Company incorporation or partnership?

Many persons in Bengaluru want to set up their own venture. Are you one of them? Are you unsure about the kind of legal structure you need for your activities?

Gyan, the business advisor, recently met Anil and Peter, who wanted to start a new venture. They were unclear about the benefits of setting up a company and wondered if the cost would be prohibitive.

Gyan referred them to a couple of specialists who could walk them through the regulatory aspects of creating a venture and registering with the concerned regulatory authorities, based on the nature of their business and the quantum of revenue expected. In addition he flagged off the following points that Peter and Anil could think about before meeting the legal /financial experts.

  • Liability: A partnership implies being liable in an individual capacity for actions undertaken by the business. If a corporate entity is set up, the founder is liable only to the extent of capital/ownership/stake in the business. Thus in the partnership, one can become liable for actions taken by the other partner and there is no limit on the liability. However this is limited in a corporate set up. Entrepreneurs are often therefore advised against getting into partnership.
  • Perception: Typically, a corporate entity may be perceived as more serious and may find it easier to get business. Of course this depends on the nature of the business
  • Funding: If the business grows and you need equity funding, you may have to set up a corporate entity, as funding is typically given to a company
  • Immediate costs: Cost of setting up a company is more than setting a partnership. You need to weigh the short term against the long term costs and implications

Gyan said that on the face of it, it appeared as if a corporate entity would make more sense. However Anil and Peter would need to spend time thinking about the long term business plan and then decide on the entity. Once a company was set up, they would have to comply with the requirements of company law and related regulations. They would need to look clearly at these requirements and then take a call.

Gyan had seen a couple of cases in the past year, where companies had been set up by more than one founder-Director.  Subsequently there was some divergence in views among these founders… and the activities of the companies came to a halt. However, the statutory requirements had to be met. This became a difficult issue to handle as all the founders wanted to exit from the venture. So Gyan advised Peter and Anil, to think carefully and discuss this with experts before deciding on the next steps.

Anjana Vivek
About Anjana Vivek 45 Articles

Anjana Vivek, Director, VentureBean Consulting Private Limited, is a consultant, teacher, writer; CA & visiting faculty at IIM(B). Her specialties are business models, funding strategy, entrepreneurship, M&A and valuation.

7 Comments

  1. Thanks Raj Chandra R, for writing in about one of the choices available in the future for entrepreneurs in India, i.e. Limited Liability Partnerships (LLPs). This is a new structure for a business and so, it would take some time for us to see the practical benefits and disadvantages as compared to what has been stated on paper. In fact, this is so new that the first LLP has been registered only 3 days back, on April 2nd, 2009. This is as per the Ministry of Corporate Affairs, Government of India on the site http://www.llp.gov.in/. As your question is relevant for this topic, I have spoken to a couple of experts and will come out with a follow up post on this. My post did talk about perceptions and long term implications, so some of this will be understood in more detail in the next few months.

  2. Jayant has raised some points re the disadvantages of partnership, particularly when there is dissent amongst the founders. Thanks for the inputs Jayant. Entrepreneurs need to understand the options available, as well as the short term and long term implications of choices made.

    If you are planning to start your own venture, please do talk to a couple of experts and then take a view on what may work for you. What may suit one set of founders may not necessarily be the right choice for another set of founders. It would be good to do your homework, understand what is possible and then take your decisions. To connect with experts, you could check with your friends and others in your network to get some names. Alternately, you can connect with forums and entrepreneur networks such as TiE and OCC, who both help start ups and wannabe entrepreneurs in connecting with specialists/mentors. A list of some resources is in an earlier post Entrepreneur resources and networks -http://m.citizenmatters.in/blogs/show_entry/819-entrepreneur-resources . Jayant has also given his contact info and has offered to help.

  3. Parliament in Dec 2008 passed Limited Liability Partnership (LLP) Bill 2008, paving the way for an alternative corporate business vehicle that will give the benefits of limited liability and allow companies organize their internal structure as a partnership based on an agreement.

    A limited liability entity is a hybrid of existing partnership firms and full-fledged companies. It is a separate legal entity, liable to the full extent of its assets with the liability of the partners being limited to their agreed contribution in LLP.

    This opens up a new vista of structuring a business enterprise which was hitherto was not available to Indian Entrepreneur.

    Hope the Author will dwell on this and explain about its advantages and disadvantages.

  4. I think a major reason I would reccomend a Company personally, specially where the Partners are brought together by the business rather than an existing enduring relationship, is that in a Company we can create an equitable shareholder’s agreement, which can codify the process to be followed when there is a conflict.

    In a Partnership the process of dissolution actually guarantees that the Business as a whole is either acquired by the residual partners, at any price which the dissenting partner demands or the partnership becomes a non-operational entity. In a Partnership the dissenting partner actually acquires a far greater power than he can ever acquire in a Company.

    To me, this disadvantage of a Partnership far out weighs the financial costs of a Corporate existence.

    My own advice to all entrepreneurs is to incorporate as soon as possible.

    BTW in case you do need guidance, do drop me a line through http://OutSourcedCFO.GooglePages.Com

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