Every startup, for it to be legally valid, needs to be registered with the government. Unregistered startups cannot enforce their financial and other rights, and thus as a result, can run into great losses. Thus, every startup needs a “business vehicle” for it to proceed forward. Now, what is this “business vehicle”?
A Business vehicle can be simply defined as a vehicle in which you can carry forward your dream business to your destined dream destination. Confused? Well, take this analogy: you intend to go to your dream destination on a holiday, and are deciding upon what vehicle to go in. A bicycle, for the adventurous and sporty; a car for a family; a bus for a tour with friends and extended family; or a plane if it’s abroad or far flung places within your country. Thus, it all depends on where you want to go, how far you want to go, with whom you want to go, and how much can you spend to fund this travel.
Similarly, when you intend to start a business of your own, you would be faced with this fundamental question: which form would you incorporate your dream business project into? And when I say ‘form of business’ I mean any one of the following:
- Sole Proprietorship
- Private Limited Company
- Public Limited Company
- Limited Liability Partnership
- Partnership firm
- Section 25 Company
So these are the 8 Business Vehicles legally available to any entrepreneur at the initial stages of starting up, and the decision as to which vehicle to choose, solely depends on the ‘where to’, ‘how far’, ‘with whom’, and ‘how much you can spend’ criteria. These are further explained as follows:
- Where to: Assuming that your business would heavily scale up and would break even in a reasonably expected time, it is important for you to know, the vision, mission, and objectives of your business, before you decide on how you would incorporate it. That is, if you are starting up for a project lasting for a very short time, and you wish to wind up as soon as you finish the project, going for the Company form of business would be a drag on your resources. On the other hand, if you are clear in your mind that you want to be the most successful listed company in your chosen sector, it’s pointless if you go for a Trust or Society.
- How far: There is a very popular saying among the company law academia: “Men may come but men may go, but a Company goes on forever”. This adage only highlights the fact that, an organization incorporated as a Company, has its separate legal existence, and even if all the directors and shareholders die, the Company still remains. Its assets still remain. Whereas, this is not the case with Partnership firms. A firm has no separate existence without its Partners. Thus, when you start up, it is important for you to know, how far do you want to go in this vehicle, and this is very much related to what answer you give for the Where To? question.
- With whom: If it is a partnership firm that you want to start, there has to be high levels of trust between you and your partner(s). But, the same high level of trust isn’t required in case you want to start a Company, because there are stringent legal regulations governing Companies, more than Partnership firms. Also, it is said that, partnership firms are the easiest way to structure your business, because of the low compliance requirements. Thus, you got to decide who would matter to you the most in your organization 10 years down the lane: your shareholders, or your co-partners, and also what is the amount of control you would want to exercise in all matters relating to your organization. The answer to this question also depends on the overall goals and objectives of your organization: Is it social entrepreneurship? People’s Company? Money-making venture? What? You want to walk with people’s aspirations, hand-in-hand with their dreams and needs, or with your own vision for yourself and your shareholders and your company’s economic prosperity?
- How much can you spend: This is in fact the most significant criterion that determines the decision of choosing a business vehicle. Because, you need to quintessentially know whether you would be bootstrapping or would be using venture capital to fund your dream project. Because, you cannot possibly bootstrap if you want to set up a Public Limited Company unless you are a millionaire already, and you cannot possible attract venture capitalists and angel investors if you are planning to set up a partnership firm. Also, there are various legal restrictions put on foreign investments, and external commercial borrowings. Hence, your funding options would be limited and/or defined by the choice of your business vehicle. Thus, it is very important to choose your vehicle wisely.
Thus, this is just an introduction to the different kinds of business vehicles available out there, and what are the different criteria to be taken note of while choosing one for yourself.
It is pertinent to note here that, for reasons as diverse as taxation benefits, ease of setting up, lesser compliance work, more stability, and the like, the four most common sought-after business vehicles, by most startups are:
- Sole Proprietorship
- Partnership firm
- Limited Liability Partnership (LLP)
- Private Limited Company (Pvt. Ltd.)
There are many differences between these kinds of business structures and each of them has its own pros and cons. You would be reading more on each of the business vehicle mentioned, and also their viability and sustainability as compared to each other, in the upcoming articles. Feel free to post your queries below in the form of comments.