14 May 2015 19:54 IST

How do I register a family business?

It’s better to be a private Ltd company as you will find it easier to access funds

So, you are part of a family business with four brothers and you are looking to register your business. How should you proceed?

There are a couple of things that you need to keep in mind. First, what you are trying to do is to bring professionalism to a family-based business. In such a case, choosing an option like a ‘Partnership’ may not be the best solution. What works very well in such cases is to form a Private Limited Company, with each brother becoming a Director in the Company. By doing this, you will be able to include all the brothers in the business, and at the same time, you will be able to allocate specific responsibilities and duties to each of the brothers.

Alternatively, you may choose to form a Limited Liability Partnership (LLP).

If you are dealing with large quantities of goods and investing significant amounts of money, a Private Ltd. firm is better since such firms get easier access to new forms of capital such as private equity. A proprietorship or Partnership, or even an LLP, find it nearly impossible to raise such funding.

Additionally, if you decide to bring in professional managers to run your business, a Pvt. Ltd. Company is more conducive – you can incentive these managers by offering them equity in your Company, which is not possible in the case of a Partnership, Proprietorship or even an LLP.

How can I be paid?

And, if it’s a Pvt. Ltd company, how can I be paid by the Company?

Certainly, you, as the founder of the company, can be paid by the Company. There are different ways in which you can be paid.

If you decide to act as the employee of the company, then the manner in which you can be paid is through a salary. Here you would, like any other employee, need to enter into an employment contract with the Company, and receive a remuneration. In addition to this remuneration, on the basis of this Employment Contract, and a specific clause for bonuses, you may be paid a bonus at either regular intervals or on the achievement of certain goals. For example, the bonus could be paid every quarter (3 months), ₹5,000, or for every 10 happy customers a ₹1, 000 bonus.

What may also be done is that you could be paid by way of consultancy fees. Consultancy fees are paid for your expertise in management and your time. So, if you are going to be managing the marketing efforts being made by your Company, for instance, you may derive your salary/remuneration in the form of this consultancy fee. Here, shares are a good way of deriving remuneration in the form of dividends. This can happen by the Company giving you a certain amount of shares at regular intervals. For example, your Shareholders’ Agreement could state that you will get 0.2 per cent of the shares of the Company every two months.

Dividends are the payments made to the shareholders of a company out of the profits made by the company. For example, if the total profit of your company in a particular year is ₹10,00, 000 and you want to distribute 10 per cent of that as dividend, and you hold 49 per cent of the shares of your Company, then you would be entitled to get ₹49,000/- as dividends

 An uncommon way is through the payment of a commission. For example, the Company sets a goal that on the completion of every 500 clients, ₹50,000 will be given to you as the founder. This could be a form of payment.

Thus, rejoice! There are many different ways in which you can be paid as the owner of the Company.  

*VakilSearch simplifies legal for start-ups by facilitating company registration , trademark filing , documentation and compliance.


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