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.