Choosing from so many options is hard, isn’t it? We walk you through the ABCs of starting a business by examining the advantages and disadvantages of the three most popular types of Indian business entities.
Corporate organizations now have more flexibility thanks to the 2013 Limited Liability Partnership (LLP) Act and the Companies Act. Entrepreneurs or promoters should understand the pros and cons of each business venture before choosing one.
In order to begin a business, a firm must be registered. You must decide which type of business you will establish as a business owner. There are many types of business structures that you can choose from, such as LLPs, OPCs, partnerships, sole proprietorships, etc.
The paperwork, however, may seem overwhelming to new business owners. India is working to make doing business easier. Despite this, there are some legal pitfalls that new business owners can fall victim to. Let’s examine them.
- Limited liability partnerships (LLPs) are more appropriate than private limited companies
- Is it too early for a founders agreement, and if a simple agreement would suffice?
Below are the main characteristics of each structure, along with which businesses they are most suitable for.
A Private Limited Company’s Features
By using ESOPs, startups can raise funds or attract the best talent.
Raise Funds for Your Business
Fast-growing businesses wishing to be funded by venture capitalists (VCs) need to register as limited companies. They can only become shareholders and directors of private limited companies. LLPs require investors to become partners, while OPCs cannot accept additional shareholders. Therefore, if you are raising money, the following points don’t really matter because the decision has already been made.
Compliance Is Required At A Higher Level
To make access to funding easier, the Ministry of Corporate Affairs (MCA) must approve the creation of a private limited company. There is a statutory audit, an annual filing with the Registrar of Companies (RoC), an annual IT report, quarterly board meetings, as well as the filing of minutes. Assume your business isn’t structured to meet these requirements. In that case, you may wish to wait about a year before registering a private limited company (some businesses first register as an LLP because the compliance requirements are simpler).
Tax Advantages Few
It is commonly assumed that a private limited company has many tax advantages, but this is not true. In addition to industry-specific benefits, there is a 30% flat-rate tax on profits. Dividend distribution taxes (DDT) and minimum alternate taxes (MAT) must be paid. An LLP is a better choice if you’re looking for the structure with the lowest tax burden.
Cost Of Starting A Business
Establishing a private limited company in India costs at least Rs. 8000, excluding professional fees. Nevertheless, some states charge much higher fees; Kerala, Punjab, and Madhya Pradesh do so. Additionally, you should have some paid-up capital, which can be as little as Rs. 5000 at first. Registration costs are approximately Rs. 13,000.
List Of The LLP’s Features
An LLP is designed for professional and advisory firms that do not need equity funding. Consider an LLP if you find yourself in this situation. It combines the best features of a partnership and a private limited company.
Businesses That Are Not Scalable
If your business is unlikely to need equity funding, an LLP combines the benefits of a limited liability company and a general partnership. Like a general partnership, it has a simpler structure and limited liability, much like a private limited company.
Compliance Was Lower
LLP has received some concessions from the MCA. An audit is only required if a company has a turnover of more than Rs. 40 lakh or if it has a paid-up capital of more than Rs. 25 lakh. LLPs, on the other hand, require minimal notification to the RoC of structural changes, as opposed to private limited companies.
Advantages Of Taxation
With profits over Rs. 1 crore, LLPs offer tax benefits. In contrast to companies with profits exceeding Rs. 1 crore, LLPs are not subject to the tax surcharge and dividend distribution tax. There is no income tax on loans to partners.
The number of partners in a limited liability partnership is unlimited. If, for example, you are building a large advertising agency, you don’t have to worry about any cap on the number of partners.
Cost Of Starting A Business
With government fees of Rs. 5000, no paid-up capital, and low compliance costs, a private limited company is much cheaper.
OPCs are similar to private limited companies, except that there is only one director (although there must be a nominee), who is also the only shareholder.
As A Solo Entrepreneur
OPCs are an improvement over sole proprietorships since your liability is limited. If a company has revenues greater than Rs. 2 crores, and paid-up capital greater than Rs. 50 lakhs, it must be converted into a private limited company. You may also consider starting a private limited company, as this will allow you to have more flexibility in funding (since an OPC must have a nominee director).
Requires High Levels Of Compliance
There are no board meetings, but you must conduct a statutory audit, submit annual and IT returns, and follow MCA regulations.
Tax Advantages Are Minimal
The OPC has some industry-specific advantages, similar to a private limited company. The profits, however, must be taxed at a flat rate of 30%, and the DDT and MAT apply. An LLP can be advantageous if you’re seeking a tax-efficient business structure.
Costs Of Starting A Business
There is a difference of about 7,000 rupees between a private limited company and a government-run one. In Kerala, Punjab, and Madhya Pradesh, the fees are higher.
Partnership Firm Features
Use this legal structure only if you are running a small business with no debts or liabilities, which is highly unlikely. Unlimited liability poses a significant risk.
Liability Without Limit
As a result of unlimited liability, the partners in the business are all liable for their debts. If you cannot repay a bank loan or are liable to pay a fine, your possessions can be seized. Banks, institutions, or suppliers own your jewelry, house, and car. In addition to being easy to set up and requiring minimal compliance, a partnership offers no advantages over an LLP. Even registering it, which is optional, may not make it cheaper. As a result, unless you’re running a very small business (say, you run a lunch Dabba service in your area and want to set a profit ratio with your partner), you shouldn’t consider forming a partnership.
Easy To Use
As long as you don’t register your firm, you need only a partnership deed to get started. This usually takes just a few days. Once you have scheduled an appointment with the registrar, you can complete the registration process in a single day. An LLP or public limited company has a simpler start-up process than a private limited company.
Sole Proprietorship Features
This should only be considered by small traders and merchants. As in the case of a partnership company, this is due to unlimited liability.
Liability Without Limitation
Sole proprietorships are not considered separate entities, just as partnerships are not considered separate entities. The sole proprietor must repay all debts. Therefore, the sole proprietor is liable for all debts. Since it discourages risk-taking, it is only useful for small businesses. If your business requires a loan or will have to pay penalties, fines, or compensation, you should register an OPC.
Getting Started Is Easy
Despite what many people believe, registering a sole proprietorship is not possible. There is no separate registration procedure for sole proprietorships. All you need is a business registration. If they are selling goods, online retailers only need to register for sales tax. Setting up a sole proprietorship is therefore relatively simple.
There are fewer rules that need to be followed by an LLP than by a private limited company. A small business owner may benefit from OPC, but it is highly taxed. Partnerships and sole proprietorships are easy to start, but liability is unlimited.