Venturing into the startup universe is a daunting task to say the least. You’re immediately faced with a multitude of tasks and challenges that will guarantee to test every fibre of your being. However, every small victory will give you a larger sense of accomplishment than anything you’ve ever experienced. In this post let’s deep dive into one of the first big decisions you’ll need to make as a startup founder; which entity should you register your startup as? Should you opt for a sole proprietorship, a partnership, an LLP (limited liability partnership), an OPC (one person company) or a Pvt. Ltd. This may seem like an easy-peasy decision, but trust us when we say, it’s one of those things that can make or break your startup.
The table below thoroughly explains the details of each type of entity based on a number of parameters with everything ranging from entity structure to tax applicability and annual compliances.
A few other things we’ve learnt with all our experience in the startup ecosystem are:
People who provide a specialised service or bring a certain skillset to the table should always opt for an LLP as they will never have people investing in their business considering they aren’t offering a tangible product as such. For example, a marketing firm or a CA firm should always opt for an LLP as they’re providing a specialised service to their clients.
- The best way to analyze which type of business you want to set up is by first figuring out what your appetite for risk is like. For example, a college fresher who’s just graduated and is thinking about starting up his own business should ideally go in for a proprietorship or a partnership as it’s simpler and cheaper to form and is very easy to close down. They can choose either of these two entities till they figure out their proof of concept and whether or not it works. If they are convinced their business has potential, they can always convert to an LLP or Pvt. Ltd. in the near future. However, in the case of a professional who has been working for a few years and then decides to start something on his own, he could directly go in for a Pvt. Ltd. Provided, of course, that he’s confident about his proof of concept. Basically what we’re saying is, it’s always easier to test the shores by opting for a proprietorship or partnership instead of going all guns blazing without having a revenue model in place.
- Another deciding factor when choosing which entity to go in for is being mindful of the kind of sector you’re in. For example:
- Service sector/ Anything that’s technically driven: LLP
- People who anticipate more funding to come in from an external investor: Pvt Ltd.
- Person who is providing a service on a technical skillset that he possesses and has no partners and is providing this service to a good variety of clients: OPC.(where you run the show and build a team under you and also you have no anticipation of anyone investing in your business. However, since in an OPC your scalability gets restricted, you should convert only once you want to start scaling up and change to a Pvt Ltd. depending on what level you want to scale to.
- One great way to decide what sort of an entity you should go in for is to determine the level of scalability you anticipate in your startup’s life cycle.
- What we have seen in certain cases is that the founders have built a wonderful product but have no clarity on what sort of an entity they should set up and have not been able to come to a consensus on the same and hence a brilliant product has ended there and then. Do not let this happen to you and your startup.
We hope this post helps solve any and every query you have in regard to this subject. Keep visiting our blog to find more such articles that will help you through the course of your startup journey. If you’d like to suggest a particular topic that we should write on, do tell us in the comment section below.