Legal AdviceOPC

Difference Between OPC and LLP – Which is Better?

Trying to figure out whether you want to register your business as a one-person company or an LLP? We’ve got the answers for you in this article.

There are different types of business structures and you can register your business or company in any one of the business structures. Entrepreneurs must be aware of the benefits of each of the business structures. This article will explain the difference between OPC and LLP

Entrepreneurs are regularly confused about which business structure they should register as. But the available structures are so distinct that you shouldn’t be, particularly if you’re wondering whether to register an OPC or an LLP. Let’s find out why it is so, as well as help you figure out which one is better suited to your business.

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Who Is It For?

An OPC is for entrepreneurs who are sure they want to have full control over their business. There can be no other shareholder or director, which also means no board meetings and lesser compliance. However, these businesses can’t be very big since all OPCs are required by the Ministry of Corporate Affairs (MCA) to become LLPs or private limited companies once their earnings surpass ₹2 crores.

Meanwhile, an LLP is for businesses, both small and large, that don’t want to increase funding, either from a VC or the general public. This is why it tends to be the preferred business structure for law firms, publicity agencies, and web development shops.

Legal Existence

An OPC has a distinct legal identity despite having only one individual at the forefront. It is likely because all OPCs need a candidate partner, who is powerless before the promoter’s death or departure but takes over at this point. Since the company has an independent identity, the liability of the director is limited.

On the other hand, an LLP has a separate legal existence, which also makes it possible to limit the liability of the partners.

Tax Benefits

Just as with a private limited company, there are no general advantages here, though there may be some industry-specific benefits. One must pay the tax at a flat rate of 30% on profits. Dividend distribution tax (DDT) applies, as does the minimum alternate tax (MAT).

However, an LLP has a few advantages over all other business set-ups, particularly if your revenues cross ₹1 crore. This is because the wealth tax is not applicable. Tax is, however, payable at 30% on profits, and MAT and DDT are applicable.

Mandatory Compliances

All OPCs must maintain books of accounts complying with statutory audit requirements and submit income tax returns and annual filings with the RoC.

LLPs must maintain books of accounts, but only need to comply with statutory audit requirements if turnover exceeds ₹40 lakhs capital contribution exceeds ₹25 lakhs. LLPs must, however, submit income tax returns and annual filings with the RoC.

Documents for Incorporation

The Memorandum and Articles of Association are the key documents of incorporation.

On the other hand, the limited liability partnership agreement is the core document for its incorporation.

Account Maintenance and Audit

It is mandatory to do account maintenance and audit wherever applicable in an OPC.

However, in LLPs, the accounts must be audited if the turnover is greater than ₹40 lakhs or if the contribution surpasses ₹25 lakhs.

Management Benefits

Management remuneration is permissible in the hands of an OPC company as a deduction, and no limit is specified.

Whereas, in an LLP, management remuneration in the possession of a licensed company subject to limitations is allowed as a deduction.

Loans and Advances Towards the Participants by the Entity

When the OPC meets the requirements, it is taxable as a considered dividend under Section 2(22 e) of Income Tax Act, 1961.

In LLPs, None of it is taxable. Other than in the case of a private company which has been converted to LLP, it is taxable for the first three years after transition.

Foreign Direct Investment (FDI) in the Form of Capital or Contribution or Equity.

The law doesn’t permit FDI as it is the prerequisite that an OPC member is an Indian citizen or a resident in India to be qualified to incorporate a one-person corporation, i.e., an OPC member.

FDI in LLP is permitted in those sectors or activities. Where 100% FDI is permitted on an automatic route but with no FDI related performance-based conditions.

Such entry is subject to prior approval by the Government/FIPB.

The laws don’t allow FDI in the following:

  • Sectors with an automatic route of less than 100% FDI;
  • Authorized sectors, such as agricultural/planting and print media, as well as other sectors in which FDI is prohibited.

Profit Distribution

OPC private companies must pay tax on dividend distribution. The firm waives the profit in the shareholder’s hands.

Whereas, there is no tax on income sharing by the LLP. Profit in partners’ hands is exempt.

The above information offered on the differences can be of great help to startup owners. The inputs offered above can help to choose the right business structure for their business. There are certain legal laws and compliance requirements of the above business structures.

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