How to form your own startup: a legal perspective

Monday November 14, 2016 , 5 min Read

Do you have an idea in mind? Do you have an idea to implement that idea in your mind? Do you think that you can monetise your idea by doing business? Do you have the resources to do business? Do you have people with whom you want to associate? Are you ready to take the plunge and build your brand?

If all your answers to the above questions are in the affirmative, then fasten your seat belts, because you are now ready to form your own startup. So, you must be wondering with all the hype created around it, what exactly does a startup actually mean.

Image Credit : danskepatienter.dk

In general parlance, a startup is a formal organised structure through which business could be set in motion and be established over a period of time. In India, this formal organised structure could be in the form of a company incorporated under the provisions of the Companies Act, 2013 or a partnership firm registered under the provisions of the Indian Partnership Act, 1932 or a limited liability partnership incorporated under the provisions of the Limited Liability Partnership Act, 2009.

The individuals wanting to have their own startup get baffled as to which structure is most suitable for them. For such individuals who are confused about the same, here is a crisp distinction between the three structures to provide some clarity:

Basis	Company	Partnership	Limited Liability Partnership (LLP)
Number of Members/ Partners	In case of One Person Company – 1 ;In case of Private Company- 2 (minimum) and 200 (maximum); andIn case of Public Company- 7 (minimum) and unlimited (maximum)	Minimum 2 and Maximum 20	Minimum 2 partners and there is no limitation of maximum number of partners.
Separate Legal Entity	Is a separate legal entity.	Not a separate legal entity.	Is a separate legal entity.
Perpetual Succession (Uninterrupted Existence)	Enjoys the benefit of perpetual succession, members may come and go but the company exists.	Exists as per the will of the partners. Does not enjoy perpetual succession.	Enjoys perpetual succession, partners may come and go, but the LLP exists.
Cost of Formation	High	Low	Medium
Property Ownership	A company being a juristic person, can acquire, own, enjoy and alienate, property in its own name. No shareholder can make any claim upon the property of the company so long as the company is a going concern.	Partners are the joint owners of the properties and assets of the Partnership.	The LLP exists independently of its partners and therefore, has the ownership of properties and assets in its own name.
Requirement for registration	Mandatory	Optional	Mandatory
Creation	Created by law	Created by agreement or contract.	Created by law and by agreement.
Charter Document	Memorandum and Articles of Association are the Charter Documents	The Partnership Deed is the charter and the sole governing document of the partnership firm	The LLP Agreement is the charter of the LLP which denotes its scope of operation and rights and duties of the partners vis-à-vis LLP
Foreign Participation	Foreign nationals can become members of a company.	Foreign nationals cannot form partnership firm in India.	Foreign nationals can be partners in an LLP.
Investment Magnet	Highest traction for investment.	Lowest traction for investment.	Low traction fro investment.
Liability	Generally limited to the amount required to be paid up on each share.	Unlimited. Partners are severally and jointly liable for actions of other partners and the firm and liability extend to their personal assets.	Limited, to the extent their contribution towards LLP, except in case of intentional fraud or wrongful act of omission or commission by the partner.
Creditworthiness	Due to stringent compliances under various laws, Companies enjoys high degree of creditworthiness.	Creditworthiness of firm depends upon goodwill and creditworthiness of its partners	Enjoys comparatively higher creditworthiness from partnership due to stringent regulatory norms, but lesser than a company.
Level of Compliances	High	Low	Medium

After getting some clarity on the fundamentals of each structure, one may analyse their requirements and may further obtain professional advice for choosing the best suitable structure as per the requirements.

Though from the above points it could be observed that from the perspective of roping in investments from angel investors, VC funds, seed funds, etc., in future, the best form of organisational structure for a startup is to form a company. With the recent amendments initiated by the Ministry of Corporate Affairs (MCA), forming a company has never been so easy.

On October 1, 2016, the MCA has introduced SPICe (Simplified Proforma for incorporating Company Electronically) for simplifying incorporation of a company through online application form INC-32. Additionally, the Ministry has also launched electronic submission and filing of the Memorandum of Association (INC-33) and Articles of Association (INC-34). This step of the Government of India is progressive and welcome by the Indian startup ecosystem.

Following is a procedure on how to incorporate a company via SPICe, (Please note that the process is for formation of private limited company):

Take a note of the mandatory documents required to be attached with the form of incorporation:

Affidavit and declaration by the first subscribers and directors;
No Objection Certificate (NOC) from the owner.
Address proof of the company, which includes copies of utility bills (not older than 2 months)
Copy of Rent Agreement, if the office premises are rented
Copy of PAN card of the subscribers/ directors.
Identity Proof- Copy of AADHAAR card (mandatory if applicant has valid PAN). Otherwise, voter ID or passport or driving licence of the subscriber/director;
Address Proof- Latest bank account statement or telephone bill or electricity bill not older than two months of the subscriber/director.
In case of foreign nationals, passport is to be mandatorily attached and all the documents shall be adequately apostilled or notarised.

Secondly and lastly, follow the below stated procedural steps:

* Collation and arrangement of documents may be time consuming and may take more than 2 days.

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