Is registering in form of a private company better than L.L.P. and O.P.C. for startups

Is registering in the form of a private company better than L.L.P. and O.P.C. for startups

Choosing from so many possibilities is difficult, isn’t it? We will walk you through the A.B.C.s of starting a business and present the benefits and drawbacks of India’s three most common types of business entities.

There is more freedom for corporate organizations now that the 2013 Limited Liability Partnership (L.L.P.) Act and the Companies Act have been adopted. Therefore, it is crucial that the entrepreneur or promoter weigh each company Venture’s benefits and disadvantages before making a decision.

The first task when a company enters the realm of commerce is to register the Company. You must make a decision about the type of business you wish to establish, like a business owner.

You can choose to form an L.L.P., O.P.C., partnership, sole proprietorship, or another type of business.

But dealing with paperwork like a startup’s new owner probably be intimidating. Fortunately, the Indian government has made efforts to make the ease of doing business a reality. However, there are some legal snags that new business owners may be misled by. These includes

Registering in the form of a limited liability partnerships (L.L.P.) when limited private corporations (P.L.C.s) would be a better fit

Whether it’s too soon and whether a straightforward founders’ agreement would be enough.

We’ve outlined the key characteristics of each structure and evaluated which industries work best in order to simplify this procedure.

Characteristics of Private Limited Companies

In summary, startups wanting to gain capital or recruit the finest candidates for the labor market should take into account this legal structure with ESOPs.

For Companies Seeking Funding

Businesses extending quickly and may need V.C. funding must register in for of private limited entities. This is because private limited companies can only become shareholders and be given a board of directors. O.P.C.s cannot accept more shareholders, and L.L.P.s would need investors to be partners. Therefore, if you’re trying to raise money, the next criteria barely apply because you’ve already picked your choice.

Greater Compliance Is Necessary

The registration of a private limited company must comply with Ministry of Corporate Affairs requirements in return for the ease of accepting finance (M.C.A.). These include a statutory audit, annual filings with the Registrar of Companies (RoC), annual I.T. returns, quarterly board meetings, the filing of these meetings’ minutes, and many other things.

Imagine if your Company isn’t set up to fulfill these demands. If so, you probably want to delay creating a private limited company for a while (some businesses first register an L.L.P. because the compliance are fewer).

A few Tax Benefits

Contrary to popular belief, the private limited Company has few tax benefits.
Several benefits are industry-specific, but taxes must be paid at a flat rate of 30% on profits. The dividend distribution tax (D.D.T.) and minimum alternate tax are applicable (M.A.T.). The L.L.P. does have some benefits over other structures if you’re searching for the one with the lowest tax burden.

Starting Price

Starting a private limited business without professional fees will cost at the very least Rs. 8000. However, in some areas, like Kerala, Punjab, and Madhya Pradesh, this will be more expensive. It would be beneficial if you had some paid-up capital, which can start with Rs. 5000. The expense of compliance is roughly Rs 13,000 per year.
Qualities of an L.L.P.

Professional and advising companies without a requirement for equity funding should use the L.L.P. If this relates to your Company, choose an L.L.P.; since 2008, it has grown in favor due to its ability to combine some of the best features of both a partnership company and a private limited company.

L.L.P.

An L.L.P. combines several benefits of both the private limited Company and general partnership, so you probably wish to register one if you’re operating a business that won’t probably need equity financing. It has restricted liability, similar to a private limited company, and a more straightforward structure, similar to a general partnership.

Decreased compliance

The L.L.P. has received some benefits from the M.C.A.
For example, an audit is only necessary if your paid-up capital or turnover exceeds Rs. 25 lakh or Rs. 40 lakh, respectively. Additionally, while limited private corporations must notify the RoC of structural changes, L.L.P.s only have a basic need.

Tax Benefits

The L.L.P. provides tax benefits if your Company generates profits of more than Rs. 1 crore. Dividend Distribution Tax and the tax surcharge, which only apply to businesses with profits over Rs 1 crore, do not apply to L.L.P.s. Additionally, loans to partners are not treated like income.

Amount of Partners

The number of partners in an L.L.P. is unlimited.
For example, if you’re creating a sizable advertising firm, you don’t need to be concerned about a partner cap.

Startup Price

Five thousand rupees in government fees, no paid-up capital, and negligible compliance costs make this process majorly less expensive than forming a private limited company.

Aspects of an O.P.C.

Except for the fact that there is only one director (although there must be a nominee), who will be the only shareholder, an O.P.C. is quite similar to a private limited company.

For lone proprietors

The O.P.C. is designed for solitary entrepreneurs and considerably improves the sole proprietorship firm because your liability is restricted.

Note that it must be transformed into a private limited company if its revenues exceed Rs. 2 crores and its paid-up capital exceeds Rs. 50 lakh. Additionally, given that a nominee director is required (to ensure the O.P.C.’s permanent existence), you can think about forming a private limited company, which will have the ability to raise money.

High Compliance Standards

Although there are no board meetings, you must perform a statutory audit, produce annual and I.T. returns, and follow all M.C.A. regulations.

Minimal Tax Benefits

The O.P.C. offers several advantages specific to certain industries, just like the private limited Company.

However, the D.D.T. and M.A.T. are applicable, and taxes must be paid at a fixed rate of 30% on profits. The L.L.P. does provide some superior benefits if you’re searching for a structure with the least amount of tax liability.

Startup expenses

Almost identical to a private limited company, with government fees of just around Rs. 7,000. The fees are majorly higher in Kerala, Punjab, and Madhya Pradesh. However, this will vary for different states.

Characteristics of a Partnership Company

This organization is only appropriate for tiny businesses with no debts or liabilities, which is highly unusual. For one thing, there is no limit to culpability.

Unlimited Liability

The partners in the business shall have limitless liability for all of their obligations. This means that your personal belongings may be seized if you cannot pay back a bank loan or must pay a fine for any reason.

Therefore, your jewelry, home, or car would be in the bank’s, institution’s, or supplier’s rightful possession. Beyond being simpler to set up and requiring less paperwork, the partnership has no advantages over the L.L.P.

It could not even be less expensive if you register it, which is a choice. So, unless you’re running a very small business (let’s say you and your partner operate a lunch Dabba service in your neighbourhood and want to establish a profit ratio),
Choose against joining a partnership.

Simple to Start

All you need to get going is a partnership deed if you decide not to establish your partnership firm. This can be completed in two to four days. Once you have an appointment with the registrar, even registration can be finished in a single day. Starting a private limited corporation or L.L.P. is majorly more complicated than here.

What a Sole Proprietorship Looks Like

Only insignificant business people should take this into account. This is due to limitless responsibility, which is the same as it was in the case of the partnership firm.
Unlimited Liability

A sole proprietorship doesn’t have a separate existence, just like a partnership. Thus, the sole proprietor is the only party who may be sued to collect any obligations. This implies that the owner is completely liable for all debts.

This is only appropriate for small enterprises because it should strongly discourage taking risks. It is important that you consider registering an O.P.C. if you intend to operate a business that calls for a loan or probably force you to pay penalties, fines, or restitution.

Simple to Start

There is no such thing as a sole proprietorship registration, notwithstanding the claims of numerous persons. Ownerships do not require a different registration process. All you require is a business-related government registration.

Therefore, a proprietor would only require a sales tax registration if they were selling items online. As a result, setting up as a sole owner is not too difficult.

An L.L.P. must abide by fewer rules than a private limited company, which has higher compliance requirements. O.P.C. is appropriate for a single firm owner, although it has a high tax rate. A sole proprietorship and a partnership are simple to set up yet have unlimited liability.

Private Limited Company vs. LLP

A Private Limited Company is what?

A private limited company is a voluntary organization with no fewer than two and no more than fifty members that have limited liability, restrict the transfer of its shares to its members, and is not permitted to solicit subscriptions for its shares or debentures from the general public. In this case, the members’ responsibility is restricted, and the shares assigned to them are likewise not readily transferable.

A Limited Liability Partnership: What Is It?

An L.L.P. is considered similar to any other partnership firm in India. There is no joint obligation generated by other partners, nor is any partner held responsible for the independent or unlawful activities of another partner.
As a result, L.L.P. is a corporate body, a separate legal entity from its partners, and has perpetual succession.

Investor Preference Venture capitalists choose private limited companies over limited liability partnerships because they provide simpler investment alternatives and make it simpler to raise funds than L.L.P.s.

Indian Venture Capitalists stress that companies they will consider must be in the form of a private limited company since they are not yet comfortable with L.L.P.s. Despite the huge benefits of the L.L.P. form in the case of several business models as far as India is concerned, V.C.s are risk-averse and generally have shown to be slow adopters.

Private limited companies are the best option if you intend to raise Venture money soon.
Key Benefits of a Pvt. Ltd. Company Over an L.L.P.

To Secure Funding- A business needs money to get started, stay afloat, and expand. Due to their inability to issue shares, proprietorships, partnership businesses, and limited liability partnerships cannot secure equity finance. This drawback could be quite important throughout a business’s expansion stages.

To increase corporate credibility: In the modern economy, investors, vendors, and clients all seek out companies that are credible. When forming a private limited company, the relevant information is made publicly searchable in a database, including the firm’s name, date of incorporation, registered office address, status, and other details.

This feature makes it simple to verify the Company’s existence, which raises its legitimacy of the Company.

To pursue several opportunities: Successful business owners are often serial entrepreneurs who move on to replicate their first Venture’s success in a number of additional companies.

Since they are not treated like separate legal entities and are linked to the promoter, businesses established like a sole proprietorships or partnerships would find it difficult to pursue many chances that come their way. On the other side, establishing a private limited company would allow the promoter to take advantage of many chances with the development of entity.

An “exit plan” is something that most of the of business owners forget to consider when they first start their companies. For all promoters, private limited businesses provide the finest exit path.

While a company is still operating, only its shares may be sold or transferred to another entity in whole or in part without any complications. Therefore, creating a private limited company gives you a huge benefit when developing and carrying out a business exit strategy.

Going Global: Only private limited companies and limited companies are eligible for automatic Foreign Direct Investment of up to 100%, which allows any foreign entity or foreign person to participate in a company without requiring last government approval.

To accept investments from foreign entities, entities including proprietorships, partnerships, and limited liability partnerships must first receive government clearance.
Therefore, it is better to create a private limited company if your business has goals of going global.

Advantages of L.L.P. over Pvt. Ltd.

No restrictions on business owners; L.L.P.s require a minimum of 2 partners. Contrary to a private limited corporation, which is restricted to having no more than 200 members, there is no upper limit on the number of partners.

There is no requirement for a minimum contribution, in contrast to a business, in an L.L.P. You can create an L.L.P. with the least amount of capital.

There is no obligation for an audit to be performed voluntarily; nonetheless, all businesses, whether public or private, regardless of share capital, are obligated to have their financial records audited.

However, there is no such necessity in the case of L.L.P.
Only if its contributions reach Rs. 25 Lakhs or its annual turnover exceeds Rs. 40 Lakhs is a Limited Liability Partnership required to have an audit completed.

Savings due to lower compliance burden: while a Limited Liability Partnership is only needed to file the Annual Return and a Statement of Accounts and Solvency, a Private Limited Company is expected to complete at least 8 to 10 compliances annually.

Taxation of L.L.P.s:

L.L.P.s are taxed equally with partnership companies for income tax purposes. As a result, only L.L.P. must pay income taxes; the shares of its partners are exempt. Consequently, no dividend distribution tax is due.

The income tax law’s “deemed dividend” provision does not apply to L.L.P.s.

Making the switch from a business to an L.L.P. is possible. If the requirements of section 47(xiiib) of the Companies Act 2013 are met, the capital gain on the conversion of a company into an L.L.P. is exempt.

A private limited company’s benefits

A private limited company (Pvt ltd company) is the most popular business structure for entities looking to operate profitably and take advantage of incorporated entity benefits, mainly limited liability. Pvt ltd companies additionally provide limited responsibility and minimal legislative compliance, in addition to the benefits listed below:

Distinct legal entity

An entity is something that has a separate existence and an actual existence. A business is a juristic person and a legal entity created under the Act. A person who is not a natural person or a human being is known by a term juristic person. As a result, a corporate form of organization has extensive legal authority and is able to both own property and incur debt.

The shareholders and directors of a company are not responsible to the Company’s creditors for such debts. A private limited company is, therefore, a legal entity distinct from its members.

Continuous Existence

A firm has “perpetual succession,” which is continued existence up until its formal dissolution. A corporation is unaffected by the death or other termination of any member since it is treated like a separate legal entity and can carry on with business as normal regardless of membership changes. One of a company’s most crucial traits is perpetual succession.

Small Liability

The legal status of having a restricted amount of legal responsibility for a company’s debts is known by the term limited liability.

In a limited liability company, the member’s liability for the obligations of the firm is restricted, in contrast to proprietorships and partnerships.

In other words, the responsibility of a company’s members is only as great as the face value of the shares they have purchased. Because of this, when a corporation is limited by shares, the members’ liability upon a winding-up is restricted to the amount still owed on their shares.

Shares are freely and easily transferable.

A shareholder may transfer their shares of a corporation limited by shares to anyone else. Compared to the transfer of ownership in a company operated like a proprietary concern or partnership, the transfer is simple.

It is simple to transfer shares by completing a share transfer form, signing it, and giving the share certificate to the buyer.

Owning Real Estate

A firm is a juristic person who can acquire, hold, enjoy and alienate property in its own name. No Shareholder shall claim any interest in the Assets of the Company while the Company is in existence. The corporation’s assets are not the shareholders’ property. The Company itself is the true owner.

Ability to file and defend lawsuits

Suing someone means bringing a lawsuit against them in a court of law.
A firm, being an autonomous legal body, can sue and be sued in its own name, just as one individual may bring a legal action in his or her own name against another in that person’s name.

Multiple Relationships

Under the company form of organization, a corporation may bind itself to any one of its members. It is possible for someone to run a business while working for it. An individual can, therefore, simultaneously hold the positions of shareholder, creditor, director, and employee.

Borrowing Power

A company has more beneficial possibilities for borrowing money.

It can receive contributions from the general public, issue secured and unsecured debentures, and more. Even financial organizations like banks prefer to provide major financial support to businesses over partnership corporations or proprietary enterprises.

When deciding on the appropriate business structure, bear in mind that this decision is crucial like the idea’s implementation. Although the creation and compliance costs of an L.L.P. are far lower than those of a One Person Company (O.P.C.) or a Private Limited Company, proprietorship and partnerships are unable to provide the proper financial support that a startup needs to thrive.

edited and proofread by nikita sharma