Wall street Journal has an informative article on the best legal structure for a startup
Choosing the appropriate legal structure is a crucial decision for any startup.
Based on our past experience, here are the top 5 things to think-through while making this decision:
Understanding the Options
It is important to explore and understand the full range of options available to an entrepreneur. The choice of legal structure in India can either be a for-profit entity (i.e. a sole proprietorship or a company or a partnership firm or a limited liability partnership etc.) or not-for-profit entity (i.e. a society or a trust or a company registered under Section 25 of the Indian Companies Act, 1956 etc.) or even a hybrid structure (i.e. affiliate for-profit and not-for-profit entities functioning together as a cohesive business unit and interacting with each other on an arm’s length basis whileleveraging their respective synergies).
Nature of the Company and Context
The choice of legal structure, whether it should be a stand-alone entity or a hybrid structure, or whether for-profit entity or not-for-profit entity, should reflect the business plan of the entrepreneur, and not necessarily vice versa. Entity structures are intended to foster and facilitate entrepreneurship and factors such as business operational model, regulatory and tax considerations, transaction costs, sector specificity of activities (e.g. microfinance, agriculture etc.), type of funding sought, dynamics between and amongst the various promoters and funders, proposed mechanism for profit sharing or distribution, governance considerations, limited liability aspects etc. collectively govern the choice of legal entity.
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