What type of business should you start in Bangladesh (legally)?

This is the first article of a partnership between The Business Standard and A.S & Associates. Our goal is to make legal communications more accessible to the business community. The articles will be published bi-weekly.

Once you have an idea, tested the business model and have made up your mind about seriously pursuing entrepreneurship as your career, the next question that you should consider is the legal form of conducting the business. Needless to say, it is an extremely pertinent question and an entrepreneur in the making ought to know the types of different business structures and consider the pros and cons of each of such options carefully before reaching a conclusive answer to that question. Listed and explained below are the main features of the types of businesses that can be set up in Bangladesh:

1. Sole Proprietorship: 

As the name indicates when a business is owned and operated by a single individual, it will be deemed to be a sole proprietorship firm. In terms of formalities and compliance requirements, it imposes the minimum obligations. A sole proprietorship can be set up simply by obtaining a trade license from the local City Corporation or Paurashava. However, this form of business entity will not cater to businesses having two or more owners. 

Pros:

1. Relatively easier, quicker and inexpensive to set-up;

2. The proprietor is the owner of the business; as such the assets of the business are owned by the proprietor; and

3. Almost no reporting requirements, as far as the business entity is concerned (see below the obligations of the company, for a comparison).

Cons:

1. The owner of the business will be personally liable for all the liabilities and obligations of the business, including the taxes and debt;

2. While the profits accrue to the proprietor, the brunt of loss is also suffered by him/her; and

3. Not suitable for businesses involving two or more founders; resultantly, no outside investor can be on-boarded.

2. Company: 

A company is a separate legal entity established by way of registration with Registrar and Joint Stock Companies and Firms (RJSC). The process of setting up a company is known as 'incorporation'. At least two (2) shareholders are necessary for setting up a private company in Bangladesh. For a public company, the minimum number of shareholders is seven (7). Once the incorporation is complete, the company takes an existence separate from its shareholders and directors. As such, in most cases, the rights, liabilities and obligations of the business vests in the company and remain separate from its owners (unless personal guarantees are taken from the shareholders). This means that the personal assets of the shareholders remain beyond the reach of the creditors regardless of the amounts of liabilities of the company.  A company is legally required to hold at least 1 (one) Annual General Meeting (meeting of its shareholders) and 4 (Four) Board Meetings (meeting of its directors). Besides, each year it is legally mandated to submit various Annual Returns with RJSC which includes details of its shareholding and management (Schedule X) and financial statements of the company.

Pros: 

1. No personal or financial liabilities of the shareholders against the company's business obligations.

2. The shareholders' liabilities are limited to the amount of share capital unpaid on the shares subscribed. The liabilities for debts and taxes are borne by the company itself.

3. Easier to take outside investments.

Cons:

1. A relatively expensive and complex process of setting-up;

2. Stringent management requirements and financial reporting obligations prescribed by law.

3. Partnership:

A partnership can be formed by two or more people by executing a Deed of Partnership. Unlike a company, the partnership is not treated as an entity separate from its founders; as such, each partner is jointly and severally liable for the actions, including the debts, of the partnership business or other partners. To a specific partner, such liability shall accrue regardless of his/her part in the action attracting liabilities. Though registration of partnership does not affect the validity of the partnership, without registration, the partnership firm will be barred from bringing an action before the court for enforcing a right arising out of a contract against either the firm or any past/present member or any third party. As such, it is advisable to register the partnership with the Registrar and Joint Stock Companies and Firms (RJSC).

Illustration: TBS

If a partnership is formed, the partnership deed should have details of the nature of the business, the capital contribution of each partner, profit-sharing ratio, management and decision-making process of the business of the firm, etc. It is strongly recommended to specify in the Deed of Partnership the future of partnership in the event of the death of a partner (unless so specified, the partnership will dissolve upon the death of a partner).

Pros:

1. Registration of partnership deed is not compulsory; hence, easier and cheaper business set-up, in comparison to companies;

2. Nominal regulatory formalities to maintain the partnership firm; and

3. Easy to dissolve by agreements between the partners, compared to involvement of courts in most cases for dissolution of companies.

Cons:

1. The partners are personally liable for the debts of the firms, having unlimited liabilities;

2. One partner can be liable for the actions of others, though the former had no part in the action; and

3. Transfer of partnership interest requires consent from all other partners.

4. One Person Company:

As the name suggests, this type of company is formed by only one person who wishes to carry out business activities and has only one natural shareholder, who is also ought to be the director of such a company. The memorandum of such company must state the name of the nominee, with his/her consent, who would become the shareholder of the company upon death or incapacity of the shareholder. This structure has been introduced in the country very recently. One Person Company also requires registration with the Registrar and Joint Stock Companies and Firms (RJSC). Such a company is required to hold at least 4 (four) Board Meetings; however, there is no prescribed format as to how these meetings are to be held. Additionally, such a company is mandated to submit a yearly balance sheet and financial statements, bearing the sign of its Director, at RJSC, within 180 (one hundred eighty) days from the end of each financial year. 

Although there is no restriction at law for a foreigner to form such a company, the prescribed form of memorandum only provides for a field to include NID information of the shareholder and there is no option for the passport of the shareholder. As a result, a foreigner practically would not be able to form a one-person company.

Pros:

1. No personal or financial liabilities of the only shareholder against the company's business obligations; and

2. Easier to get loans from banks when compared to a proprietary firm.

Cons:

1. An individual cannot incorporate more than one such company;

2. Not suitable for small businesses as required minimum paid-up capital for such company is BDT 25 lakh.

3. Foreign investors practically cannot incorporate such company; and

4. The requirement that shareholder must be a 'natural person' means that investors who invest through a parent company by incorporating a subsidiary company, cannot do so under this structure.

Ultimately, whichever form of business one chooses depends on the circumstances of each entrepreneur. If one is hoping to test the idea, and the business requires minimum investments, going with the sole proprietorship might be a good option. On the other hand, if a business needs large investment, considerable human and technological resources, opting for a company might be the most suitable option.   

Farhana Khan is an advocate at the Supreme Court of Bangladesh and a partner at AS and Associates