With the government of India encouraging the spirit of entrepreneurship through several reforms like Start-up India, the number of new businesses has been skyrocketing.
There has been a steady surge in the number of start-ups in India in the post-covid era. Undeniably, this is an appreciable trend, yet it leaves us with two crucial questions that need to be addressed with respect to the start-ups. One, is whether it is necessary to register it in the first place and if yes, the next question is whether it should be incorporated only as a private limited company or a Limited Liability Partnership (LLP).
Most often, budding entrepreneurs view registering their start-ups as an unwanted burden as it invites an endless list of legal compliances. Further, a start-up doesn’t have a liberal amount of funds, which makes them think twice to spend on the registration of the firm. Furthermore, if the start-up fails to propel ahead and if the owner wishes to shut it down for obvious reasons, the process gets complicated and more cumbersome than had the business been registered.
Despite the dilemma an entrepreneur might have with respect to the registration of the start-up, here is why doing so might be a good idea:
Startup Company Registration (LLP or PVT) in India: Is It Necessary : To Give the Startup a Legal Personality:
A business is most trusted and looks credible when it is incorporated as a legal structure, for instance as a private limited company. Additionally, the name of the firm is also trademarked, to have a unique identity in the market.
Startup Company Registration (LLP or PVT) in India: Is It Necessary: Bank Account:
A business would require a current account to be operational in an authorised bank to carry out the necessary financial transactions, which is not possible unless the business is registered legally.
Entering Contractual Obligations:
When the start-up enters contractual obligations with customers or with other potential businesses, it is most preferable when the start-up is a separate legal entity, as it would discharge any personal liability on the part of the members of the start-up.
To Acquire a Proper Channel for Payment Gateways:
Once a business is established and financial transactions commence between parties, there comes the need for online payments through various payment gateways such as PayU, Razorpay, etc. that authorises the credit or debit card transactions. In order for the business to collaborate with the payment gateways, a valid registration of the business is mandatory.
Availability of Funds:
Funds are easily available to a registered business, compared to an unregistered business. A private limited company, for instance, can raise funds from Venture capitalists.
Choosing the Right Corporate Entity for the Start-Up:
Once the business owner is convinced that the start-up should be registered, there comes a point where the owner is left at a crossroads to choose between a private limited company or an LLP (Limited Liability Partnership). The question here is why the other entities like the sole proprietorship or OPC (One Person Company) are excluded here.
Well, the start-up can be registered as an OPC or sole proprietorship as well. The reason behind not endorsing these types of entities for registering a start-up is that these are not conducive to attracting investment to the company. Also, in the case of a sole proprietorship, the proprietor is bestowed with unlimited personal liability. That leaves the owner with two sane options to choose from, a private limited company or an LLP.
Incorporating a Startup As an LLP:
LLP acts as the most viable corporate entity for start-ups as it offers the combined benefits of limited liability of a private limited company and flexibility of a partnership firm. An LLP firm enjoys perpetual existence and can enter contracts by itself. It can also purchase or hold property of its own.
Although an LLP firm has fewer compliances, it has its inherent disadvantages. For instance, regardless of whether the start-up is active or not, the income tax returns have to be filed annually when incorporated as an LLP. An LLP must have at least 2 partners. A start-up may be a brainchild of a sole entrepreneur and hence might not be able to incorporate as an LLP with 2 partners.
Incorporating a Startup As a Private Limited Company:
A private limited company is often the go-to option in many businesses, as it enables the effortless raising of funds. Given the volatile nature of start-ups, private limited companies can be easily sold or transferred easily if the owner wishes to. Further, a start-up may be tight on its capital investment and luckily, there is no minimum capital requirement for a private limited company. More importantly, a private limited company can utilise FDI (Foreign Direct Investment). Also, amongst all the corporate entities, a private limited company secures the most credibility of the customers and hence might be the best option for a start-up.
Yet, a private limited company does have some pain points. There are too many compliances that are to be adhered to during and after the registration in the case of a private limited company, such as filing annual returns, maintenance of statutory registers, etc. In addition to this, a private limited company should also bear compliance with tax and labor laws as well. For a start-up, something as complicated as a private limited company might be overwhelming.
Keeping this in mind, it can be tough to take a one-sided stance favoring either of the corporate entities when it comes to the incorporation of a start-up in India. It absolutely depends on the priorities of the business when it comes to choosing between a private limited company or a Limited Liability Partnership. While a private limited company gives a wide scope to procure investment, an LLP gives more control and flexibility. Therefore, the entrepreneur has to carefully weigh the pros and cons and decide which corporate entity would suit the business better at the time of incorporation, thus saving the cost and time of converting from one entity to another after the initial registration.
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