[Editorial notes: This is a 4-part series that will walk you through the company incorporation process.]
It is very important to have a right business entity which can support various needs of business like scalability, compliance requirements, branding etc. Overkill or an underkill can be expensive in short term or long term. Many entrepreneurs think that they can make suitable changes to business entity by changing from 1 form to another as the need arise. Many times, it may not be possible and most of the times it is fairly time consuming. With the vibrant economy we live in, time can be of extreme importance and delays in change procedure can hamper your prospects severely.
Many startups have a shoe string budget while booting up. While this is something unavoidable, it is important that you should look at the short term as well as long term goals before choosing your business entity. We have seen many startups fail in short term just because they had a wrong entity selected and with heavier costs associated to make the changes (both in terms of money and time), it has made the situation more critical with the shoe string budgets.
Few important aspects you should consider before starting your venture:
– Ownership/ Control: Can your business be controlled by a single person or does it require delegating controls to multiple people. Please consider the scalability of business before answering this question.
– Scalability: How scalable is your business. Is this going to be couple of people company in next 3-5 years or you have an aggressive growth planned. Does your business need to be present in multiple locations, or employ a big team etc.
– Branding/ Comfort factor: What kind of brand you are planning to create. Will your future customers or employees or other stakeholders feel comfortable to be associated with you or will they have concerns in mind while dealing with you. How you can put their concerns to rest when the business is starting up.
– Fund requirements: What is the fund requirement for your business? Is it going to be met from self-funding or generated from business? Are you looking to raise money from outside investors (angel/ seed/ venture etc…)? What’s the timeline you are looking to raise the money. What kind of business entity investors are generally comfortable with.
– Target customers: Is your business delivering a product or service. Are you targeting enterprise, SMBs, consumers? What markets you plan to operate in – Local, City, State, Country, Global etc. What demographics are you targeting?
– Compliance requirements: Do a brief survey of what all legal or business licenses you may need. Is there a relief available to a particular entity or is it going to be a complex process. How much time & efforts are needed to get these licenses or contracts and what shall be cost of maintain them.
– Liability protection: What possible liabilities you foresee in your business. Do you need a limited liability entity or an unlimited liability one will also work?
In the next article we shall look at various business options available and their flavours.
– More legal resources for startups.
[Guest article contributed by eLagaan team. eLagaan offers end to end CA, CS, Business Legal & Payroll services for businesses.]