The rapidly expanding start-up scene in Bangladesh is exciting and an indication of the potential in our youth. The “Next Big Idea” is being generated daily and many actually see the light of day. While most start-ups tend to have an excellent “front” – interactive websites, Facebook pages full of good and regularly updated content and Google themed offices, one often wonders if the young entrepreneur has thought through the “back” – legal structure, ownership, tax etc. Entrepreneurs should realise at an early stage that start-ups have the potential to grow into considerable sized high value companies, at which point a number of issues, if not addressed at the outset become a headache. In brief, the following should be addressed/planned for/thought of by entrepreneurs at an early stage of business development:
- Legal form – most start-ups tend to be the outcome of an amalgamation of a number of intelligent minds. Once certainty is established that an idea is to be formalized into a business, it is important to think of legal form. A number of legal forms are possible in Bangladesh, all with their pros and cons:
- Sole Proprietorship – in case you are a rare prodigal one man show, a sole proprietorship is rather hassle free and easy to setup. One just has to obtain a trade licence from the local city corporation in his/her name, open a bank account using the license and you are setup. The cost is minimal and the only compliance is yearly trade license renewal which should set one back by less than BDT 10,000. Such firms are not separately taxable, meaning the owner only has to maintain his/her own tax compliance on a yearly basis, including the net business income in his/her total taxable income.
- Partnership – this is a registered partnership. One can also have an unregistered partnership but that is just a number of sole proprietors working together. Registered partnerships are formed through a partnership deed/agreement which has to be then registered with the Registrar of Joint Stock Companies & Firms (RJSC). Although registered partnerships are deemed to have more structure than sole proprietorships, they still have unlimited liability on partners and are still considered as individuals for tax purposes.
- Private Limited Company – this is the ultimate and most preferred legal form. Shareholders have limited liability and it is the most robust structure from a governance point of view. In comparison this is rather expensive to setup. However, from a long term perspective, this is the best legal form to choose. Tech companies specifically often see high growth in 2-5 years after which entrepreneurs look to sell a stake or attract investors. At such a time if a legal form does not exist or a loose form such as a sole proprietorship or partnership exists, it often becomes difficult to value the firm and sell a stake. A detailed matrix on the various issues related to the above three legal forms is depicted below:
- Risk – if a business involves a great deal of risk, a sole proprietorship or partnership may be a bad idea since the liability to owners is unlimited, meaning owners and partners are personally liable for all business debts and obligations.
- Tax – a very important aspect which most small businesses fail to plan for. Taxes (direct and indirect) vary widely between business nature and industry and therefore it is very important to assess the implications at the outset. Most importantly, once setup, ensure tax compliance at all times as the last thing a small business needs is a big tax penalty. Sole proprietorship are not taxed.
- Operations – sole proprietorship and partnerships in Bangladesh are not meant for large scale structured businesses. One hindrance that most people operating such business will face is the inability to get loans. One may get small SME loans but most lenders in the country now prefer private limited companies.
- Capitalization – at a level of maturity most start-ups/small business look to attract investment to allow them to take the next step forward. One cannot really invest in a sole proprietorship and no investor will invest in a partnership in Bangladesh due to the unlimited liability factor, leaving private limited companies as the only legal form in which a stake can be sold/fresh investment can be made. Applicable for both foreign and local investment.
- Termination – sole proprietorships are easy to wind up. One has to stop doing business, wait for trade licence to expire, completing the process. Registered partnerships have a bit more documentation where partners have to dissolve the partnership in writing. However, the process of winding up a private limited company is long and complex in Bangladesh. In short it involves, appointment of official liquidator, auditor and in our experience can take up to 3-4 years.
Every entrepreneur wants to be as successful as possible and it is imperative to choose a business form which allows you to grow unhindered. Although business form can be changed, in Bangladesh that tends to be a complex process with no proper prescribed methodology and only leads to the additional expense and energy. While I use the term “start-up” the above applies to all new businesses as essentially every company was once a “start-up”!
A final word of advice – register and copyright your brand (before someone else does)!!