Introduction
The Start up ecosystem
in India has seen tremendous growth since 2010. With over 3000 start ups and
800 more every year, India is the 4th largest country after US and China. This
reflects the growing entrepreneurial spirit and risk taking disposition
emerging in the country, with most of the founders profiling in the average age
group of 32 yrs of age. This is further encouraged by the new Start up policy
that has been initiated by our Honourable Prime Minister Mr. Narendra Modi.
While
the entrepreneurs/founders have ideas that can be potential game changers, they
need to be guided on the policies, procedures, regulations, taxation and other
directives that can complement their vision. A start up thus has to deal with a
number of issues to grow into a successful organization. In this article, we
will look into one of the initial aspects that contribute significantly to the
success of the Start up that is “Structuring”.
Structuring a Start up
Structuring
in effect means designing/organising the Start up primarily from the point of
view of:
·
Choice of legal entity
·
Choice of Jurisdiction
Choice of Legal Entity
Most of
the founders/entrepreneurs come from technical backgrounds and need to be
guided on the appropriate legal entity and various formalities as it gives the
basic identity to the Start up and ensures it does not get into any future
legal hurdles.
The
Start up can choose from any of the entities below:
1.
Proprietorship: This
works when the idea is new and you want to test at the proof of concept (POC)
stage without inviting any investor and to avoid cumbersome legal compliances
and expenses.
2.
Partnership: This
applies when you have two/more partners involved with an idea. For instance
when 2 or more enthusiastic IITians come together with an idea and want to do
POC of the same. This form again
involves bare minimum legal compliances & expenses.
Both of the above involve a
personal liability in case of any losses/failures associated with the start up
3.
Limited
Liability Partnership (LLP): This is a very popular entity at the POC
stage where the promoters can restrict their personal liability with few legal
compliances.
4.
Company
– Private Limited Company/Public Company: This is suitable for a more
matured start up where the idea has been externally validated and is thereby
moving on to the next level of growth. At this stage, an investor is typically
sought for venture financing options.
Choice of Jurisdiction
A Start
up can opt for inward structuring, whereby the promoter establishes the entity
and does business within India. This option is best suited for local business,
income & expenses. However, if your idea has a global appeal and has
expenses to be payable outside India, then it may make sense to go for an
outward structure, i.e. setting up the entity outside India.
Further
if you are establishing a parent entity within the country or outside, you need
to consider various implications. A Start up has to take into account the
appropriate jurisdiction of the holding company as it needs to look into tax
implications, adequate protection for its intellectual property, venture
financing requirements, future potential of business to go global in which case
the holding company may have to be shifted to an offshore location in future, and
more. The decision has to be analysed from a long term perspective and
accordingly structured at the initial stages. The Start up could also opt for
an outward structure and choose a location/country with the preferred
advantages. Singapore, for instance, has a number of government schemes and
grants in various sectors and has also consistently topped the world rankings
in ease of business.
In
effect, structuring the right kind of Start up helps to mitigate future risks
and avoid any complications that may arise while the Start up is nearing
maturity.
In the
forthcoming issues, we will cover other aspects affecting Start ups in detail.
This
article is authored by A. Loganathan, representing India Business Solutions (IBS) which
is a boutique advisory firm helping a lot of Start ups in India and Singapore
in fulfilling their aspirations.
Loganathan is heading the Singapore operations of IBS and can be reached
on loganathan.a@consultibs.sg. Website: www.consultibs.sg
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