Monday 15 February 2010

Starting a company? What you should do on priority?

New entrepreneurs as well as established small business players find it difficult and cumbersome to get through the first stage of starting a company, which is it's legal formation. This is one of the most important areas to look into, however many people overlook it and find themselves handicapped a few years down the line when they are looking for external investment or finance.
Remember that any investor looks for an asset, and assets have first existence on paper. Even banks look for 3 years track record to provide unsecured or secured finance.
So what should one do? Here are some steps that I would like to advice.
1. Secure your idea on paper :
Put a business plan together. Refer to various sample business plans that are available online. Put a study on market size, market need, your product offering and how your product offers significant value addition to other players in the market. Generally investors like ideas that cater to mass market and offer a much needed solution to a problem at lesser price and in quicker time.
Get your copyright, trademark and apply patents if possible.
2. Form a company :
Decide the ownership structure in equity terms and form the company on paper. In forming a company, here are the options that one has to consider:
a. Sole Proprietorship Firm :
Although a lot of people get started with sole proprietorship firms, such form of companies is suitable if one wants to expand the company operations in the future and scale the company. Though Sole proprietorship firm lets you open a bank account. The major advantage of this form is that it is easiest to form and the biggest drawback is that the liability of Sole Proprietor is UNLIMITED.
b. Partnership Firm :
Partnership firms are very much like Sole Proprietorship firms with the only difference of multiple partners. Both forms let you open a bank account and shift to more recognized model in the future. It costs approximately Rs. 10000 to start a Partnership Firm. Major disadvantage of Partnership firm is that the liability of Partners is UNLIMITED & each partner is liable for all the deeds of other partner & the Firm.
c. Private Limited Company :
This is the most recognized form of company formation that needs minimum Rs. 1 lac as paid up capital by it’s shareholders and needs a minimum of two directors. Private limited company formation needs simple documentation and costs approximately Rs. 20,000.

d. Limited Liability Partnership :
Limited liability partnerships is a newly introduced format by the ministry of corporate affairs and offers several advantages both Private Limited Company & Partnership Firms such as :
i. Limited liability on directors / Partners
ii. Unlimited partners
iii. Tax benefits in the form of NO TAX on PROFIT distribution
It costs approximately Rs. 15,000 to start a limited liability Partnership.
e. Foreign Incorporation :
This type of incorporation is required when your target market lies outside your country of residence and operation. Most online firms cater to diversified global clients hence need to form a company in the region they conduct business in. Foreign companies who want to do business in India can register a private limited with foreign directors. While Indian businesses who want to do foreign incorporation can typically opt for Limited Liability Company structure which can be registered online and are supported by most countries such as US, UK and Singapore. The cost varies depending on the Country & type of Incorporation.

3. Start recording transactions :
You will be able to open your bank accounts once your company is formed. It is very important to do as many transactions as possible through bank because it is the perfect evidence for various VCs or financing institutions.

4. File your company returns regularly :
File returns for your company regularly, there are various tax numbers required in order to do that. But it is better if you file your returns on time.

5. Know the bank people and get your finance pre-approvals :
When you start the company and customers start coming in, most people get stuck with inability to arrange finance for scaling up. Although Venture Capital and Angel investment exists, most people know that the probability to secure it is as good as winning a lottery. But do not get upset. If you have your papers right, any of your local bank has programs such as unsecured and secured finance, from Rs. 30 lacs to even Rs. 300 crores.

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