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Private Limited or LLP? Which company structure to choose for my startup?

As if running a business isn’t hard enough, entrepreneurs must be aware of all the legal aspects of business. With the right advice, this can be simple and amply clear (the law should be understood by everyone, after all), but this is hard to find because most explanations aren’t tailored for start-up entrepreneurs; they’re text-book definitions and features of the various legal structures: private limited company, limited liability partnership (LLP), one-person company (OPC), general partnership and sole proprietorship. So what do you need to know?

Certainly not everything. For example, you can simply exclude the general partnership and sole proprietorship from your comparison, as they are largely outdated structures (on account of unlimited liability, which makes owners personally liable for all debts). Let’s now focus on the three structures that matter: Private Limited Company, LLP and OPC.

Private Limited Company

Most new entrepreneurs know only of private limited company. Often, they’re right to pick it, but not always. Here’s all you need to know about it:

For Businesses Raising Funding
Tech start-ups, particularly those building a scalable business, require funding from venture capitalists (VCs). Funding would make VCs shareholders and given them a seat on the board of directors. These can be accommodated only by a private limited company, as LLPs would require investors to be partners and OPCs can have only one shareholder.

Requires Greater Compliance
In exchange for easy accommodation of shareholders, the directors must comply with a number of regulations set by the Ministry of Corporate Affairs (MCA). These include statutory audit, annual filings with the Registrar of Companies (RoC), submission of income tax returns and many others.

Has Few Tax Advantages
Although thought to be many, there are not many tax advantages, aside from some industry-specific ones. Taxes are to be paid at a flat rate of 30% on profits, dividend distribution tax (DDT) applies, as does Minimum Alternate Tax (MAT).

Separate Legal Existence
A private limited company has an existence that is completely independent of its directors and shareholders. This means that their death would not impact its legality, as is the case with a general partnership, for example.

Cost of Starting-Up
Now that the MCA has removed the minimum paid-up capital requirement, the costs of starting a private limited company are manageable. Government fees work out to around Rs. 7,500, while professional fees are around Rs. 7,000.

LLP
Introduced as recently as 2008, the LLP is quickly gaining prominence, with good reason. Here’s what you need to know about it:

For Non-Scalable Businesses
Businesses with two or more partners, operating in a space that is unlikely to show much growth or growth that will require outside investment, should surely opt for an LLP. This would include web development firms and financial advisories.

Fewer Compliances
An LLP requires audited annual returns to be filed only if it has a turnover of greater than Rs. 40 lakh or capital contribution of more than Rs. 25 lakh. It also needs to communicate fewer business transactions and structural changes than a private limited company. So those businesses not keen on raising funding should turn to LLP, rather than register a private limited company.

Tax Advantages
There are some important advantages over the private limited company. For example, Dividend Distribution Tax and tax surcharge don’t apply. Loans to partners are also not taxable as income.

Separate Legal Existence
An LLP has an existence completely independent of its partners. This means that their death would not impact its legality, as is the case with a general partnership.

Cost of Starting-Up
The costs of starting an LLP are low. Government fees work out to around Rs. 5,000, while professional fees are around Rs. 5,000.

OPC
An entrepreneur who wants to start up solo can register an OPC, although it needs a nominee director who will take over in case the original director/shareholder is no longer active.

For Solo Entrepreneurs
If you’re an entrepreneur who wishes not to include any other person in the business, you may choose to start an OPC. It is similar in many ways to a private limited company, particularly in terms of compliance, although you can’t raise funding. Moreover, if it has revenues of over Rs. 2 crore and paid-up capital of over Rs. 50 lakh, it needs to be converted into a private limited company. So it isn’t really suited to scalable businesses.

Requires Greater Compliance
In exchange for easy accommodation of shareholders, the directors must comply with a number of regulations set by the MCA. These include statutory audit, annual filings with the RoC, submission of income tax returns and many others.

Has Few Tax Advantages
Although thought to be many, there are not many tax advantages, aside from some industry-specific ones. Taxes are to be paid at a flat rate of 30% on profits, DDT applies, as does MAT.

Separate Legal Existence
An OPC, despite having just one owner, has an existence completely independent of its director-shareholder. This means that his/her death would not impact its legality, as is the case with a sole proprietorship; the nominee director would temporarily take over.

Cost of Starting-Up
The costs of starting an OPC are low. Government fees work out to around Rs. 7,000, while professional fees are around Rs. 6,000.

[This is a guest Post by Hrishikesh Datar, CEO of vakilsearch.com, a leading provider of legal services, including company registration.]

Hrishikesh Datar
 

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