The trend of starting up a new business in India is quite catching up, not in scale or pace that’s been seen in Silicon Valley. We see patterns wherein many want to start/build something new – working executives who have acquired enough skill sets and experience, along with a group of friends or Freshers who are talented and have a good business idea.
Although talented in their respective fields, knowledge or awareness to this crucial component that links everything in a business or organization (legal aspects) is missing quite often . The start-up guy must acquire some basic legal knowledge that puts various things into perspective and certain things can be avoided in the future.
We’ll explore the key different scenario that may arise in the future and this article would help keep you well prepared for those eventualities. A common example to mention is a person ABC wanted to start a business and just for meeting the statutory requirement of minimum 2 partners; he invites his ex-colleague XYZ, to be a partner/director of the company. Later on, some conflict of interest crops up that leads to some disagreement.
In this he/she could find scratching their head and what they have done, If ABC should have introduced his spouse/parents as another partner instead of his colleague that would have met the statutory requirement and the further issues may be avoided. There can be many instances that shall result in conflicts, due to misunderstanding among partners or purely lack of knowledge e.g. Determination of Capital, Director’s remuneration, Partner’s rights, roles & responsibilities, Expulsion of any partner etc.
We have new legal structure options now – LLP apart from Private Limited for Startups. It gives the Entrepreneur to select according to his/her business needs, which goes well with the saying “one size doesn’t fit all”.
In this MarketExpress Startup /SME Guide, I would like to share some of the aspects one should take care of or the points to be discussed among partners while forming a LLP or a Private Limited Company.
In case of a LLP, it is important to note that all these points should be part of the “Limited Liability Partnership Agreement” to be made between the partners. Following points should be discussed before drafting of LLP agreement,
- LLP funding/capital – Partners either may bring in Cash / money’s worth of any Property, Rights or render Services agreed to as per as separate agreement made between the LLP and such Partner. If the partner intends to render his services in the form of capital, it shall be valued by a practicing Chartered Accountant or by a practicing Cost Accountant or by approved valuer from the panel maintained by the Central Government. Also in this case, the clauses of service agreement should be drafted carefully between the partner and LLP.
- Partner’s contribution – Proportion of contribution to be decided either equally or based upon the responsibilities. Partners shall have the rights, titles and interest in all the properties and assets of LLP in proportion to their Contribution.
- Admission of new partner – Consent of all partners is necessary.
- Rights and duties of partners – Mutual rights and duties of partners.
- Indemnity (compensation) clause – Partner’s liability to indemnify for any loss to LLP due to his fraud in the conduct of business.
- Expulsion (removal/displacement) of partner – To decide the circumstances when majority of partners can expel a partner.
- Remuneration – The payment of salary / remuneration to be paid to the Designated Partners should be decided mutually based upon the responsibilities or services rendered.
- Sharing of annual profits – Portion of profit payable to partner to be decided.
- Termination and dissolution of partnership firm – The decision to terminate or dissolve the firm would be decided by the partner if it has incurred losses (if any).
- Matters to be decided by a resolution passed by a majority in number of the partners – In this case affirmative votes of all designated partners would be considered.
- Appointment of nominee in case of demise of existing partner – This clause can be inserted separately in LLP agreement, in advance. The Partners may nominate the persons / relative to inherit their respective interests by way of implicit assignment immediately upon their death or being declared insolvent.
Additionally to the above points, while forming a Private Limited Company, one should take care of following points to be discussed among partners;
- First directors – Whether they would be executive (working) or non executive (non working).
- Resident Status of shareholders – Whether they are Indian resident / Non Resident Indian / PIO holder/ foreign national / body corporate – the incorporation procedure part varies for each type.
- Shareholding structure – Type of issue (Equity or preference), face value, number of equity, contribution to be made by each shareholder.
- Registered address for proposed new company – To decide mutually the place at which the company will be incorporated (i.e. in case the partners reside in different States). Based upon the place, stamp duty may vary. One should submit proof of residential address at the time of incorporation.
- Clauses of Memorandum of Association (MOA), Articles of Association (AOA) which are the important documents of the company, needs to be drafted suitable to the business of the company.
- The capital clause should be mentioned carefully in MOA/AOA so that any clause can be inserted / deleted, if required later on.
So, are you start-up ready?