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:
- 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.
- 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
- 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.
- 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 firstname.lastname@example.org. Website: www.consultibs.sg