration mistakes by startups in India

 

Image source: shutterstock.com

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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.

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Gaurav Yadav

ESTELLA CONSULTANCY is an India based Legal Consulting Agency that has been delivering Business management solutions to clients since 2009. We offer an impressive portfolio of...

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