We have recently incorporated two businesses, one of them obviously is Krya and another one which will also go live shortly (more on that later).
The process of incorporating our ventures has been very instructive. It also brought us back into close contact with several government agencies that regulate the process. For several years we have been insulated from interactions with the government (save the occasional passport renewal). We decided to enter every single interaction with an open mind and have been rewarded with pleasant transactions; which means that we can focus on the core job of creating our brand.
For this piece I will focus on our company structure
Traditional business vehicles
In India the vehicles available hitherto fall into two groups
- Partnership & Sole Proprietorship
- Private limited company & limited company
The fundamental difference between the two groups lies in the creation of a separate legal entity,”the company” in the case of the second group. This legal entity has distinct identity of its own which is separate from that of its founders/owners. For the owners part their liability is limited to the extent of the capital contributed to the formation of the company. In the case of the first group i.e. partnership & sole proprietorship, the firm has no identity of its own. All liabilities due to the firm are automatically due to the partners/proprietor.
In addition, partnership & sole proprietorship have several restrictions on raising capital and cannot issue shares to the public through IPO etc. Of course this means that companies have high start-up costs, tougher compliance and regulatory norms.
Enter Limited Liability Partnerships (LLP)
The limited liability partnership (LLP) act 2008 offers a great solution to bridge the gap between the two traditional business vehicles by combining their key features. The key features are
- Creation of a separate legal entity , “XYZ LLP”
- Low start-up capital & government fees
- Simplified compliance norms.
For example there is no specified minimum start-up capital, returns need to be filed only annually and LLPs with annual turnover under Rs 4 Million do not have to audit their accounts.
Moreover for a LLP with 2 partners & with start-up capital under Rs 1 lakh the total incorporation fee is just Rs 1000! This is very reasonable considering the cost of a digital signature token with two year validity is Rs 2500.
To top it all, the entire process of incorporating an LLP is done online with documents being scanned and uploaded with a digital signature. Of course the digital signature needs be verified by an accountant in practise whose charges are extra.
LLPs are a standard business vehicle in many countries across the world and a common perception is that they can only be used by services like lawyers or accountants. However the LLP act clearly stipulates that any two people starting a legal business to create profit can incorporate an LLP.
The only difficulty we faced in incorporating Krya Consumer Products LLP was in reservation of the company name. There are some guidelines laid down by the Ministry of Corporate Affairs that were difficult to understand at first, and I will address that in a separate post.
At Krya we are very excited about starting a business right now in India. Everyone we have talked to has been thrilled about the idea of starting a business with sustainability as a core value.
The availability of a hard working, flexible business vehicle like an LLP is yet another reason why it is a great time to start a business.