17 April 2020
Company vs Limited Liability Partnership, what to be as a Start-up?
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    Start-ups and Entrepreneurship has become the new slogan of the youth in the past few years. As an entrepreneur, one most important decision while initiating a start-up is which business structure should be opted for, a Private Limited Company or a Limited Liability Partnership (LLP).

    Start-ups are found to be in dilemma regarding the structure of the entity considering its huge impact on ownership, management, taxation, liability of debts and laws and procedures applicable.

    What is a Private Limited Company ?

    A private limited company is an entity registered under the Companies Act, 2013 as an artificial legal person, having an independent legal entity with a perpetual succession. A private limited company must have minimum 2 members and can have maximum 200 members.

    Features of a Private Limited Company :

  •     Easy to set-up with SPICe+ form
  •     Ownership and Management segregation
  •     Earns trust from the public due to heavy compliances
  •     Market dominance on other types of entities like One Person Company and LLP.
  •     Easy availability of Funds
  •     Tax benefits from the Government.

  • What is a Limited Liability Partnership (LLP) ?

    LLP is a business format that combines the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost.

    LLPs are regulated under the Limited Liability Partnership Act, 2008 which states that every LLP shall have at least two designated partners being individuals, at least one of them being resident in India and all the partners shall be the agent of the Limited Liability Partnership but not of other partners.

    Features of Limited Liability Partnership (LLP) :

  •     Easy incorporation procedures
  •     Flexible working and lessor compliances
  •     Easy Decision making and troubleshooting
  •     Perfect for small scale Business
  •     No compulsory audits except for a few

  • Major Factors influencing the decision of a Start-up :

      Mission and Vision of the Entrepreneur :

    Business in the long run needs various stakeholders, investors and professionals as the backbone for perpetual succession. Structure of a company and governing laws allows easy introduction of stakeholders. Creditability and confidence enhanced due to compliances of various laws like Companies Act, Income Tax and GST Laws by company makes it easier for stakeholders to join it without any hesitation.

    In a LLP, introduction of new partners have many times leads to conflicts and lead to winding ups.

      Ownership and Management :

    Shareholders are the owners of the company, as they have invested their money in it. However, management is vested with the Board of Directors. Directors may or may not be the shareholders of the company.

    Partners are the owners of the LLP and they also have complete control of management and decision making as they are also designated partners. Sometimes at the discretion of partners, management can be vested to a single partner or to any other outside person.

      Taxation and Audit compliances :

    The Private Limited Companies are taxed at 25% plus surcharge for Gross turnover upto 400 Cr. And at 30% plus surcharge for Gross Turnover above 400 Cr. It can be taxed at 15% and 22%, if it fulfils certain prescribed criteria as per the Income Tax Act, 1961. Share of profit to owner is taxable at effective rate of 16.55%

    LLP is treated at par with partnership firms for taxation matters. Accordingly, LLP are taxable at 30% plus surcharge and share of profit to its partners is exempted. Thus, no dividend distribution tax is payable on share of profit. However, Alternate Minimum Tax at effective rate of 19.05% is applicable.

    At a glance, a comparative statement between LLP and Private Limited Company on other important parameters which can be taken in view while decision making:

    S.No. Particulars Limited Liability Partnership Private Limited Company
    1. Ownership Partners are the owners Shareholders are the owners
    2. Management LLP is managed by Partners as per LLP agreement. Partners can delegate management power to a management team or single partner Management of Company is vested with Board of Directors elected by shareholders
    Formation and Business Structure
    3. Governing Laws The Limited Liability Partnership Act, 2008 The Companies Act, 2013
    4. Incorporation Procedures Simple and quick at the same time cost-effective Lengthy and Time-consuming
    5. Minimum Capital requirement At the option of the partners No minimum Paid up capital required
    6. Maximum No. of owners No such limit. An LLP can have any number of partners Maximum 200 shareholders are allowed
    7. Liability of Owners Limited to the agreed contribution Limited to the unpaid amount of shares taken in the company
    8. Directors/Designated Partners Designated Partner should be a partner in LLP A director need not be a shareholder
    Funding and Withdrawals
    9. Loan funding Generally loans are taken from partners and their friends and relatives. Bank loans are also possible, but due to lack of confidence generally it gets difficult. Being more credible, Company can attract funding easily from external parties, as it can be easily valued and purchased via transferability of shares
    10. Withdrawal of Capital Partners can withdraw capital subject to LLP agreement. It is also possible for a partner to reduce contribution liability after giving notice to creditors Once paid up, capital cannot be withdrawn by shareholders without the approval of court. Company can buy back the shares subject to Companies Act.
    11. Meetings of Management No such meeting required In case of a private company, Directors are required to meet minimum 4 times in every year
    12. Meeting of Owners No such meeting required General meeting of shareholders to be conducted once in a year mandatorily
    Records and Audit Compliances
    13. Registers and records LLP is not strictly and mandatorily required to maintain Registers, Records and Minutes. It can be prepared as and when required unless it falls under audit criteria. Company is mandatorily required to maintain all Registers, Records, Minutes of Board Meetings and General Meetings from time to time, irrespective of doing business or not.
    14. Requirements of Audit Mandatory audit by a Chartered Accountant only if the turnover exceeds Rs.40 Lakhs or contribution exceeds Rs.25 Lakhs. Mandatory audited by a Chartered Accountant irrespective of its turnover

    There is no thumb rule for selection, it depends on factors like if you plan to take your business to international level or planning to pursue multiple opportunities and planning to source funds from investors and outsiders, you should opt for a Private Limited Company whereas if your business is for small scale and you need to have complete control of management or it is confined to a particular area, go ahead with a Limited Liability Partnership.

    With the abundance of professionals for consultancy makes it convenient for start-ups to understand pros and cons and also getting ample guidance for choosing whether they should go for a Private Limited Company or a Limited Liability Partnership.

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