When starting your own business, there are so many things to consider, whether it’s the kind of entity you want to create or the legalities that it entails. If you have this idea while you’re still working your current job, be careful! You don’t want to be breaching the terms of your employment agreement. The first, most important step to take is ensuring that you evaluate your existing commitments. Check your employment agreement or consultancy agreements for clauses that could imply that whatever you develop during the time of your employment/engagement will belong to your employer. In addition, most companies have a non-compete or non-solicit clause that prohibits you from starting a similar line of business or joining a competitor, or soliciting away employees/clients/vendors.
Once that is taken care of, you get to the actual planning of your start-up. Before you jump into the details of what your business is going to be like and how it’s going to run, you want to first think about whether you’re starting out alone or with a co-founder(s). If you decide to start this with a partner, make a note of the terms of your partnership with them and record it in writing. Oral agreements don’t count! A co-founders’ agreement helps in the long run.
Looking into the process itself, there are mainly 4 steps that it can be classified into -
Ideation – This is where you first and foremost think of a name for your start-up and check for its availability. Most people make the mistake of checking for domain availability while in actuality, they need to be checking if it’s available under the Ministry of Corporate Affairs and the Trademark Registry.
Once this is done, your next thought is probably about how to protect your idea from all the people you’re sharing your ideas with. Unfortunately, that isn’t possible in India, and neither can you go around asking everyone to sign NDAs. But fortunately for you, the idea itself is not what matters, it is the execution that is important.
Implementation – A frequently asked question is: when is the right time to incorporate an entity? There’s no right answer to this, but why waste time when you have a perfectly good idea? Do it as soon as you can. During this process, you’ll be faced with the challenge of what type of entity you’d like your start-up to be. When you say “entity”, this decision will require you to think ahead and decide what you want for your start-up in the long run. If you decide you want to get funding in the future, it is always advisable to start directly with a private limited company (Pvt. Ltd.). But on the other hand, if you’re not planning to get future funding, you can either pick a limited liability partnership (LLP) or a Pvt. Ltd. Company. A common question in this area is “what if I want to start with a sole proprietorship or a partnership?” The answer is – don’t do it. Neither of them is an entity. Another thing being, if you start off with either of them and decide to later change or restructure, it becomes a bigger hassle than you can imagine, not to mention the large amounts of money you’ll be paying your consultants. You will also not be eligible for Start-up India benefits if you decide to start with either a sole proprietorship or a partnership firm and then restructure it into an LLP or a Pvt. Ltd. So, as already mentioned, make sure you know what you want for your startup so that scaling is easy.
Let’s understand better what each of these is:
Sole Proprietorship – This is NOT an entity. You can start this by simply opening a current bank account and does not require too much of an initial cost. However, you can neither get venture capital funding nor government grants for future expansion. The other downside is that any liability has to be taken on by the sole proprietor himself/herself. Even though there are cases of sole proprietorships doing exceedingly well, personal liability is one main reason that investors don’t prefer them.
Partnership Firm – This is ALSO NOT an entity. Although this is a registered entity, it is not a corporation. In this case, you may be able to get government grants, but you cannot get venture capital funding. This too causes any liability to be borne by the partners themselves as they are not a separate entity from the firm.
Limited Liability Partnership (LLP) - This is a fairly new concept that came to India in 2008. LLPs are corporate structures that run any type of business (for example, providing consultancy services). But like the previous two, this is not the right option for you if you’re looking for venture capital funding.
Private Limited Company (Pvt. Ltd.) - this is by far the best option to consider. It’s a fairly easy process to start one.
The steps include -
- Get your company name approved
- Get a minimum of 2 directors and 2 shareholders (the directors can be shareholders too)
- Each director will need a DIN and DSC