Two Names on the Signboard
Three friends want to start 'Crust & Crumb', a small bakery and cafe in Guwahati. Ananya will bake full time and put in ₹1.5 lakh; Bhaskar will handle marketing and put in ₹1 lakh; Chandan will contribute ₹5 lakh but keep his bank job and wants a fixed 30% share. They expect first-year sales of ₹18 lakh, a net margin of 8%, and a need for ₹9 lakh in total. Ananya and Bhaskar want limited liability and a clear exit route; Chandan wants his money protected and a say in any sale of the business. They cannot agree on whether to register a private limited company, an LLP or a simple partnership. Registration and compliance costs matter because cash is tight.
1. Recommend a form of organisation, comparing liability, control, compliance and funding implications.
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Simple partnership: cheapest to start, but unlimited liability. Ananya and Bhaskar could lose personal assets, and Chandan's passive role would still leave him exposed. Not suitable.
LLP: separate legal entity, limited liability for all three, and profit sharing can be unequal. Compliance is lighter than a company - annual statement of accounts and solvency, but no compulsory board meetings or dividend procedures. It suits a cash-tight cafe where the owners want protection without heavy formality. Its weakness is that raising outside equity later is harder.
Private limited company: strongest structure for bringing in investors, issuing shares and giving employees stakes, but higher registration and annual compliance costs, board formalities and statutory audit. At ₹18 lakh expected sales and 8% margin, those costs would absorb a meaningful share of profit.
Recommendation: register an LLP now, with a written LLP agreement. If the cafe later needs angel investment or share-based incentives, convert to a private limited company. Do not start as an unregistered partnership merely to save registration fees.
2. Draft four terms that must be settled in writing before money is invested.
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- Capital and profit share. Record each partner's contribution and the agreed profit-sharing ratio. State clearly whether Chandan's 30% is a share of profit only, not a guaranteed return. Decide how additional capital will be raised and how dilution will be handled.
- Roles and decision rights. Ananya controls production and staffing, Bhaskar controls marketing and sales, Chandan is passive. List reserved matters requiring all partners - new borrowing above a limit, sale of the business, admission of a new partner, related-party purchases - and day-to-day matters each can decide alone.
- Drawings, salary and reserves. Ananya and Bhaskar work full time; fix a modest monthly drawing or salary and require a reserve before profit distribution. Otherwise working capital will be drained.
- Exit and valuation. Set notice periods, a valuation method, a right of first refusal for the other partners, and a non-compete period. Chandan's fear of losing his money is best handled by a clear exit route, not a fixed return.
A dispute-resolution and deadlock clause should be added, since three partners can split two against one.
3. Chandan argues that a 30% fixed share is fair because he contributes the most cash. Evaluate this.
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Chandan provides ₹5 lakh of ₹7.5 lakh contributed capital - about 67%. A 30% profit share is not automatically unfair, because Ananya and Bhaskar are contributing full-time labour and skills that the business depends on. Sweat equity has real value: without a baker and a marketer, Chandan's ₹5 lakh would earn nothing.
But two things need correction. First, 'fixed' is the wrong word. A partner's share is a residual claim on profit; in a loss year Chandan receives nothing. Promising a fixed 30% return would make him more like a lender, and that should be documented as a loan with interest if that is the intention. Second, his 67% capital contribution for 30% profit should be justified explicitly - for example, by a lower share until his capital is returned, or by a preferential distribution.
A workable structure: 30% profit share to Chandan, with a defined priority return of his capital from the first available surpluses. His 'say in any sale' should be a reserved matter in the agreement, not an informal understanding.