Which Type of Company is Best for You

After deep thought, you have decided what your business is going to sell. You have decided how much you will charge for it, and how much money it will make for you in a year. You have even decided what your company is going to be called.

Now you just need a bank account to cash the checks. 

Now you could just tell you customers to write the check in your name, but you start considering various question like, 

Would my business look like it's just a one-person show? 
What if I want to make my friend a partner? Would she be OK with the checks being in my name?
Would customers be more comfortable dealing with a professional sounding 'company' rather than a person?
What if I want to have more than one company, all doing different things?
What if I need funding? Would investors be happier investing in a company rather than an individual?

You my dear, budding business owner have just had an epiphany;

A BUSINESS IS SEPARATE FROM IT'S OWNERS

Now that's not always strictly true in a legal sense, as you'll see in a bit, but the thing is if you cash checks in your own name, that makes you self-employed, not a business owner.

Take a look at this video in which the Rich Dad Poor Dad guy defines self-employed and business owner;

http://www.youtube.com/watch?v=RfWPnftm2kQ

Basically there are 3 types of business entities that most (civilized) countries in the world have.

They all have important advantages and disadvantages. At different stages in your business, one or the other business entity might be appropriate for you. 

In the course of my business life, I have started all of these entities.

PROPRIETORSHIP OR SOLE PROPRIETORSHIP

This is  the simplest type of business entity. Simply put this type of business is not different from its owner in a legal sense. 

With this type of company, you as the business owner would be solely responsible for all decisions taken in the company. You would have a right to all the profits that the business made.

You would also have to bear all the loss that the company made and be personally responsible for repaying any debts that the company incurred.

It is really difficult to get any type of funding into this kind of entity and impossible to take on more partners. On the other hand, the good thing is that the paper work involved and regulation of this type of enterprise is minimal.

Probably the only thing you will do with a proprietary concern is cash checks in it's name.

This page gives you the documents you need  to open a bank account in the name of a proprietorship.  This is pretty much the same for every other bank.

Assuming that you have the proof of identity and proof of address, the only thing you will need is to get certificate of registration under the shops and establishments act.

That's really simple too.This form is for the applying for registration under the shops and establishments act in Karnataka, but every other state has a similar form available on it's department of labor website. Just fill up the form, submit it along with any fees to the labor officer closest to your address. He will give you a certificate of registration of shops and establishments.

For any new business owner, a Proprietorship is probably the best kind of entity and this is the one I would recommend you start with.

PARTNERSHIP FIRM

If you want to form a business along with someone else, like your friend, wife or husband, you may want to start a partnership firm.

This page will tell you a lot in terms of what a partnership firm is. A partnership firm, like a sole proprietorship, is the same as it's partners in the eyes of the law. So you will be personally responsible and liable for repaying any money owed by the firm. Not just that, you will also be responsible for any actions of your partners.

A partnership firm needs to have a minimum of 2 partners and can have a maximum of 20 partners. 

Like a proprietorship, a partnership is easy to form and has minimal regulation from the government. Also, like a proprietorship, a partnership is not perpetual and ceases to exist in certain situations, like the death of a partner.

Although not mandatory, a partnership firm usually has a Partnership Deed, which lays down the rights, duties, profit share, etc. of each partner.

You might want to engage the services of an advocate to draft the partnership firm. I would recommend that you use this one, which is my sisters company law firm. They can give you the legal advice you need to draft the appropriate partnership deed. 

The partnership deed is registered with the Registrar of Firms and societies. This deed is also required to open a bank account.

A partnership is ONLY required if you want to bring in someone else into your business. My advice would be to avoid this kind of entity all together. Start out with a proprietorship, and then go on to form a limited liability company which I talk about below;

LIMITED LIABILITY COMPANY

Eventually when your business grows, you will want to form a company. Basically a limited liability company is an organization where the owners' liability is limited.

For example in a private company limited by shares (Called a Private Limited company in India), no matter what the company owes, you only stand to lose what you have invested in the company. Your personal assets, like your house or car can not be taken away by your creditor.

In the eyes of the law, the company is a separate entity from its owners. It has rights and duties similar to a person. If that concept is difficult to understand, you are not ready to form a limited liability company yet. Read up some more starting with the Wikipedia page.

Talk to a chartered accountant or an advocate who deals with company law. 

This is the type of company that get really REALLY big, like the ones listed on the stock exchanges. This is the type of company that will eventually make you very rich but it comes at a price.

Limited Liability are subject to a LOT of government regulation. There are also a lot of procedures that need to be followed to setup a company. This page will help you get started.

You should also be ready to have your accounts, ownership details and everything else looked at by ANYBODY, because all of this stuff will be up on a website that anyone can see.

Anyway, to round things up start your business as a sole proprietorship, and when things start getting serious and the money starts flowing, setup a limited liability company.

Till Next Time

Sunil

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