Choose your startup structure

KOCHI: If you are starting up, this is often the biggest question you come across. Which company structure should you choose? Should you directly register as a private limited company or should you run it as a sole proprietor? India has four basic business structures to kickstart your startup and you can choose whichever suits your model the best. I suggest you talk to your tax and legal consultant before taking the final decision. But this article should help you get a brief overview:

Sole Proprietorship
Generally, this is the easiest model to begin a startup. Having less stringent rules, the proprietorship format is easier to register, requires lesser charges and can help you get off-ground. Most traditional shopkeepers fall in this category. With a VAT registration, you can start selling goods on marketplaces or e-commerce websites. However, this one fully risks the owners as the entire liability lies on the proprietor. And hence you will not be able to raise funds in this format.

Limited Liability Partnership
In this structure, the liability of partners is limited to the extent of their contribution towards LLP. Requiring a minimum of 2 partners, this format limits the liability of partners and hence is easier to take loans as the structure is more compliant. Many real estate builders use this structure for their business.

Private Limited Company
A private limited company requires a minimum of 2 directors and follows all stringent norms and compliances. This is the most advisable model if you are looking to raise VC funds. The company is governed and regulated under the Companies Act, 1956. Most startups use Private Limited Company as their business structure.

Single Person Company
Recently introduced, this business structure aims to help single founders set up their own company with compliances as a regular company. However, if you are looking to raise VC funds, we still suggest that a private limited company structure is more suitable.So now that we know some basics about registering a startup, the next question comes – when to register your startup? Should you directly go for LLP or Pvt Ltd Company registration? My suggestion is no. Most of your startups will typically be burning money in the first few months of its operations. And if that is the case, maybe run it as a proprietor or non-registered entity.

Once you reach a stage where you can at least start seeing revenues kicking in, then surely you can go for registering your startup. The same advice I would also suggest for trademark filing. But we will keep that discussion for some other day.Rajeev Tamhankar is IIT Roorkee Silver Medalist and Founder, Founder of TBS Planet Comics, Ex-Flipkart, Xiaomi employee.(The views expressed by the author are his own)