Build a company structure like you build a huge building, have a great foundation.
In recent weeks I have been interacting with young entrepreneurs and I found that some of them are not fully aware of a sustainable structure of a company and how the right legal structure of a company can help in sustaining the business for longer term. Some of them did not have a clear understanding on different types of businesses. Here, I try to brief about different company types and which of these types is more sustainable and why.
The Company
The Company is the real sustainable form of any business. The basic difference between company and partnership or sole proprietorship is the limitations of the liability.
Sole proprietorship is a form of business owned by any single person. This is a very common form of business for individuals who start their business without involving someone else. In this type of business, the liability of the owner is unlimited, which means the personal belongings and assets of the owner can also be attached to serve any liability of the business.
Partnership is the type of business where two or more people join together through a legal agreement to do the business. The owners’ liability in this type of business is also unlimited to the extent of his/her share holding in the partnership.
Company is the real sustainable form of any business. The basic difference between company and partnership or sole proprietorship is the limitations of the liability. In case of company, whether private or public, the liability of the owners is limited up to the business' belongings or assets. The owners’ personal assets outside of the business cannot be attached for any liability of the business. The company can be registered by a single member but the commonly used forms of the companies require minimum two members for a private company and three members for a public company.
Since the company always have an independent substantiality, there is always a regulator to make rules and regulations for it. Every company is bound to follow these rules and regulations, which means that company works within a certain boundary, which is primarily constructed to make every company sustainable.
Since the company has the stringent controls by default and it is mandatory for it to get its financials audited by the external auditors, it is easily acceptable to financial institution and venture capitalists for financing or funding.
Yes, this sustainable model of the company will bring in some additional costs, but, the cost of doing business is going to be there in any case. We must keep one thing in mind that we have to have a public company while going for listing/IPO.
· Private Limited company – Where the plan is to have limited number of shareholders and comparatively less stringent regulations, still keeping the liability limited to the business.
· Public Limited company – Where the plan is to go public.
I will talk more about structure of multiple companies, parent, subsidiaries, especially how to establish a subsidiary or parent in the US and move key employees to the US to manage them.
Please feel free to reach me for any questions on this topic.
Qamar Abbas Sipra
Founder, FINACCC Consultants