Which Business Entity is the Best for Start-ups?
Hello everyone! We are here with our new blog post series where we will explore the company types and the best business entity for a start-up :) The first blog post of our series is titled “Which Business Entity is the Best for Start-ups?”- enjoy!
In the simplest terms, start-ups are scalable commercial organizations that find a speedy solution to a market-related issue discovered or offer more efficient solutions than their competitors via their product or service and increase value by expanding swiftly. Among many other aspects, capital is a start-up’s most significant point of distinction from large-scale companies. Usually, we can say that having a start-up is a long journey where you may experience occasional disruptions while trying to reach big dreams and profits with small budgets.
Considering that start-ups have small capitals and budgets, we should keep personal liability for debts at the minimum level while the company’s responsibility, or legally speaking, the legal entity at the optimum level. Also, we need to find the best business type to attract investors to our start-up. Here, the question that comes to our minds is which company type is most suitable for start-ups.
What type of business should we choose for our start-up?
Despite the various company types in the law, we will discuss sole proprietorships, joint-stock companies, and limited liability companies, that is, the most favored business types by start-ups.
Compared to joint-stock and limited companies, a sole proprietorship includes the benefits such as simple establishment processes and lower start-up costs. However, after starting a sole proprietorship, you will not be able to hide behind the legal entity status to avoid your debts and liabilities. Given that 70% of start-ups are closed, we need to protect ourselves by remembering that we may not complete this process smoothly and that things can go wrong. Since sole proprietorships hold you solely liable for all your assets and all kinds of business-related debts, it is clear that they cannot offer you optimum protection.
Then we have two options left. Limited company? Or a joint-stock company?
Regarding limited companies, it is stated in the law on the Procedure for the Collection of Public Receivables that “The shareholders of limited liability companies are directly responsible for public receivables which may not be completely or partially collected from the company in proportion to their capital share and will be subject to follow up as per the provisions of this law. According to the first paragraph, when a shareholder transfers their capital share, the alienator and the assignee are severally responsible for the public receivables before the transfer.” Thus, it is clarified that the limited company’s shareholders will be held liable for the public receivables such as fees, taxes, and charges.
Considering the Turkish Commercial Law, the liabilities of shareholders are outlined for Limited Companies that “Shareholders are not liable for the debts of the company; they will be responsible only for paying the basic capital shares for which they have subscribed and for fulfilling their obligations to make additional payments and for secondary performances outlined in the company contract.” The Court of Cassation also determined that the debts arising as public receivables are fully independent and separate from the capital debts. Thus, investors avoid putting money into a limited company and even becoming a shareholder.
Eliminating the limited companies, we also understand that the best business type for start-ups is a joint-stock company.
Well, what kind of benefits does being a joint-stock company offer start-ups?
In joint-stock companies, the company is responsible for its debts only with its property holdings. Shareholders are not liable for company debts. This feature of joint-stock companies allows investors to become your shareholders confidently. Some investors even require the relevant company to be a joint-stock before investing. Then let’s look at what a joint-stock company offers different than other business types:
In case you would like to merge with a company, you can be the assignee shareholder.
· It will not be possible to claim the dissolution of your company due to one of your shareholders’ debts.
· If you or your venture fails, you can maintain the sustainability of your entrepreneurial career since joint-stock companies allow shareholders and the Board of Directors to have the minimum liability.
· In case the company makes a business exit, the joint-stock company with printed stocks and certificates is exempt from income tax for holding the company shares for two years. Namely, the exit status is not subject to pay income tax arising from income gain.[1]
In conclusion, considering the approaches to business risks in terms of investors and entrepreneurs, it is obvious that the best choice is limited and joint-stock companies, that is, the companies with share capitals. However, in case you would like to decide on the company type after putting your idea into effect, even on a small scale, establishing a sole proprietorship can also be a good starting point.[2]
We hope you have enjoyed reading our blog post. The following blog post in our series: What is a Joint-Stock Company and How to Establish One?
See you soon and stay healthy!
Some of Our Other Blog Posts You May Find Interesting
Emergency “ROSEN BRIDGE” and Transforming HR
Venture Builder: A flexible model for creating start-ups
When You’re Out of Solutions, Try Getting Bored
Bibliography;
(Ömür, 2019)
(Erdem Mümtaz Hacıpaşaoğlu, 2018)
[1] Paraşüt Mikro Group. “The Diary of an Entrepreneur: Which Company Type Is the Best for Establishing a Business? (Girişimci Günlüğü: Hangi tür şirketi kurmak daha mantıklı?)”. Access: November 6, 2021. https://www.parasut.com/blog/girisimci-gunlugu-hangi-sirket-turu-benim-icin-daha-uygun.
[2] Erdem Mümtaz Hacıpaşaoğlu & Okan Şencan, Startup Law (Startup Hukuku), Istanbul, Sola, 2019, page 77.
