So many options so hard to choose, isn’t it? We bring to you the advantages and disadvantages of the 3 most popular types of business entities in India and help you through the ABCs of starting a company.
Since adopting the 2013 Limited Liability Partnership (LLP) Act and the Companies Act, there is now more flexibility for corporate organizations. Therefore, it is critical that the entrepreneur or promoter knows the pros and cons of each business enterprise and chooses the right one. Know about the differences between Private Limited Vs. LLP Vs. OPC.
When a business takes the first step into the world of trade, the initial task is to register its firm. As a business owner, you are required to choose the type of company you want to set up. You have the option of starting an LLP, OPC, Partnership, Sole Proprietorship, or others.
However, as the new owner of a startup, paperwork can be overwhelming. Fortunately, the Government of India has worked towards ensuring ease of business becomes a reality. Despite this, there are a few legal hassles that new company owners can get misled by. These include
- Registering themselves as private limited companies when a limited liability partnership (LLP) would suit them better
- Whether or not it’s too early, and whether or not a simple founders’ agreement would do just fine.
To make this process simpler, we’ve fleshed out the main features of each structure and analysed which businesses they suit best.
Private Limited Vs. LLP Vs. OPC
Features of Private Limited Company
In short, consider this legal structure by start-ups looking to raise funding or attract the best in the job market with ESOPs.
For Businesses Raising Funding
Fast-growing businesses that will require funding from venture capitalists (VCs) need to register as private limited companies. This is because only private limited companies can make them shareholders and offer them a board of directors. LLPs would require investors to be partners, and OPCs cannot accommodate additional shareholders. Therefore, if you’re raising funding, the points that follow scarcely matter; your decision is made.
Requires Greater Compliance
In exchange for the convenience of easily accommodating funding, the private limited company registration set-up needs to meet the Ministry of Corporate Affairs (MCA). These range from a statutory audit, annual filings with the Registrar of Companies (RoC), annual submission of IT returns, as well as quarterly board meetings, the filing of minutes of these meetings, and much else. Suppose your business isn’t geared to meet these requirements. In that case, you may want to wait a while before you jump into registering a private limited company (some businesses first register an LLP because the compliances are fewer).
Few Tax Advantages
The private limited company is assumed to have many tax advantages, but this is not the case. There are some industry-specific advantages, but taxes are to be paid at a flat rate of 30% on profits, the dividend distribution tax (DDT) applies, as does Minimum Alternate Tax (MAT). If you’re looking for the structure with the lowest tax burden, the LLP does offer some better benefits.
Start-up Cost
A private limited company costs around Rs. 8000 to start at the very least, excluding professional fees. However, this will be higher in some states; in Kerala, Punjab and Madhya Pradesh, the fees are much higher. It would help if you also had some paid-up capital, which can be as little as Rs. 5000 to begin with. The annual compliance costs are around Rs. 13,000.
Features of an LLP
The LLP is meant for professional and advisory firms with no need for equity funding. If this applies to your business, pick the LLP; it’s been gaining in popularity since 2008 because it combines some of the better aspects of partnership firm and private limited company.
For Non-Scalable Businesses
If you’re running a business that’s unlikely to require equity funding, you may want to register an LLP as it combines several benefits of the private limited company and general partnership. Like a private limited company, it has limited liability and has a simpler structure, like a general partnership.
Fewer Compliances
The MCA has made some concessions to the LLP. For example, an audit needs to be performed only if your turnover is greater than Rs. 40 lakh or paid-up capital is more than Rs. 25 lakh. Furthermore, whereas all structural changes need to be communicated to the RoC in the case of private limited companies, the requirement is minimal for LLPs.
Tax Advantages
If your business is earning over Rs. 1 crore in profits, the LLP offers tax benefits. The tax surcharge applies to companies with profits over Rs. 1 crore doesn’t apply to LLPs, nor does Dividend Distribution Tax. Loans to partners are also not taxable as income.
Number of Partners
There is no limit to the number of partners in an LLP. So if you’re building a large advertising agency, for example, you needn’t worry about any cap on the number of partners.
Startup Cost
Much cheaper as company incorporation for LLP than starting a private limited company, with government fees of Rs. 5000, no paid-up capital and low compliance costs.
Features of an OPC
An OPC is not much different from a private limited company, except that there is only one director (although there must be a nominee), who will also be the sole shareholder.
For Solo Entrepreneurs
A significant improvement over the sole proprietorship firm, given that your liability is limited, the OPC is meant for solo entrepreneurs. However, note that if it has over Rs. 2 crore revenues, and paid-up capital of over Rs. 50 lakh, it needs to be converted into a private limited company. Furthermore, given that there must be a nominee director (to enable the perpetual existence of the OPC), you may also consider starting a private limited company, which will also have the flexibility of raising funding.
High Compliance Requirements
While there are no board meetings, you have to conduct a statutory audit, submit annual and IT returns, and comply with the various requirements of the MCA.
Minimal Tax Advantages
The OPC, like the private limited company, has some industry-specific advantages. But taxes are to be paid at a flat rate of 30% on profits, the DDT applies, as does MAT. If you’re looking for a structure with the lowest tax burden, the LLP does offer some better benefits.
Start-up Costs
Nearly the same as a private limited company, with government fees of a little less than Rs. 7,000. However, this will change for different states; in Kerala, Punjab and Madhya Pradesh, the fees are much higher.
Features of a Partnership Firm
You should consider this legal structure only if you’re running a small business that will have no debts or liabilities, which is very unlikely. The simple reason for this is unlimited liability.
Unlimited Liability
On account of unlimited liability, the partners in the business are liable for all of their debts. This means that if, for whatever reason, you’re unable to repay a bank loan or are liable to pay a fine, this can be recovered from your personal possessions. So the bank, institution or supplier would have the right to your jewellery, house or car. Furthermore, aside from the ease of set-up and minimal compliance, the partnership offers no benefits over the LLP. If you opt to register it, which is optional, it may not even be cheaper. Therefore, unless you’re running a very tiny business (let’s say you offer a lunch dabba service in your area and would like to set a profit ratio with your partner), you should not opt for a partnership.
Easy to Start
If you choose not to register your partnership firm, all you need to get started is a partnership deed. You can have this ready in just two to four days. Even registration, for that matter, can be completed in a day, once you have the appointment with the registrar. As compared with a private limited company or LLP, the procedure for starting up is much simpler.
Features of a Sole Proprietorship
Only small traders and merchants should consider this. Just as in the case of the partnership firm, the simple reason for this is unlimited liability.
Unlimited Liability
Just as a partnership, a sole proprietorship has no separate existence. Therefore, all debts can only be recovered from the sole proprietor. This means the owner has unlimited liability concerning all the debts. This should heavily discourage any risk-taking, which means that it’s suited to only tiny businesses. If you plan on running a business that requires a loan or may end up paying penalties or fines or compensation, it’s best you look into registering an OPC.
Easy to Start
Although many people say they want a sole proprietorship registration, there is no such thing. There is no separate registration procedure for proprietorships. All you need is a government registration relevant to your business. So if you’re selling goods online, a proprietor would only need a sales tax registration. Therefore, starting up as a sole proprietor is relatively easy.
A private limited firm requires more compliance, while an LLP has fewer rules to adhere to. OPC is suitable for one business owner but does have a hefty tax rate. A partnership company and sole proprietorship both are easy to start but come with unlimited liability. Hope this blog helps to identify the differences on Private Limited Vs. LLP Vs. OPC
FAQ:
What is a private limited company?
A private limited company (PLC) is a business entity that is incorporated under the Companies Act, 2013. It has a separate legal entity from its members and offers limited liability protection to its members. PLCs are required to have a minimum of two directors and two shareholders.
What is a limited liability partnership (LLP)?
An LLP is a type of business entity that is incorporated under the Limited Liability Partnership Act, 2008. It is a hybrid business structure that combines the features of a partnership firm and a company. LLPs offer limited liability protection to their partners and are not required to have a minimum capital requirement.
What is a one-person company (OPC)?
An OPC is a type of private limited company that has only one member. It was introduced in 2013 to make it easier for entrepreneurs to start and run their own businesses. OPCs offer limited liability protection to their sole member and are not required to have a minimum capital requirement.
What are the benefits of each business structure?
Benefits of a private limited company: Limited liability protection for members Separate legal entity from its members Perpetual succession Can raise capital through equity and debt Suitable for businesses of all sizes Benefits of a limited liability partnership: Limited liability protection for partners Flexible management structure No minimum capital requirement Suitable for businesses of all sizes Benefits of a one-person company: Limited liability protection for the sole member No minimum capital requirement Easier to start and run Suitable for small businesses and entrepreneurs
How do I set up a private limited company, LLP, or OPC?
To set up a private limited company, LLP, or OPC, you will need to file the necessary incorporation documents with the Registrar of Companies (ROC). The specific requirements will vary depending on the type of business entity you are setting up. You can find more information on the ROC website. Here is a brief overview of the steps involved in setting up each type of business entity: Private limited company: Choose a company name and check for availability Obtain a Digital Signature Certificate (DSC) for the directors and subscribers File the Memorandum of Association (MOA) and Articles of Association (AOA) with the ROC Pay the incorporation fees Obtain a Certificate of Incorporation from the ROC. Limited liability partnership Choose an LLP name and check for availability Obtain a DSC for the designated partners File the LLP Agreement with the ROC Pay the incorporation fees Obtain a Certificate of Incorporation from the ROC. One-person company: Choose an OPC name and check for availability Obtain a DSC for the sole member File the Memorandum of Association (MOA) and Articles of Association (AOA) with the ROC Pay the incorporation fees Obtain a Certificate of Incorporation from the ROC.
