Startup incorporation is different than other business incorporation, as it is highly dynamic in nature and structure should support various phases of startup life cycle. Incorporation needs to be well thought through or else startup may end up making multiple changes to business structure which may result in loss of time, effort and money .
Entrepreneur should answer the following question before deciding the structure:-
- How many founders now and in next 2-5 years?
- Hiring plan with Plan A and Plan B?
- Do you wish to offer EOSP?
- What level of investment they wish to raise and when?
- Is there an exit strategy - Acquisition, Merger, IPO etc.?
- How soon the company will be cash positive?
Additionally, the licenses (e.g. Service tax, Shops & Establishment, Import Export Code, STPI registration, PF etc.) needed to run a startup should also be factored in before arriving at the decision.
A startup can look at these options:
- Private Limited Company
- Limited Liability Partnership (LLP)
- Sole Proprietorship (not One Person Company) - During Pivot phase only
Private Limited Company
A Private Limited Company is the most preferred form of business entity as same provides ease of doing business and also in investor friendly
- Ability to issue ESOPs
- Supports Differential stock types - Preferred stocks, Equity stocks etc.
- Stocks has absolute units - Premium can be calculate on per stock basis during investments
- Higher brand value as compared to any other business type
- Better corporate governance norms and processes
Limited Liability Partnership (LLP)
- Offers Limited liability
- No limits on number of partners
- Ability of migrate to Private Limited in case of unprecedented growth
- More suitable for hyper local, services and consulting startups
- Challenges in raising investments (local or FDI)
Steps to Incorporate:
- Finish all incorporation related documents (MoA, AoA etc.)
- Obtain Digital Signature
- File for Incorporation (alongwith name approval)
- Receive Incorporation Certificate along with MoA & AoA
Here are few videos to help you know more about incorporation.