In this blogpost,  Mansumyer Singh, Advocate, Student of the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about the various business structures a single founder could opt for.

Introduction

There are a number of business structuring options available for a person wanting to start a new business. A new founder can choose to either start his business as a sole proprietorship, wherein his business will not have a separate legal entity and will be included in his personal assets/income for the purposes of taxation.

A new founder can also choose to start his business using the One Person Company business structure newly introduced under the Companies Act, 2013. A One Person Company is the same as a Company in the sense that it has a separate legal entity, but leeway has been provided to OPCs under the Companies Act, 2013 such as being allowed to have only one director and other rebates in the holding of Meetings. The incorporation process and filings are the same as those in the case of a Company. Some relaxations for compliances have been provided under the Companies Act, 2013.

If there are multiple founders wanting to start a business, they may choose to adopt the Partnership business structure, or they may choose to structure their business as a Limited Liability Partnership if the partners wish to have limited liability.

Entrepreneurs may even choose to start their business as a Company, which has advantages like limited liability and easy access to investment and loans, both foreign and domestic. But since the incorporation process, compliance and filings are pretty exhaustive, the cost for incorporating and running a Company may be a little too much for new entrepreneurs.

Being a single founder

While conventional wisdom postulates that a start-up should preferably have multiple founders, but when it comes to businesses with multiple founders, more often than not there is that one dominant founder without whom the start-up will not be able to achieve the same heights of success it would if he is there playing his part.

Conventional wisdom also says that if you are a single founder of a start-up business, the odds are stacked heavily against you and that co-founder businesses have higher chances of success. However, this is not necessarily the case. On the contrary, we can safely say that now is the best time to be a solo founder in India. The government has been promoting start-up businesses with flagship policies like “make in India” and “start up India”, along with the recently unveiled Start-up India Policy 2016, which has provided a number of advantages to single founder startups, which are not subject of the present article.

The above-mentioned policies adopted by the government to promote start-ups have resulted in creating an entrepreneurial atmosphere in the country and will lead to a substantial drop in the cost of building businesses in the long run. This drop in the cost of building businesses is a massive advantage to single founders, who lack the large resource pool which might be available to multiple founders, which leads us to a very pertinent issue we shall now discuss.

Angel Investors, Venture Capitalists and other investors generally tend to be wary of single founder businesses. They prefer to invest in businesses with multiple founders over those with single founders. Thus, single founders have a harder time raising money in the form of outside investments when compared to multiple founder businesses and resultantly, it would be tougher to build your business and make it grow at a rapid pace. However, that may not be a bad thing.

The earlier a business raises money in the form of investments, the more risk it is asking the investors to endure. Thus, funding in the form of investments at the beginning stages of business when the founder is unsure of how it will run and whether it will succeed may not be that good an idea.

Business structures which can be adopted by single founders

There are a number of business structures which Indian entrepreneurs can choose for their businesses like, Private limited Company, Partnership, Limited Liability Partnership (LLP), the newly introduced One Person Company (OPC) and Sole Proprietorship.

Each business structure has its distinct features, and it cannot be assumed that any one structure is inherently better than the other. Which business structure is more suitable depends on the individual circumstances of each business. Thus, the decision of choosing a legal structure for your business is not one that should be taken lightly. The needs of the business must be the determining factors when it comes to choosing a business structure, and they must be matched with the advantages offered by the different business vehicles in order to decide on the one most suitable for that particular business.

When it comes to single founder businesses, the choice of structures available is considerably less as compared to businesses with multiple founders. A single founder can choose to establish a sole-proprietorship or he can choose to form a One Person Company (OPC) which has been newly introduced under the Companies Act, 2013.

Both structures have their distinct advantages and preference of one over the other depends entirely on the needs of the particular business.

Sole proprietorship as a business structure for single founders

Sole Proprietorship is the simplest of all the business structures. It is ideal for a single founder who is looking to experiment with his start-up and wishes to test the waters before delving too deep into the business. A single founder may choose to start his business as a Proprietorship when the nature of his business is simple, the risk involved is low, the product market is small, and there is not a substantial capital requirement or the need for a large amount of outside funding/investments.

In a Sole Proprietorship, the single founder possesses all the authority in respect of his business. A sole proprietorship is not a separate legal entity, and all its assets and liabilities are deemed to be assets and liabilities of the proprietor. For the purposes of taxation, the income of the proprietorship is deemed to be the income of the proprietor and is taxed accordingly. A sole proprietorship need not be registered, which makes the process of starting a proprietorship a lot less cumbersome as compared to the other business structures. The key features of a Sole proprietorship are as follows:

• It is the simplest of all business structures
• Registration not mandatory.
• Almost no Compliance requirements.
• The proprietor has complete control of the finances of the company.
• The Proprietor has unlimited liability in the Proprietorship.
• Succession in case of death of proprietor through execution of will.[1]

One person company (OPC) as a business structure

One Person Company (OPC) is a business structure newly introduced under the Companies Act, 2013. It essentially consists of all the characteristics of a Private Limited Company, but with considerably lesser compliance requirements. An OPC can be incorporated by a single person and can fully function with only one director and member. However, an OPC need not have just one member; it can have up to 15 members. This feature gives the founder flexibility in case he wishes to include more persons in his business venture.

One Person Company is best for a single founder who has a well-defined business plan but wishes to start small and subsequently grow as the business grows. It is not meant for a founder who wants to experiment with his venture. An OPC caters to the single founders who wish to start their business in an organized manner and enjoy the benefits of limited liability offered by the OPC business vehicle.

Once incorporated, an OPC has a separate legal identity and has to ensure its compliance with the Companies Act, 2013. However, OPCs have been given some relaxations under the Companies Act, 2013 and have lesser compliances as compared to Private Limited Companies. Some of the key features of an OPC are:

• Separate Legal Identity.
• Limited Liability.
• Requires a minimum of Rs. 1 Lac Paid-up Capital.
• The member can name a nominee who will succeed him in the event of his death.
• OPC must meet the minimum compliances under Companies Act, 2013.[2]

Conclusion

A single founder should choose carefully and wisely while deciding on a business structure for his start-up and should seek professional advice before deciding the same. A single founder who has a definitive plan for his business venture and wishes to start his business and make it grow in an organized and structured manner should prefer the One Person Company business vehicle. However, the cost of incorporation and compliances in the case of OPCs can be substantial. In terms of taxation, an OPC is the same as a Private Limited Company, and its income is taxable at the flat rate of 30%, which doesn’t make it as cost effective as a Proprietorship.

On the other hand, a single founder who wishes to experiment with his business and wants to gather a better understanding of his business and its working before getting further involved in it will be better off choosing a Sole Proprietorship business vehicle, provided that the business is relatively low risk, and the capital and funding requirements are relatively small since the proprietor will have unlimited liability in a proprietorship.

[1] Lawsikho.com-NUJS diploma in entrepreneurship administration

[2] ibid