Legal Structure for your startup
Private Limited Company is the most popular legal structure for businesses and they tend to be viewed with more credibility than an LLP or General Partnership. For any startup looking to build an expandable business, Private Limited Company is the most ideal one .Startups choose this because it allows outside funding to be raised easily, limits the liabilities of its shareholders and enables them to offer employee stock options to attract top talent. As these entities must hold board meetings and file annual returns with the Ministry of Corporate Affairs (MCA).
- Limited Liability: In cases where businesses need to borrow money, and if it cannot be repaid by the business, only the amount invested in starting the business would be lost, the director's personal property would be safe. Whereas in the case of General Partnership, partners are personally liable for all the debt raised and so, the partners would have to sell their personal possessions to do so.
- Investment-ready: Private limited companies easily accommodate equity funding as there is a clear distinction between shareholders and directors as well as limited liability. In fact, venture capitalists and private equity funds are unlikely to invest in any other structure. This is because LLPs would require them to become partners in the business, while an OPC can have only one shareholder.
- Better Debt-raising Capacity: A private limited company has more options for taking on debt than LLPs. Not only are bank loans easy to obtain (relative to OPCs and LLPs), the option of issuing debentures and convertible debentures are available to it.
- More Credibility: The private limited company structure lends credibility to the business, on account of the compliances that are necessary from the very beginning. On the other hand, several compliances for an LLP, such as appointment of an auditor, kick in only after its turnover crosses a certain amount, while many are not required at all.
1. Memorandum of Association:
The contents of Memorandum of Association (MOA of a Private Limited Company)
- Name Clause: The name of the Company must be stated with the last two words ‘Private Limited’. The Companies Act provides that a company should not be registered with an undesirable name ;the desirability in which decided from the facts and circumstances in each case.
- Situation Clause: The state where the registered office of the company will be located. The domicile of the company should be stated for the determination of jurisdiction of the Court as well as of the registrar.
- Object Clause: From legal point of view, this clause is ascribed the highest importance. Any number of lawful objects can be included in the object clause whether the company engages in those activities or not. Any activity which offends the object clause would be considered ultra vires i.e., beyond the powers of the company
- Liability Clause: A company must state that liability of its members is limited. A company cannot increase the liability of a member without his/her written consent.
- Capital Clause: The amount of share capital with which the company is going to be registered and the division into shares of equal value is required to be shown.
- Association and Subscription Clause: An association clause signifies the desires of subscribers to form a body corporate that should be appended in all cases at the foot of the Memorandum. The subscription clause states that each subscriber is to take at least one share in the company and will state the number of shares taken by him along with his signature.
Charter documents of a company
The articles of a company contains regulations for domestic management of a company and creates rights and regulations between the members and the company. The AOA are the by-laws of the company which makes the directors and other officers perform their function as regards the management of the company. Sector 31 vests company with power to alter or add to its articles.
- Pre-incorporation formalities: The following is to be carried out for setting up of company in India:- Obtaining of Director's Identification Number ("DIN") and Digital Signature Certificates ("DSC") for the proposed directors of the company by preparing and filing of all the relevant forms and documents as required under the provisions of the companies act. Next step is filing of online application for the approval of name of the company, and the name should not match with any other existing company. Once the name is approved by the registrar of companies, the drafting of the charter documents of the company is to be carried out i.e. memorandum (MoU) and articles of association (AoA), which are the basic documents for any company. Filing of all the incorporation forms with the RoC for registration of company and obtaining a certificate of incorporation of the company.
- Post-incorporation formalities: The company becomes a separate legal entity once the certificate of incorporation is been issued by RoC.Some basic registrations like filing of application for obtaining a permanent account number and tax deduction account number on the name of the company and any other business specific registrations from the relevant government authorities i.e. Import – Export Code Number in case of company carrying out the business of import and/or export are required to start the business. Further, the company is required to hold first board meeting immediately after incorporation, carrying out the annual general meetings every year, maintaining all the secretarial records at the registered office of the company, maintaining of statutory registers, minutes books etc. of company in compliance with the companies act.
Legal formalities for incorporating a company
Limited Liability Partnership (LLP)
Limited Liability Partnership (LLP)has become a popular legal structure for businesses. It's better than General Partnership since it limits the liabilities of its partners to their contributions to the business and also offers each partner protection from the negligence, misdeeds or incompetence of the other partners. The LLP is also cheaper to incorporate than a private limited company, requires less compliances and can be profitable from tax perspective. However, if you're looking to raise venture capital then LLP cannot accommodate it.This is why they are most popular with professional services (web designers or architects, for example) that require no equity funding. That said, it is not entirely uncommon for startup founders to first register an LLP and convert it to a private limited company before raising funding.
- Limited Liability: Businesses often need to borrow money. In a General Partnership, partners are personally liable for all this debt. So if it cannot be repaid by the business, the partners would have to sell their personal possessions to do so. In an LLP, only the amount invested in starting the business would be lost; all personal property would be safe.
- Relatively Cheap: If you're bootstrapping, you may be interested in knowing that an LLP has no authorized capital (minimum of Rs. 1 lakh for a private limited company), significantly lowering the cost of registration.
- Reduced Compliance: An LLP only requires audited annual returns to be led if it has a turnover of greater than Rs. 40 lakh or capital contribution of over Rs. 25 lakh. It also needs to communicate fewer business transactions and structural changes than a private limited company.
- Tax Advantages: There are some important advantages over the private limited company. For example, Dividend Distribution Tax and tax surcharge don't apply. Loans to partners are also not taxable as income.
The LLP incorporation procedure takes 20 to 35 days to complete, depending on whether you have your documents in order and the workload of the Ministry of Corporate Affairs (MCA).
- DSC & DPIN Applications: All the proposed partners need a Digital Signature Certificate (DSC), which is necessary to get them a Digital Partner Identification Number (DPIN).
- LLP Name Approval: The unique name you wish to give your LLP should be available and pass the naming guidelines provided by the MCA.
- LLP Registration: LLP Registration: During the process, you would need to submit various documents relating to all the partners in the business and a No-Objection Certificate from the property's owner. Prepare all of the forms and submit them to the MCA.
- PAN & TAN Applications: Every company needs a registered Permanent Account Number (PAN) and Tax Account Number (TAN).
Private Limited Vs. LLP
1.Whose funding need does it support?
Private Limited Company If your startup wants to build an expandable business structure, then this is the best option for you.An Investor will want you to convert to this business structure before investing. Limited Liability Partnership This is ideal for startups that can manage on debt. Private Equity funds and Venture Capitalists are unlikely to invest as it would require them to become partners.
2.Startup registration cost
Private Limited Company This option is relatively expensive , with registration costs starting at Rs. 16,000 and minimum paid-up capital of Rs. 1 lakh. It takes 20 to 25 days to incorporate.
Limited Liability Partnership Substantially cheaper than the Private Limited Company, with just registration costs of Rs. 11,000. There’s no paid-up capital.
3. Mandatory compliances
Private Limited Company It must maintain books of accounts, comply with statutory audit requirements and submit income tax returns and annual filings with the Registrar of Companies (RoC). Limited Liability Partnership In this business structure, an accounts book must be maintained that must comply with statutory audit requirements (if turnover exceeds Rs. 40 lakh or capital contribution exceeds Rs. 25 lakh) and submit income tax returns and annual filings with the RoC.
4. Tax advantages
Private Limited Company No advantages in general (industry-specific advantages are available). You need to pay a tax of flat rate of 30% on profits, Dividend Distribution Tax (DDT) and Minimum Alternate Tax (MAT) Limited Liability Partnership No general advantages (industry-specific advantages are available). Tax to be paid at at a flat rate of 30% on profits. However, MAT is applicable. DDT and Wealth tax is not applicable.
5. Business survival after the departure of a promoter
Private Limited Company The business will survive and will go on as long as there are a minimum of 2 directors and shareholders. This is because a private limited company has a separate legal existence Limited Liability Partnership Yes it will survive .An LLP has a legal existence independent of its partners. There must be a minimum of 2 directors. There is no limit to the number of partners.
Lean Startup Strategy
- Problems:List your top 3 problems
- Solution: List your top 3 feature
- Key metrics: List the key activities you measure
- Unique Value Proposition: State what differentiates you from the rest and worthy of attention
- Unfair Advantage: Which cannot be easily bought or copied
- Target Customer Segments
- Channels to reach your target customers
- Cost Structure
- Revenue Flow
Problem/Solution Fit :
A) Make a Business plan which can consist of the following:
Find out how you want to implement your strategy and concentrate on early adopters.
- Step 1 (Build) : At first build a prototype for testing the ideas. Google form among others is the best place to find out what kind of ideas do you want to test and what kind of prototype should you build.
- Step 2 (Measure) : The next step is to expose your prototype to customers and track their behaviours by collecting datas Google Analytics among others will help you in figuring out what ,how and when should you track .
- Step 3 (Learn) : The last step is that you can learn from the behaviour and transform them into new ideas Google sheets will help in knowledge tracking and sharing it with the rest of the team So, by following this process, risk of the startup is reduced while value of the startup is increased.
- So, by following this process, risk of the startup is reduced while value of the startup is increased.
B) Minimum Viable Product (MVP):
The main goal of MVP is to build the “bare-bones” product and test the idea.How to do it?
- Eliminate: The factors that should be eliminated on which the industry has been competing for long
- Reduce: The factors that you should reduce below industry’s standards
- Create: Making the factors that the industry never offered
- Raise: The factors that should be raised above industry standards.
Product Market Fit:
It is developing a solution that matches the problem.To reach Product Market fit, we have to undertake 4 actions:
Before you invest in scaling the product, your startup should achieve product market mix.
- What are your Strengths? (ex. Unique Product features)
- What are your Weakness? (ex. Product scalability issue)
- What are your Opportunities? (ex. Undeserved and attractive market segment)
- What are your Threats? (ex. competitors offering product at comparable lower price)
To help understand the comparative advantage of your startup in the industry, it is important to do the SWOT analysis. It asks the following questions:
- Potential Entrants
- Internal Rivalry
- Substitutes(or Complements)
Porter’s Five Forces
It consists of 5 basic forces :
- Customer: To create a “real value” rather than focusing on existing solution, rightly address the need of customers that is not yet met.Next is finding a market segment that will correctly meet your startup needs and abilities.Last but not the least is having a reliable market access to customers.
- Product: Why are you creating the product? To address the a specific need of customer; so your product features should be simple and well focussed to the goal. If your product is based on an existing solution, then a customer will hesitate before adopting to a solution if they have already invested in the existing solution, so there should be a clear value proposition describing why your product is beneficial to adopt.
- Timing: Every market has a natural lifecycle and the opportunity to enter the market is at its peak (Golden era) just before the market capitulates.As rhe market gradualy matures, opportunity to enter falls. As technology is commoditized(cloud services, open source software, hosting) i.e; the cost and risk of a software product is so reduced that the competitive barrier to entry has fallen; thus making competitive positioning more dependent on strategic issue.
- Competition: If there's already a well established brand and a mature competitor,then it's better to avoid price competition and existing economies of scale.For a market which is new, there is low price leadership so you can focus on volume and commodity whereas for a fragmented market it is advisable to focus on specific customer, yet again for a stagnant market your product should be innovative or disruptive.
- Substitutes(or Complements)
- Financial: Sunk cost and Opportunity cost are the two important things to be considered. Sunk cost is the capital that you have to commit for your startup but will not get it back and opportunity cost since that money can be committed to somewhere else.Also there should be a working capital float for payment.
Five essential focus point of every startups
Traditional Marketing Strategies
- Features: To serve the customers need better include the missed out features and exclude the costly features.
- What need of customers is being served when they use your startup’s product/service
- Variety, Design: How can your product/service be differentiated from your competitors’ ?
- Quality and Packaging: What will be your customers experience when using your good/service?
- Brand name
- How do the buyers value your good/service?
- Are the customers price sensitive ?
- How can your product/service’s price be compared to the that of your competitors?
- What amount of discounts should you give to your customers to attract them to buy your product/services?
The 4Ps of Marketing
Product/Service that you are selling.
Price paid by the buyers for your product/service.
- Where do buyers look for your product/service
- What can you learn and/or differentiate from your competitors regarding their platform of selling a product
- Are you using the right distribution channels?
- Are trade fairs and sales team etc. vital for the selling of your product/service?
- Ways to reach your target market: Sales promotion, public relations, advertising, direct marketing
- Where and when can you market your product/service to your target market?
- What can you learn from your competitor’s promotion and is their way of promotion going to hamper yours?
- s your product/service dependent on market seasonality? If yes, then when is the best time to promote for yours?
Traditional Marketing Strategies
Place where you will sell your product/service
Promotion to make people aware of your product/service
- Surveys used to test your product/service ideas, making your message clear and discovering new potential customers.
- Use Google docs and Forms(free) to create market surveys that can be embedded in your website or blog
- Use LinkedIn polls to survey demographics(for a fee) or your own network(free)
- Make people fill out the form by incentives, or posting them in Facebook, LinkedIn or by tweeting or reaching friends or family members personally
- Competitors, Potential Partners, Marketing Channels, Sales Prospects, Journalists, Industry events
- For Web research the following tools can be used-
Knowing your customers and exploring your environment
- Conversion rate: It measures visitors converted into buyers . If you had 200 visitors and 6 buyers, then you have a conversion rate of 3%.Product copy, product images, site design, pricing, product sales, and site reputability all have a huge impact in converting visitors, especially for an ecommerce site. To calculate conversion rate, divide the number of buyers by the total number of visitors.
- Average Order Value: The average rupee amount of each order placed. The formula for average order value: (Total order amount) / (number of orders) How to increase order size?
- Customers can be given the option to purchase two items together at a cheaper price than each item individually
- Having pop-up messages or suggesting additional products in the footer
- Free shipping or gifts for orders above a certain amount
- Abandonment Rate: The rate of customers who put an item in the cart but did not purchase the product by the total number of people who completed the checkout process
- New Subscribers/Registrations: It indicates whether your business is growing or not.
- Customer Loyalty: The time gap between each individual customer’s orders
- Tracking promo-code: The success of a campaign can be viewed by tracking how many people inserted a promo code.
- Social Media Networks: The most popular social networks today are Facebook, Twitter, LinkedIn, Tumblr, Reddit, Pinterest and now Instagram. Facebook users typically like visual posts like pictures and video whereas LinkedIn is a much more professional network. Reddit detests spammers ; so the content shared in Reddit should be much more specific and unique to the categories chosen. In Twitter if you share links(blog links) ,that will be responded well by the potential customers. A blogging platform can also be set up by using WordPress or other platforms.
- Startup PR: Media Advisory, Logos & Screenshots, Founder Bios & Photos are required for a successful media launch. To market your product/service and pitch it to the media, you need to start identifying our product/service and whom and how will it provide a solution to the problem. To make customers like you, give your focus on the strongest value proposition.
- Creating Content: To promote your startup, a great content is necessary; but before proceeding, a topic list should be created on the basis of core keywords. E-books/Guides, Webinar, Newsletter and Video can be four main types of content to be published. Also email capturing in the form of email submits, newsletter subscriptions and blog subscriptions are vital for any startup marketing.
- Analytics: Analytics tool like Google analytics are of a great help which allows them to track visits and events. The next step is measuring weak growth and month growth that can be attributed to some tweets or newsletter that went viral. To make your startup all the more successful, come with some new ideas like a contest and free gifts for participating in that contest, or some other innovative ideas , which even if it fails, you have nothing to lose. You can always try from various angles which if succeeds, will be worth it.
Preparation of Financial Statements
Cash comprises of cash on hand and demand deposits with banks.
- Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Examples include commercial paper, marketable securities, money market funds,short -term government bonds, treasury bills.
Cash flows are inflows and outflows of cash and cash equivalents
Cash and Flow Statement
Cash flows are useful in assessing the ability of an enterprise to generate cash and cash equivalents and also the needs of these enterprises to utilize these cash flows. An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented. It is used to evaluate the changes in net assets of an enterprise and its financial structure. Cash flow information of the past is an indicator of the amount, timing and certainty of the future cash flows. It can also be used to check the accuracy of such past assessments of future cash flows and help in examining the relationship between profitability and net cash flow and also the impact of changing prices.Definitions
cash receipts from the sale of goods and the rendering of services;
cash receipts from royalties, fees, commissions and other revenue;
cash payments to suppliers for goods and services;
cash payments to and on behalf of employees;
cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits;
cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and
cash receipts and payments relating to futures contracts, forward contracts, option contracts and swap contracts when the contracts are held for dealing or trading purposes.
Operating activities include the core business activities of a company such as manufacturing, distributing, marketing and selling a product or service. Examples of cash flows from operating activities are
Proceeds from disposal of property, plant and equipment
Cash receipts from disposal of debt instruments of other entities
Receipts from sale of equity instruments of other entities
Examples of Outflows:
Payments for acquisition of property, plant and equipment
Payments for purchase of debt instruments of other entities
Payments for purchase of equity instruments of other entities
Sales/maturities of investments
Includes purchasing and selling long- term assets and other investments
Cash from investing activities provides information regarding a company’s purchase or sales of capital assets. List of cash flows that from a firm’s investing activities are as follows:Examples of Inflows:
Receiving cash from issuing stock or spending cash to repurchase shares
Receiving cash from issuing debt or paying down debt
Paying cash dividends to shareholders
Proceeds received from employees exercising stock options
Receiving cash from issuing hybrid securities, such as convertible debt
Cash from financing activities in the cash flow statement shows how a firm raises capital and pays it back to investors through the capital markets.
Cash dividends payments, adding or changing loans, or issuing and selling more stock are also included in the activities. It measures the flow of cash between a firm and its owners and creditors.
A positive figure is suggestive of cash coming into the company, which boosts its asset levels. A negative figure is suggestive of a company paying out capital, such as paying off long-term debt or making a dividend payment to shareholders.
A firm’s financing activities comprises more or less of the following:
Table 1.a. Direct method of Cash Flow Statement
Example of Cash flows from operating activities
Table 1.b. Direct method of Cash Flow Statement
Example of Cash flows from Investing activities
Table 1.c. Direct method of Cash Flow Statement
Example of Cash flows from financing activities
i) Variable unit costs: Cost of producing one unit of output. Variable costs include all the costs that go into making the product or buying it wholesale. It varies with the volume of production and rises as production rises and falls as production falls
ii)Fixed Cost: These include the costs of operating a business like rent or mortgage, utilities, insurance, salaries of non-production employees, and all other costs. Overhead costs are salaries or rents paid per month to employees.
iii)Unit Price: Determine the unit price for your product
iv)Break-even point: It is the point at which costs and revenue are equal and there is no net loss or gain
v)Create a spreadsheet: A spreadsheet is to be constructed before making break even calculation. The spreadsheet will plot break-even for each level of sales and product price, and it will create a graph showing you break-even for each of these prices and sales volumes. A layout of spreadsheet is given in the next page.
A break-even analysis tells us whether the products you are producing and selling are profitable or not. A break-even table to show break-even points for various sales volumes and unit prices for each product; a lender or investor will probably want to see this information in the financial report section of your business plan It determines the point at which revenue equals cost. .Break even analysis calculates margin of safety; the amount by which revenue exceed breakeven point.
A break-even table is constructed to show break-even points for various sales volumes and unit prices for each product; First, you need to determine the following:
Table 3.Startup costs worksheet
Startup costs include all the facilities costs, equipment, initial supplies and materials, advertising materials, and miscellaneous costs you need to open your business. Costs are estimated to make sure you have all the expenses you will need to get started. It's always better to OVER-estimate expenses and UNDER-estimate income. Startup costs worksheet layout:
Table 4. Balance Sheet
A balance sheet is a business statement showing what the business owns, what it owes, and the value of the owner's investment in the business. The balance sheet is calculated at a specific point in time - at business startup; at the end of a month, a quarter, or a year; or at the end of the business. It states the balance of income and expenditure of the preceding period. A sample balance sheet is as follows:
Table 5. Income Statement
Income statement (also known as profit and loss statement ) is actually a pro-forma or projected statement because it estimates the amount of income at the end of the first year. Over a specific time period say a month, a quarter, or a year, it shows the revenues and expenses, and resulting profits/losses of a business . A sample income statement is as follows:
Bootstrapping from personal finances or operating revenues of the company
Friends and family
High Net-worth Individuals (HNIs)
Bank Loans, credit cards
Sources and Uses of funding
Uses of fund: Funds are required by the startups for quantities of supplies, equipment and furniture, purchase of building/land or costs of deposits for rent, advertising and other startup costs.
Total Uses of fund = Subtotals of startup costs worksheet( table 3 )+ Working Capital needs (amount of money you need to have in hand to pay bills while you will establish your business)
Sources of fund: All the sources of fund are listed here:
In the Sources of Funds section, all the sources of funds are listed such as collateral for the loan you are seeking. This might include equity in your home, a savings account.
Amount of financing needed=Total uses of funds- total collateral provided