Tuesday, February 22, 2011

Registering a Limited Liability Partnership

Last evening we received the final bit of paper required to function as a legal business. HasGeek is now a fully legit Limited Liability Partnership. The process took just under 110 days. I thought it would be instructive to lay down the timeline for those considering the startup route.

Phase 0: Decision

As a sole founder I could have settled for a sole proprietorship, but decided to go for an LLP because I did not see this as something that would work without partners, and switching in future would be a hassle. A sole proprietorship does not require registration to do business, but does need sales and/or service tax registrations to handle money above certain limits. Those registrations cannot be transferred when you incorporate.

HasGeek was built on the experience of running Barcamp Bangalore, where all of us were volunteers sparing a few hours over weekends. I learnt from there to regard volunteers as significant contributors, and wanted a legal structure that allowed rewarding them for their efforts. With an LLP, they can become partners.

NoDateDescriptionDays
1. Oct 18, 2010 Initial discussion with legal advisor on registering a startup -17
2. Oct 31, 2010 Decision to register an LLP -4

Further reading:
Quora: What are the pros and cons of a Limited Liability Partnership (LLP) registration over a Private Limited registration for Indian startups?

Phase 1: Partner Registration

The “Designated Partners” of an LLP need to be registered with the government before the organization can be. My wife Zainab Bawa stood in as the second partner with a small share.

NoDateDescriptionDays
3. Nov 4, 2010 Authorization to legal advisor to start the process. Primary motivation: have a bank account ready before DocType HTML5 in Chennai on November 27 0
4. Nov 9, 2010 First notice from llp.gov.in that I’ve registered for a Designated Partner Identification Number (DPIN) 5
5. Nov 10, 2010 First notice from llp.gov.in for Zainab’s DPIN registration 6
6. Nov 11, 2010 Both DPIN applications come back asking for us to sign across our photos. Zainab is away so we return the attested photos the following day 7
7. Nov 17, 2010 DPINs still not ready. Reason given: LLP department is upgrading to new e-form system 13
8. Nov 19, 2010 Zainab gets her DPIN. I don’t 15
9. Nov 24, 2010 My DPIN is rejected because my father’s name is written differently on my PAN card and driving license. They say it has to match the name on the driving license (id proof document) 20
10. Nov 26, 2010 My DPIN is assigned 22

Phase 2: Incorporation

An LLP is essentially a registered agreement between the partners. The agreement can pretty much say anything, even granting specific partners special powers. However, the agreement is not private. It has to be shared with the bank and possibly other service providers, and they must be notified of changes to the agreement, which includes addition and removal of partners. Each change requires re-registering the document with the government.

NoDateDescriptionDays
11. Nov 24, 2010 Legal advisor asks for a few paragraphs listing all business activities, to go into registration documents for the LLP. Requires me to imagine everything HasGeek may potentially do years from now, since amending in future can be a hassle 20
12. Nov 24, 2010 Legal advisor sends a draft of the partnership agreement 20
13. Nov 27, 2010 Event day: DocType HTML5 Chennai. Our lead sponsor agrees to pay in advance, but we can’t receive without being registered. We are way past the expected date for all this to be complete 23
14. Dec 4, 2010 Event day: DocType HTML5 Pune. More expenses with no inflow in sight. Audience turnout is twice what was expected, so our expenses double too. Zainab has been hospitalized a couple days prior and I coordinate the event from her bedside. I lose my voice thanks to the stress and the sore throat picked up in Chennai 30
15. Dec 6, 2010 I finally revise and send in the partnership agreement. My sore throat starts to lift and I can speak again 32
16. Dec 8, 2010 Minor amendments to partnership agreement. We submit signed and scanned copies for registration 34
17. Dec 15, 2010 HasGeek Media LLP is incorporated. llp.gov.in sends us an unsigned PDF of the certificate 41
18. Dec 28, 2010 After much pleading, a scanned copy of the signed certificate is finally emailed to us. A signed copy is necessary to apply for a PAN card and open a bank account 54

Phase 3: Permanent Account Number (PAN), the tax id

Despite having become a legal entity, the company cannot receive money (beyond a low limit) until it has a PAN card, or at least proof of having applied for one.

NoDateDescriptionDays
1. Dec 28, 2010 Legal advisor sends copy of PAN card and Service Tax applications, for us to print, sign, stamp, scan and submit 54
2. Dec 31, 2010 Zainab and I return from vacation two days ahead of schedule to submit the documents 57
3. Jan 9, 2011 NSDL sends email to acknowledge receipt of application for a PAN number 66
4. Jan 12, 2011 HasGeek’s PAN number is assigned. We get email notice 69
5. Jan 17, 2011 PAN card arrives in the mail 74

Phase 4: Opening a bank account

My legal advisor handled everything relating to incorporation and taxation, but opening a bank account fell to me. I figured I’d go with ICICI Bank since they have a branch across the road from home, and I already have a savings account there.

NoDateDescriptionDays
1. Dec 13, 2010 I approach ICICI Bank to open an account, but they can’t proceed until the company is incorporated 39
2. Dec 31, 2010 I submit all documents, including the necessary seals on the application form. My LLP agreement says I will be the sole authorized operator of the account, but the sales rep insists on Zainab’s photo and signature on the application form. He also wants Form 49, despite the company not yet having a PAN number. He refuses to accept Form 60. I tell him we have applied online and the acknowledgement does not say it is Form 49, but he wants a copy anyway. Says he will come home on Monday and pick it up 57
3. Jan 3, 2011 Sales rep fails to keep his appointment 60
4. Jan 4, 2011 Sales rep calls at 9 AM and says he will come by 11 AM. My house is 200 metres from the branch. He does not show up at 11. I call him, but he does not answer the phone. I call again at 12:30 and he’s confused about who I am and what appointment he had. Finally he remembers and says he had a meeting and could not come. I ask him when he’s coming. He says he’ll come at 3. At 4 he’s still not arrived and is not answering the phone again, so I go to the branch and insist on sitting there until the paperwork is processed. The sales rep is there but does not remember me at all. Another sales rep takes over the interaction. He says the account will take 3-4 working days, so it should be active on Monday 61
5. Jan 10, 2011 No news. I visit the branch around noon to check up. They check their systems and say there’s no update. They have no idea what the status is 67
6. Jan 12, 2011 I visit again to check status. They say the application came back the previous day with two issues, but the sales rep did not bother to call me. What are the issues? 1. One of the documents has my middle name (which I rarely use) and another does not. They want to confirm both are the same person. 2. Zainab’s name is listed in the account despite the LLP agreement saying I was the sole authorized operator. Now they want to take it out 69
7. Jan 20, 2011 After a few more trips to the branch to sign and re-sign various documents, the account is finally activated. The branch manager issues me a written apology for the delay, citing confusion over my name as the reason. This is not the first time my middle name has caused trouble. It takes another fortnight to get all the standard features enabled so I can start using the bank account 77
8. Jan 21, 2011 I make the initial deposit into the bank account and leave for DocType HTML5 in Hyderabad. More expenses, and we still can’t receive money because we need to charge for service tax but don’t have a service tax registration number 78

Phase 5: Service Tax and Tax-deduction Account Number (TAN)

We are a product company, but our product is not physical material. In tax-speak, that makes it a service business. Any business that grosses 10 lakhs (INR 1,000,000) in a year must collect service tax, for which it needs a service tax registration number. We were set to pass that figure in the first two months. Service tax registration requires proof of address in the name of the company, but the address on the incorporation certificate is not good enough. It has to be a bank statement or a phone bill. Since we had charged sponsors service tax, they could not pay up until we quoted the service tax number (or at least showed proof of application), but we could not apply for this number until the bank issued a statement for the account. I had expected the account to take 3-4 days, not 20.

A TAN number is required to deduct tax at source for consultants and employees.

NoDateDescriptionDays
1. Jan 24, 2011 I return from Hyderabad and get a statement from the bank, then pass this to legal advisor 81
2. Jan 25, 2011 Service tax application is submitted 82
3. Feb 5, 2011 Event day: DocType HTML5 Ahmedabad, which means more expenses without income 93
4. Feb 8, 2011 Service tax number is assigned 96
5. Feb 9, 2011 Tax-deduction Account Number (TAN) is assigned 97
6. Feb 11, 2011 The big payment cheque finally arrives! 99
7. Feb 19, 2011 Signed copy of service tax certificate arrives in the mail 107
8. Feb 21, 2011 Letter informing us of TAN allocation arrives in the mail 109

In 109 days, HasGeek became a registered business, crossed 10 lakhs in revenue, made over 1000 contacts in real life (with double that in the database), and will close the first financial year as a cashflow positive business. Personally, I went as far as 3.75 lakhs in debt, at a short term financing cost of about Rs 12,000. If I had known this would take 100+ days, I would have borrowed from friends and family or broken out savings. At pretty much every step in the process it looked like it would take at most another week to get everything in place. My credit card issuer decided this justified doubling my credit limit. They are now offering me 100% advance on a car loan.

My legal advisor was NovoJuris. I recommend them to anyone considering a startup. They took care of everything, letting me focus on my work. They went out of their way to prod government machinery into action, without which this would have taken much longer. However, the big lesson for me is to never let an external entity define my timelines. HasGeek was nearly killed before it was born because I allowed apathetic third parties (government and private sector bureaucracies) to control my cash flow. From now on, we will put things in place months before they are actually needed, with redundant options from other providers, whether for payment gateways or data cards.

  1. 4:01 PM
HasGeek | , ,
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    Sai — Feb 22, 2011 4:41:38 PM — # ↩

    Thank you so much for this.

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    Ashwin Nanjappa — Feb 22, 2011 6:15:49 PM — # ↩

    NSDL link missing the http prefix.

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    Vinayak — Feb 22, 2011 9:46:38 PM — # ↩

    Thanks for the detailed writeup. I am posting this on the Headstart mailing list.

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    Navin — Feb 22, 2011 11:03:10 PM — # ↩

    It is sad to note so lengthy durations. Thats where a professional help and right guidance matters. We have registered LLP from scratch in under 7 working days (best case) to about 3 weeks (worst case).

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      Kiran Jonnalagadda — Feb 23, 2011 8:28:43 AM — # ↩

      Will appreciate if you can substantiate that. Hope you noticed that the biggest delay was caused by ICICI Bank, and two other big chunks were lost to (a) LLP department’s software upgrade and (b) me being too busy to revise a partnership agreement. Not sure how you can help with that.

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    Mayank — Feb 23, 2011 10:08:56 AM — # ↩

    This is good. I mean really awesome. Have not seen such a detailed and practical steps to set up LLP. Thanks for sharing.

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    Shree Kumar — Feb 23, 2011 3:05:58 PM — # ↩

    Meticulous article, Jace.

    Detailed it is, but I am sure that there is a larger story you can tell. I’m waiting for the next BarCamp - in the hope you’ll relate the story there!

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      Kiran Jonnalagadda — Feb 24, 2011 12:00:32 AM — # ↩

      Let me know what you’d like to hear. I find myself increasingly uncomfortable talking about myself with age.

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    AHugsBack — Feb 24, 2011 12:42:14 AM — # ↩

    Thanks for the massively detailed writeup. OT: Do you have any pointers / suggestions w.r.t legal agreements for freelancing/ consulting work ? Since chasing payments is a major activity,if not the main focus of small shops in India, how does one go about it ? Thx

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      Kiran Jonnalagadda — Feb 24, 2011 8:48:27 AM — # ↩

      All my agreements are over handshakes. In my experience, anyone who insists on a contract on paper is usually looking to screw you via the fine print. You will want a good lawyer to cover your ass.

      Besides, a contract does nothing to get you paid. Courts don’t work for small businesses. The only thing that works is nagging them regularly. Make sure you have the phone numbers and email address of them, their bosses, and the people who made the introductions, and keep adding more people to the loop as the days pass, but be polite each time. Never take it public, unless you want to burn the bridge and get a bad reputation.

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    Wasim — Feb 25, 2011 10:44:46 PM — # ↩

    Read all the steps, very good article and list.

    Thanks for Sharing your exp.

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    Pingback by Technobabble Podcast – Episode 5 - Technobabble — Feb 25, 2011 11:01:16 PM — # ↩

    […] pitches in to rave about the Thunderbolt port on the new MacBook Pro line-up. Kiran rants for the rest of the session on how long it took to get HasGeek registered as a business. […]

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    Rk — Apr 21, 2011 3:10:07 PM — # ↩

    thanks for this. very evident is the cluelessness, wrong process, delays by icici. for all the crying out loud about government bureaucracy, i have always found icici a pain in the neck to work with. their customer service is terrible, their salesman full of ego and rudeness and the delays unimaginable. i had a tough time waiting on their insurance which i had applied for months in advance, not being available to me till a day before departure.

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    Lawful Samurai — May 5, 2011 2:52:24 PM — # ↩

    Thanks for the details writeup.

    I too am going through the procedure of registering a LLP. I too have faced some delays in the process, and almost all of it is because of my CA. It is too late now for me to change my CA :( In any case once the process is complete, I am thinking of changing my CA.

    Do you recommend NovoJuris for the same? OTH is an auditor really required if the LLP is not subject to audit (capital < 25lakh, turnover < 40lakh)? Can the income tax returns be filed by partners themselves or with the help of a knowledgeable CA. Is the appointment of auditor (and his retainer fees) really necessary or avoidable at-least in the early years of the startup? What did you do in your case?

    Thanks,

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    Santosh — May 25, 2011 4:53:03 PM — # ↩

    Thankyou for the detailed writeup on the events leading to the incorporation of your LLP. Good luck.

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    Abdul Qabiz — May 31, 2011 11:55:35 PM — # ↩

    That’s long and we know why it takes that long. It’s hassle.

    Thanks for sharing the entire story/experience, I am sure, this would hundreds of people, who are starting up something.

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    sim — Jun 16, 2011 2:27:23 PM — # ↩

    Hello Kiran, great post, really illuminating! Sent mail to NovoJuris, but didn’t receive any answer. Do you know any other associates group/lawyer that do the same kind of job in India.
    thankyou
    sf

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    sim — Jun 17, 2011 1:16:55 PM — # ↩

    …not very kind, deleting without responding…
    probably you are going to delete also this post.
    bye

    • Avatar

      Kiran Jonnalagadda — Jun 17, 2011 10:12:03 PM — # ↩

      It wasn’t deleted, just held for moderation. I’ll ask the folks at NovoJuris to get back to you.