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Legalities of VentureLegalities of Venture
Presented by: Xerxes V. DasturPresented by: Xerxes V. Dastur
PartnerPartner
V.S.DASTUR & CO.V.S.DASTUR & CO.
Chartered AccountantsChartered Accountants

V. S. Dastur & Co.V. S. Dastur & Co.
Are you an entrepreneur?Are you an entrepreneur?
1. Must have burning desire and discipline to1. Must have burning desire and discipline to
plan, work, and sacrifice in order toplan, work, and sacrifice in order to
successfully transform your idea into reality.successfully transform your idea into reality.
2. Are you ready, willing and able to work2. Are you ready, willing and able to work
harder than you have ever before?harder than you have ever before?
3. Do you have self-confidence and discipline?3. Do you have self-confidence and discipline?
If youIf you’ve answered “no” to any of these’ve answered “no” to any of these
questions, you may not be ready forquestions, you may not be ready for
entrepreneurship.entrepreneurship.

 When you start a business, youWhen you start a business, you’’llll
have to decide upon the type ofhave to decide upon the type of
business entity you want to use.business entity you want to use.
There are a number of optionsThere are a number of options
available and each one has its ownavailable and each one has its own
advantages and disadvantages.advantages and disadvantages.
There's simply no one-size-fits-allThere's simply no one-size-fits-all
answer as to what type of entity isanswer as to what type of entity is
thethe ““bestbest””..

Developing Your IdeaDeveloping Your Idea
So whatSo what’s your idea?’s your idea?
WhatWhat’s your product?’s your product?
What goods or services are you going to provide toWhat goods or services are you going to provide to
whom and whose needs are you going to meet?whom and whose needs are you going to meet?
For starters, you should ask yourselfFor starters, you should ask yourself “What are my“What are my
skills, what am I good at, and what do I love to do?”skills, what am I good at, and what do I love to do?”

Choosing the Right BusinessChoosing the Right Business
1. Starting a New Business: Is your idea new or1. Starting a New Business: Is your idea new or
novel?novel?
2. Purchase an Existing Business: Many2. Purchase an Existing Business: Many
entrepreneurs start as franchisees in provenentrepreneurs start as franchisees in proven
businesses, thus avoiding some of the risks andbusinesses, thus avoiding some of the risks and
challenges inherent with starting a new businesschallenges inherent with starting a new business
from scratch.from scratch.

Sole
Proprietary
Concern
Partnership
Firm
Company
Joint
Venture
Limited
Liability
Partnership
BUSINESS
ENTITIES

Business Entity: Sole ProprietaryBusiness Entity: Sole Proprietary
ConcernConcern
 An individual personAn individual person
 No formal organizational requirementNo formal organizational requirement
 There is no limit to liability - your personal assetsThere is no limit to liability - your personal assets
are at stake!are at stake!
 You can only transfer the interests in yourYou can only transfer the interests in your
business by selling the assets themselves whichbusiness by selling the assets themselves which
could mean more tax liabilitycould mean more tax liability..
 Access to capital can be limited.Access to capital can be limited.
 No distinction between the owner and the entity inNo distinction between the owner and the entity in
the eyes of Tax Authoritythe eyes of Tax Authority

Business Entity: Partnership FirmBusiness Entity: Partnership Firm
 Two or more individuals (or entities) have sharedTwo or more individuals (or entities) have shared
ownership of the business.ownership of the business.
 Maximum of 20 partnersMaximum of 20 partners
 No formal organizational requirements.No formal organizational requirements.
 Any partner of the partnership can bind or obligateAny partner of the partnership can bind or obligate
the partnershipthe partnership
 There is no limit to liability for the partners. LiabilityThere is no limit to liability for the partners. Liability
is joint and several.is joint and several.
 Taxes are paid at Entity Level.Taxes are paid at Entity Level.

Business Entity: CompanyBusiness Entity: Company
What is a Company ?What is a Company ?
 Voluntary association of personsVoluntary association of persons
 Distinct name & IdentityDistinct name & Identity
 Limited LiabilityLimited Liability
 Perpetual successionPerpetual succession
Types of CompaniesTypes of Companies
1. Private Limited Company1. Private Limited Company
2. Public Limited Company2. Public Limited Company
3. Section 25 – Not for Profit Company3. Section 25 – Not for Profit Company

Private Limited CompaniesPrivate Limited Companies
 Minimum 2 and Maximum 50 ShareholdersMinimum 2 and Maximum 50 Shareholders
 No invitation can be made to public forNo invitation can be made to public for
subscription of shares / debentures/ depositssubscription of shares / debentures/ deposits
 Rigorous management/governance structuresRigorous management/governance structures
 Liability of a director/manager of such a companyLiability of a director/manager of such a company
can be at times be Unlimited.can be at times be Unlimited.

V. S. Dastur & CoV. S. Dastur & Co
Public Limited CompaniesPublic Limited Companies
 Company which isCompany which is notnot a Private Limited Company.a Private Limited Company.
 Certificate of Commencement of Business to beCertificate of Commencement of Business to be
obtained.obtained.
 Minimum 7 and no bar on Maximum ShareholdersMinimum 7 and no bar on Maximum Shareholders
 Invitation can be made to public for subscription ofInvitation can be made to public for subscription of
shares / debentures/ depositsshares / debentures/ deposits

Limited Liability PartnershipsLimited Liability Partnerships
 Hybrid business entity combining features of aHybrid business entity combining features of a
partnership firm and company.partnership firm and company.
 Limited liability of PartnersLimited liability of Partners
 No limit on maximum number of partnersNo limit on maximum number of partners
 Perpetual existence like a companyPerpetual existence like a company
 Non-applicability of The Indian PartnershipNon-applicability of The Indian Partnership
Act,1932.Act,1932.
 No requirement of minimum capitalNo requirement of minimum capital
contributioncontribution

Joint VenturesJoint Ventures
 Business agreementBusiness agreement
 Capital contribution by partiesCapital contribution by parties
 Parties agree to develop a new entity for aParties agree to develop a new entity for a
finite timefinite time
 Share Revenues, expenses & assets.Share Revenues, expenses & assets.

Major ChallengesMajor Challenges
 Economic Challenges
 Regulatory Challenges
 Technological Challenges
 Human Resource Challenges
 Personal Challenges

V. S. Dastur & Co .V. S. Dastur & Co .
Important Statutory RegistrationsImportant Statutory Registrations
 Basic Incorporation documentBasic Incorporation document
 Permanent Account NumberPermanent Account Number
 Tax Deduction Account NumberTax Deduction Account Number
 Service Tax RegistrationService Tax Registration
 Sales Tax RegistrationSales Tax Registration
 Social Security RegistrationSocial Security Registration
 Shops & EstablishmentShops & Establishment

ComparisionComparision
Sr.Sr.
NoNo
..
TopicTopic SoleSole
ProprietaryProprietary
ConcernConcern
PartnershipPartnership
FirmFirm
CompanyCompany LLPLLP
11 RegistrationRegistration Not RequiredNot Required OptionalOptional Yes, underYes, under
CompaniesCompanies
Act, 1956Act, 1956
Yes, underYes, under
LimitedLimited
LiabilityLiability
Act, 2008Act, 2008
22 SeparateSeparate
Legal EntityLegal Entity
NoNo NoNo YesYes YesYes
33 Law forLaw for
NameName
Choice of theChoice of the
ownerowner
Choice ofChoice of
PartnersPartners
Approval toApproval to
bebe
obtainedobtained
from ROCfrom ROC
Approval toApproval to
bebe
obtainedobtained
from ROCfrom ROC

Sr.Sr.
NoNo
..
TopicTopic SoleSole
ConcernConcern
FirmFirm
44 ForeignForeign
InvestmentsInvestments
-- Not allowedNot allowed
from Foreignfrom Foreign
NationalsNationals
AllowedAllowed AllowedAllowed
55 Minimum/MaMinimum/Ma
ximum No ofximum No of
Owners/PartOwners/Part
nersners
11 2 to 202 to 20 2 to 50 for2 to 50 for
PrivatePrivate
companiescompanies
& 7 to& 7 to
unlimitedunlimited
for publicfor public
companiescompanies
2 to2 to
unlimited.unlimited.
66 OwnershipOwnership
of Assetsof Assets
OwnerOwner Jointly byJointly by
PartnersPartners
With theWith the
companycompany
With theWith the
LLPLLP

Sr.Sr.
NoNo
..
TopicTopic SoleSole
ConcernConcern
FirmFirm
77 ResponsibilitResponsibilit
ies /ies /
AuthoritiesAuthorities
NoneNone Governed byGoverned by
DeedDeed
GovernedGoverned
by the MOAby the MOA
& AOA of& AOA of
thethe
companycompany
GovernedGoverned
by LLPby LLP
AgreementAgreement
88 LiabilityLiability UnlimitedUnlimited
LiabilityLiability
Joint &Joint &
SeveralSeveral
Liability of theLiability of the
PartnersPartners
Limited toLimited to
the extentthe extent
of unpaidof unpaid
amount ofamount of
the sharesthe shares
heldheld
Limited toLimited to
the extentthe extent
of theof the
contributioncontribution
stipulated instipulated in
the LLPthe LLP
Agreement.Agreement.
99 TransferTransfer -- Not PossibleNot Possible LegallyLegally
allowedallowed
Depends onDepends on
LLPLLP
AgreementAgreement

Sr.Sr.
NoNo
..
TopicTopic SoleSole
ConcernConcern
FirmFirm
1010 Basic LegalBasic Legal
DocumentDocument
NoneNone PartnershipPartnership
DeedDeed
MOA &MOA &
AOAAOA
LLPLLP
AgreementAgreement
1111 Legal ActionLegal Action
for Businessfor Business
Owner can sueOwner can sue
and be suedand be sued
OnlyOnly
registeredregistered
partnershippartnership
firm can suefirm can sue
third partiesthird parties
CompanyCompany
can suecan sue
and beand be
suedsued
LLP canLLP can
sue and besue and be
suedsued

Which entity do I choose?Which entity do I choose?

Factors to considerFactors to consider
 Mindset/PersonalityMindset/Personality
 TimingTiming
 OwnershipOwnership
 FinancingFinancing
 CostsCosts
 Tax MattersTax Matters

Mindset/PersonalityMindset/Personality
 Entrepreneurship Spirit
 Leadership Skill
 Team Member
 Listening Skill
 Self-centric
 Team builder

Timing IssuesTiming Issues
 How soon do you plan to start yourHow soon do you plan to start your
business? It is generally very easy tobusiness? It is generally very easy to
organize your business as a soleorganize your business as a sole
proprietorship, and you will spendproprietorship, and you will spend
less time preparing and filing theless time preparing and filing the
paperwork than with the other typespaperwork than with the other types
of entities.of entities.

Ownership issuesOwnership issues
 Will you own the business yourselfWill you own the business yourself
or with others? Certain businessor with others? Certain business
structures more easily accommodatestructures more easily accommodate
more than a single owner.more than a single owner.

 Also keep in mind when you areAlso keep in mind when you are
preparing your organizational documentspreparing your organizational documents
that you should consider the possiblethat you should consider the possible
implications if one of the owner wants toimplications if one of the owner wants to
leave the business. It may seemleave the business. It may seem
uncomfortable (and seem unnecessary)uncomfortable (and seem unnecessary)
to think about this at the beginning, butto think about this at the beginning, but
it can save a lot of stress and expense ifit can save a lot of stress and expense if
these issues are worked out beforehand..these issues are worked out beforehand..

Financing issuesFinancing issues
 How do you intend to finance theHow do you intend to finance the
growth of your business – do yougrowth of your business – do you
anticipate seeking outsideanticipate seeking outside
investments? If so what kinds ofinvestments? If so what kinds of
investors will you target? Differentinvestors will you target? Different
types of business entities are bettertypes of business entities are better
suited to different types of investors.suited to different types of investors.

CostsCosts
 In general, the simpler legalIn general, the simpler legal
structures are less expensive tostructures are less expensive to
form, and require less money toform, and require less money to
maintain. For example, in case ofmaintain. For example, in case of
companies there are a lot of ROCcompanies there are a lot of ROC
filings to be complied with.filings to be complied with.

RecordkeepingRecordkeeping
 You may also wish to consider theYou may also wish to consider the
various recordkeeping requirementsvarious recordkeeping requirements
that are applicable to each type ofthat are applicable to each type of
business entity. Youbusiness entity. You’’ll need properll need proper
accounting records regardless of theaccounting records regardless of the
type of business entity, buttype of business entity, but
additional legal recordkeepingadditional legal recordkeeping
requirements may vary.requirements may vary.

 For example, companies haveFor example, companies have
relatively stringent recordkeepingrelatively stringent recordkeeping
rules (compared to other entityrules (compared to other entity
types), and also have shareholdertypes), and also have shareholder
and annual meeting requirements.and annual meeting requirements.

Tax mattersTax matters
 Different entities are affected byDifferent entities are affected by
different tax provisions. In general,different tax provisions. In general,
in a sole proprietorship the profitsin a sole proprietorship the profits
and losses of the business will passand losses of the business will pass
through the ownerthrough the owner’’s individual taxs individual tax
return. This avoids additional layerreturn. This avoids additional layer
of taxation that occurs at theof taxation that occurs at the
corporation level.corporation level.

Food for ThoughtFood for Thought
Decision on the type of entityDecision on the type of entity
to choose is a crucial decision havingto choose is a crucial decision having
far reaching impact and should befar reaching impact and should be
taken after due consultation.taken after due consultation.
Invest time today to saveInvest time today to save
heartburn tomorrow.heartburn tomorrow.

THANK YOU and QUESTIONSTHANK YOU and QUESTIONS

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Legalities of Ventures

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Legalities of Ventures