Incorporation makes a business real. When does one switch from pursuing a project to turning it into a business and what is the best reason to do the same? These are some of the questions that we routinely come across and we have put all of these questions down in this segment so you can decide the time and the nature of incorporation that you require in whichever stage you are at.
The best time to incorporate is when you are about to be paid by a client. The client needs to cut a cheque in the name of your company and not you.
Having said that, if you are undertaking work that involves upfront outlay of capital or creation of intellectual property, you should go ahead and incorporate your business as soon as you decide to start it. The outlay would reflect in the book of accounts of the company. Also helps build vintage for the company in case you wish to take a loan at a later date
There are broadly 5 types of firms that one can incorporate to start a business:
Proprietorship Firm – A proprietorship firm is owned by a single person and is an unlimited liability entity. The person himself/herself is responsible for all the liabilities of the company. It is the easiest to incorporate, all you need to do is get a GST or a Shops and Establishments Certificate, get a bank account opened to get into business.
Partnership Firm – A partnership firm is owned by several partners which can number up to 50 and is an unlimited company. The company is incorporated with a partnership deed that the partners agree to abide by. The company once registered can create its own bank account and start business under the name of the firm.
Limited Liability Company (LLP) – An LLP is an organisation much like the Partnership firm but with the marked difference of being a limited liability company. Partners can join or leave the company and sell their share of the company to another partner. This format is most useful when you are running a business where strong individuals and their profiles drive the business such as Architects, Investment bankers, lawyers, etc. Unlike the partnership, the company name must be approved by the RoC and there are mandatory filings that must be made which pushes up the cost of doing business.
Private Limited Company (Pvt. Ltd.) – A Private Limited company is a very evolved form of incorporation. The biggest advantage of this kind of a company is the separation of the management and ownership. Shareholders appoint the board of directors and the board appoints the CEO. Often in early stage companies all three are the same and so the distinction is hard to make. This structure though allows for investors to step into the company without having any involvement in running the company. Given the complexity of this structure, it also implies more disclosures and compliances. It is necessary to have two directors to start a Private Limited
One Person Company (OPC) – An OPC is just like a Private Limited without the requirement for 2 Directors. It’s a Private Limited Company which has only one director. This works well for founders who do not wish to induct others into the company. But the same compliances that apply to the Private Limited also apply to the OPC. This kind of a company will have to be converted to a Private Limited if in case new investors or co-founders have to be inducted.