Updated : December 11, 2023Meaning of 'Company' : Ideal Choice for Indian Startups
Overview : Discover why companies are ideal for startups beginning their entrepreneurial journey in India. Choosing a corporate business structure is vital if you're aiming to attract investments or funding from angel investors. In this blog, we'll unpack the meaning of 'Company,' its essential features, and compare it with non-incorporated business entities. Join us as we demystify companies' benefits, legal protections, and growth potential, steering entrepreneurs towards a robust business foundation.
A company, commonly abbreviated as ‘co.’, is a legal entity established and recognised by law. It is usually formed by a group of individuals or stakeholders who come together with a common purpose of operating a business enterprise. The core of this enterprise typically involves developing, producing, and selling products or services designed to meet a specific need or desire within society. This contribution to the market often fills the gap in consumer demands.
A company is similar to an artificial person because it has its own legal status after the Incorporation of the Company. It is created and governed by legal statutes, giving it rights and responsibilities that are independent of the individuals who own, manage or work for it. This means that a company can enter into contracts, own assets, incur liabilities and be sued in its name instead of on behalf of its owners or members. This concept of a company being a separate legal entity is vital because it allows for the business to continue operating even when there are changes in ownership or management. It also provides protection for the personal assets of those involved from business-related liabilities. Let’s understand the Key Features :
Separate Legal Existence
The concept of a company being a distinct legal entity is fundamental. This separate identity allows companies to own property, make contracts, and even sue or be sued, apart from their owners. Imagine a large corporation as a living entity within the legal system, able to interact with the world independently.
Perpetual Succession
Companies have the unique ability to exist indefinitely, unlike individuals with finite lifespans. This exceptional feature enables them to engage in long-term planning and strategic vision, extending over generations of ownership and leadership. One can imagine a company as a majestic oak tree, firmly rooted in its past but with its branches stretching out to embrace a future brimming with opportunities.
Limited Liability
Owners of a company can benefit from limited liability, which depends on the company’s legal structure. This means that their personal assets are protected from the company’s debts and obligations. It’s like having a protective shield around their financial well-being, enabling them to pursue ventures with calculated risks.
Transferable Ownership
The transfer of ownership shares in a company plays a crucial role in driving economic activity and investment. This feature enables individuals to purchase shares, become part of the company’s success, and potentially earn financial benefits. It can be thought of as a constantly evolving stock market, where ownership frequently changes hands, promoting innovation and expansion.
Management Structure
Business organisations are not disorganised and turbulent; they function under a structured management hierarchy. The executives and officers of the company assume key responsibilities in making decisions, supervising routine activities, and securing the firm’s long-term growth and success. Picture a proficient crew operating a complicated vessel, steering it through choppy waters towards a lucrative destination.
Why Startups Should Incorporate a Company
For aspiring entrepreneurs, choosing the right legal structure for their startup is crucial. While proprietorship firms offer simplicity and minimal paperwork, they pose significant limitations for startups seeking growth and investment. Here’s why incorporating a company is the preferred choice for startups, particularly from the perspectives of fundraising, adding new shareholders, and offering employee stock options (ESOPs) and Tax planning.
Fundraising Ability in the Company
Private Limited Companies offer unique advantages when it comes to fundraising compared to other business structures. One of the main benefits is that investors are more likely to invest if they know their personal assets are protected by limited liability in case the company suffers losses. These advantages come from various reasons.
- Share Issuance : Companies can easily issue shares to attract angel investors, venture capitalists, and other equity investors. The companies can offer new shares to their existing shareholders on “Rights Basis” or to new potential investors by way of “Private Placement”. This allows them to raise significant capital without incurring debt.
- Investment Options : Companies offer various investment options, such as debt financing, convertible notes, safe notes, debentures and preference shares, catering to diverse investor preferences.
Non-corporate entities like sole proprietorships, partnerships, or limited liability partnerships often encounter difficulties in raising funds. Banks and investors are usually reluctant to invest in businesses that don’t provide protection for the owner’s personal assets. This lack of protection restricts access to critical capital, which is essential for growing and scaling operations.
Adding New Shareholders
Companies can issue new shares to accommodate new shareholders. This enables them to share ownership with new partners, allowing for sharing responsibilities, expertise, and opportunities. However, non-corporate firms do not have this flexibility and are, therefore, unable to add new shareholders. This limits their ability to bring in new partners, advisors, or investors who could contribute valuable expertise and resources.
Strategic Acquisitions : Companies can issue shares to acquire other companies, enabling mergers and acquisitions that drive growth. Non-corporate entities are unable to do so.
Talent Acquisition & ESOP
Incorporated companies offer Employee Stock Option Plans (ESOPs), which attract and retain top talent. ESOPs provide employees with a direct stake in the company’s success, enhancing productivity and fostering loyalty. They align employee and shareholder interests, promoting shared responsibility and investment in the company’s future. Additionally, ESOPs have tax advantages in many jurisdictions. Non-corporate entities like proprietorship firms cannot offer ESOPs, which can significantly hinder their ability to attract and retain talented individuals.
Conclusion
While proprietorship firms offer simplicity, they hinder a startup's ability to grow and attract investment. Incorporation provides critical advantages in fundraising, shareholder structure, and talent acquisition through ESOPs, Tax Planning, etc. For ambitious startups aiming to make a significant impact, incorporating as a company is the clear choice for achieving long-term success.
