Don’t fall into the trap of registering your business as a company too early. You don’t need the burden of compliances when it’s just the founders working from home.
In a start-up, everything can seem like a race. A race to building a minimum viable product, identifying a good business model and finding a good co-founder. Consequently, even what shouldn’t be done too early is treated with priority. Company registration is one such case. It’s very important, but done too early, it could unnecessarily land founders with too much compliance work. So how should entrepreneurs approach this legal aspect of running a business?
Run Lean Early On
Before registering your business, you need to know why you’re doing it in the first place. In the case of start-ups, it’s typically for raising funding (if early employees are promised equity, you can have a separate agreement with them, if needed). So until you’ve readied a product that is good enough to show investors, there’s absolutely no need to formalise your business as a company. All you really need at this point is a Founders’ Agreement.
This agreement can outline all the roles and responsibilities of the founders, the equity vested in them and the ownership of intellectual property created by them. At this point in your business, having this on paper, which can lead to some difficult conversations, can be much more important than registering your business. Companies such as Housing and Redbus, which had founders leave early on, could have greatly benefitted from having such an agreement in place.
Register When You Need To
Company registration should seem necessary. This could be because you’ve started to earn revenues and thus need a service or sales tax registration and would rather collect it in the name of your business. Or because you’ve raised funding and, as is always the case, the investor will only give you the money if you have a company registered (in this case, register when you start looking for funding, rather than when you actually receive funding). Or it may be that you’re in a business that requires such a registration.
When you’re in this position, the benefits of registering as a company will always outweigh the disadvantages. You may have to spend time and money on compliances, but you will find it beneficial to do for the credibility the private limited structure will bring. This registration will enable you to hire with greater ease (top talent are more likely to be convinced of your seriousness), allow you to open a current account, avail of credit, if necessary, and increase trust among vendors, customers and other stakeholders.
Private limited companies also enjoy tax advantages and its members have limited liability (as opposed to complete liability for all business debts in the case of unregistered businesses).