Legalities of Venture Legalities of Venture Presented by: Xerxes V. Dastur Presented by: Xerxes V. Dastur Partner Partner V.S.DASTUR & CO. V.S.DASTUR & CO. Chartered Accountants Chartered Accountants
Legalities of VentureLegalities of Venture
Presented by: Xerxes V. DasturPresented by: Xerxes V. DasturPartnerPartner
V.S.DASTUR & CO.V.S.DASTUR & CO.Chartered AccountantsChartered Accountants
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Are you an entrepreneur?Are you an entrepreneur?1. Must have burning desire and discipline to 1. Must have burning desire and discipline to plan, work, and sacrifice in order to plan, work, and sacrifice in order to successfully transform your idea into reality.successfully transform your idea into reality. 2. Are you ready, willing and able to work 2. Are you ready, willing and able to work harder than you have ever before?harder than you have ever before? 3. Do you have self-confidence and discipline?3. Do you have self-confidence and discipline?If youIf you’ve answered “no” to any of these ’ve answered “no” to any of these questions, you may not be ready for questions, you may not be ready for entrepreneurship.entrepreneurship.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
When you start a business, youWhen you start a business, you ’’ll ll have to decide upon the type of have to decide upon the type of business entity you want to use. business entity you want to use. There are a number of options There are a number of options available and each one has its own available and each one has its own advantages and disadvantages. advantages and disadvantages. There's simply no one-size-fits-all There's simply no one-size-fits-all answer as to what type of entity is answer as to what type of entity is the the ““bestbest””..
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Developing Your IdeaDeveloping Your Idea
So whatSo what’s your idea?’s your idea?
WhatWhat’s your product?’s your product?
What goods or services are you going to provide to What goods or services are you going to provide to whom and whose needs are you going to meet? whom and whose needs are you going to meet?
For starters, you should ask yourself For starters, you should ask yourself “What are my “What are my skills, what am I good at, and what do I love to do?”skills, what am I good at, and what do I love to do?”
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Choosing the Right BusinessChoosing the Right Business
1. Starting a New Business: Is your idea new or 1. Starting a New Business: Is your idea new or novel?novel?
2. Purchase an Existing Business: Many 2. Purchase an Existing Business: Many entrepreneurs start as franchisees in proven entrepreneurs start as franchisees in proven businesses, thus avoiding some of the risks and businesses, thus avoiding some of the risks and challenges inherent with starting a new business challenges inherent with starting a new business from scratch.from scratch.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Sole Proprietary Concern
Partnership Firm
Company
Joint Venture
Limited Liability Partnership
BUSINESS ENTITIES
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Business Entity: Sole Proprietary Business Entity: Sole Proprietary ConcernConcern An individual personAn individual person No formal organizational requirementNo formal organizational requirement There is no limit to liability - your personal assets There is no limit to liability - your personal assets
are at stake!are at stake! You can only transfer the interests in your You can only transfer the interests in your
business by selling the assets themselves which business by selling the assets themselves which could mean more tax liabilitycould mean more tax liability..
Access to capital can be limited.Access to capital can be limited. No distinction between the owner and the entity in No distinction between the owner and the entity in
the eyes of Tax Authoritythe eyes of Tax Authority
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Business Entity: Partnership FirmBusiness Entity: Partnership Firm
Two or more individuals (or entities) have shared Two or more individuals (or entities) have shared ownership of the business.ownership of the business.
Maximum of 20 partnersMaximum of 20 partners No formal organizational requirements.No formal organizational requirements. Any partner of the partnership can bind or obligate Any partner of the partnership can bind or obligate
the partnershipthe partnership There is no limit to liability for the partners. Liability There is no limit to liability for the partners. Liability
is joint and several. is joint and several. Taxes are paid at Entity Level.Taxes are paid at Entity Level.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Business Entity: CompanyBusiness Entity: CompanyWhat is a Company ?What is a Company ? Voluntary association of personsVoluntary association of persons Distinct name & IdentityDistinct name & Identity Limited LiabilityLimited Liability Perpetual successionPerpetual succession
Types of CompaniesTypes of Companies 1. Private Limited Company1. Private Limited Company 2. Public Limited Company2. Public Limited Company 3. Section 25 – Not for Profit Company3. Section 25 – Not for Profit Company
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Business Entity: CompanyBusiness Entity: CompanyPrivate Limited CompaniesPrivate Limited Companies Minimum 2 and Maximum 50 ShareholdersMinimum 2 and Maximum 50 Shareholders No invitation can be made to public for No invitation can be made to public for
subscription of shares / debentures/ depositssubscription of shares / debentures/ deposits Rigorous management/governance structuresRigorous management/governance structures Liability of a director/manager of such a company Liability of a director/manager of such a company
can be at times be Unlimited.can be at times be Unlimited.
V. S. Dastur & Co V. S. Dastur & Co Chartered AccountantsChartered Accountants
Business Entity: CompanyBusiness Entity: Company
Public Limited CompaniesPublic Limited Companies Company which is Company which is notnot a Private Limited Company. a Private Limited Company. Certificate of Commencement of Business to be Certificate of Commencement of Business to be
obtained.obtained. Minimum 7 and no bar on Maximum ShareholdersMinimum 7 and no bar on Maximum Shareholders Invitation can be made to public for subscription of Invitation can be made to public for subscription of
shares / debentures/ depositsshares / debentures/ deposits
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Limited Liability PartnershipsLimited Liability Partnerships
Hybrid business entity combining features of a Hybrid business entity combining features of a partnership firm and company. partnership firm and company. Limited liability of PartnersLimited liability of Partners No limit on maximum number of partnersNo limit on maximum number of partners Perpetual existence like a companyPerpetual existence like a company Non-applicability of The Indian Partnership Non-applicability of The Indian Partnership
Act,1932.Act,1932. No requirement of minimum capital No requirement of minimum capital
contributioncontribution
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Joint VenturesJoint Ventures
Business agreementBusiness agreement Capital contribution by partiesCapital contribution by parties Parties agree to develop a new entity for a Parties agree to develop a new entity for a
finite timefinite time Share Revenues, expenses & assets.Share Revenues, expenses & assets.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Major ChallengesMajor Challenges
Economic Challenges Regulatory Challenges Technological Challenges Human Resource Challenges Personal Challenges
V. S. Dastur & Co . V. S. Dastur & Co . Chartered AccountantsChartered Accountants
Important Statutory Registrations Important Statutory Registrations
Basic Incorporation documentBasic Incorporation document Permanent Account Number Permanent Account Number Tax Deduction Account Number Tax Deduction Account Number Service Tax Registration Service Tax Registration Sales Tax RegistrationSales Tax Registration Social Security RegistrationSocial Security Registration Shops & Establishment Shops & Establishment
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
ComparisionComparisionSr. Sr. NoNo..
TopicTopic Sole Sole Proprietary Proprietary ConcernConcern
Partnership Partnership FirmFirm
CompanyCompany LLPLLP
11 RegistrationRegistration Not RequiredNot Required Optional Optional Yes, under Yes, under Companies Companies Act, 1956Act, 1956
Yes, under Yes, under Limited Limited Liability Liability Partnership Partnership Act, 2008Act, 2008
22 Separate Separate Legal EntityLegal Entity
NoNo NoNo YesYes YesYes
33 Law for Law for NameName
Choice of the Choice of the ownerowner
Choice of Choice of PartnersPartners
Approval to Approval to be be obtained obtained from ROCfrom ROC
Approval to Approval to be be obtained obtained from ROCfrom ROC
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
ComparisionComparisionSr. Sr. NoNo..
TopicTopic Sole Sole Proprietary Proprietary ConcernConcern
Partnership Partnership FirmFirm
CompanyCompany LLPLLP
44 Foreign Foreign InvestmentsInvestments
-- Not allowed Not allowed from Foreign from Foreign NationalsNationals
AllowedAllowed AllowedAllowed
55 Minimum/MaMinimum/Maximum No of ximum No of Owners/PartOwners/Partnersners
11 2 to 202 to 20 2 to 50 for 2 to 50 for Private Private companies companies & 7 to & 7 to unlimited unlimited for public for public companiescompanies
2 to 2 to unlimited.unlimited.
66 Ownership Ownership of Assetsof Assets
Owner Owner Jointly by Jointly by PartnersPartners
With the With the companycompany
With the With the LLPLLP
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
ComparisionComparisionSr. Sr. NoNo..
TopicTopic Sole Sole Proprietary Proprietary ConcernConcern
Partnership Partnership FirmFirm
CompanyCompany LLPLLP
77 ResponsibilitResponsibilities / ies / AuthoritiesAuthorities
NoneNone Governed by Governed by Partnership Partnership DeedDeed
Governed Governed by the MOA by the MOA & AOA of & AOA of the the companycompany
Governed Governed by LLP by LLP AgreementAgreement
88 LiabilityLiability Unlimited Unlimited LiabilityLiability
Joint & Joint & Several Several Liability of the Liability of the PartnersPartners
Limited to Limited to the extent the extent of unpaid of unpaid amount of amount of the shares the shares heldheld
Limited to Limited to the extent the extent of the of the contribution contribution stipulated in stipulated in the LLP the LLP Agreement.Agreement.
99 Transfer Transfer -- Not PossibleNot Possible Legally Legally allowed allowed
Depends on Depends on LLP LLP AgreementAgreement
V. S. Dastur & Co . V. S. Dastur & Co . Chartered AccountantsChartered Accountants
ComparisionComparisionSr. Sr. NoNo..
TopicTopic Sole Sole Proprietary Proprietary ConcernConcern
Partnership Partnership FirmFirm
CompanyCompany LLPLLP
1010 Basic Legal Basic Legal DocumentDocument
NoneNone Partnership Partnership Deed Deed
MOA & MOA & AOAAOA
LLP LLP AgreementAgreement
1111 Legal Action Legal Action for Businessfor Business
Owner can sue Owner can sue and be suedand be sued
Only Only registered registered partnership partnership firm can sue firm can sue third partiesthird parties
Company Company can sue can sue and be and be suedsued
LLP can LLP can sue and be sue and be suedsued
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Which entity do I choose?Which entity do I choose?
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Factors to considerFactors to consider
Mindset/PersonalityMindset/Personality Timing Timing Ownership Ownership Financing Financing CostsCosts Tax MattersTax Matters
Mindset/PersonalityMindset/Personality
Entrepreneurship Spirit Leadership Skill Team Member Listening Skill Self-centric Team builder
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Timing IssuesTiming Issues
How soon do you plan to start your How soon do you plan to start your business? It is generally very easy to business? It is generally very easy to organize your business as a sole organize your business as a sole proprietorship, and you will spend proprietorship, and you will spend less time preparing and filing the less time preparing and filing the paperwork than with the other types paperwork than with the other types of entities. of entities.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Ownership issuesOwnership issues
Will you own the business yourself Will you own the business yourself or with others? Certain business or with others? Certain business structures more easily accommodate structures more easily accommodate more than a single owner. more than a single owner.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Also keep in mind when you are Also keep in mind when you are preparing your organizational documents preparing your organizational documents that you should consider the possible that you should consider the possible implications if one of the owner wants to implications if one of the owner wants to leave the business. It may seem leave the business. It may seem uncomfortable (and seem unnecessary) uncomfortable (and seem unnecessary) to think about this at the beginning, but to think about this at the beginning, but it can save a lot of stress and expense if it can save a lot of stress and expense if these issues are worked out beforehand..these issues are worked out beforehand..
V. S. Dastur & Co . V. S. Dastur & Co . Chartered AccountantsChartered Accountants
Financing issuesFinancing issues
How do you intend to finance the How do you intend to finance the growth of your business – do you growth of your business – do you anticipate seeking outside anticipate seeking outside investments? If so what kinds of investments? If so what kinds of investors will you target? Different investors will you target? Different types of business entities are better types of business entities are better suited to different types of investors.suited to different types of investors.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
CostsCosts
In general, the simpler legal In general, the simpler legal structures are less expensive to structures are less expensive to form, and require less money to form, and require less money to maintain. For example, in case of maintain. For example, in case of companies there are a lot of ROC companies there are a lot of ROC filings to be complied with.filings to be complied with.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Recordkeeping Recordkeeping
You may also wish to consider the You may also wish to consider the various recordkeeping requirements various recordkeeping requirements that are applicable to each type of that are applicable to each type of business entity. Youbusiness entity. You’’ll need proper ll need proper accounting records regardless of the accounting records regardless of the type of business entity, but type of business entity, but additional legal recordkeeping additional legal recordkeeping requirements may vary. requirements may vary.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
For example, companies have For example, companies have relatively stringent recordkeeping relatively stringent recordkeeping rules (compared to other entity rules (compared to other entity types), and also have shareholder types), and also have shareholder and annual meeting requirements. and annual meeting requirements.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Tax mattersTax matters
Different entities are affected by Different entities are affected by different tax provisions. In general, different tax provisions. In general, in a sole proprietorship the profits in a sole proprietorship the profits and losses of the business will pass and losses of the business will pass through the ownerthrough the owner’’s individual tax s individual tax return. This avoids additional layer return. This avoids additional layer of taxation that occurs at the of taxation that occurs at the corporation level.corporation level.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
Food for ThoughtFood for Thought
Decision on the type of entity Decision on the type of entity to choose is a crucial decision having to choose is a crucial decision having far reaching impact and should be far reaching impact and should be taken after due consultation. taken after due consultation. Invest time today to save Invest time today to save heartburn tomorrow. heartburn tomorrow.
V. S. Dastur & Co. V. S. Dastur & Co. Chartered AccountantsChartered Accountants
THANK YOU and QUESTIONSTHANK YOU and QUESTIONS