CS Mitesh Mehta
( Expert )
12 August 2009
Selection of the appropriate form for your business depends on many factors such as the type of business, the number of persons involved, whether you want full control or prefer to share responsibilities, capital requirements, tax regulations and business liability.
If you feel the situation is not simple, consult Companies Inn about the legal aspects of your plans and about financial implications.
Private Limited Company is formed with minimum of 2 members and 2 Directors. Maximum number of members in a private company is restricted to 50. There are restrictions for availing loans and deposits from people other than members and Directors. The name of the company shall end with the words ‘Private Limited’.
LIMITED LIABILITY PARTNERSHIP (LLP)
LLP is a new corporate businessform in India. A Limited Liability Partnership combines the advantages of both the Company and Partnership into a single form of organization. This business form is going to be the future organization structure available to small business, start ups and service industries.
An LLP can be formed by two partners and 2 designated partners. There is no restriction for maximum number of partners in LLP
When making a decision about the type of business to form, there are several other criteria you need to evaluate. Analyse the following points carefully before taking proper decision.
A. Legal liability
To what extent does the business owner needs to be insulated from legal liability? Majority of people approaching Companies Inn for registration of business organistaion prefer corporate structure of business as liability of members is limited to the share/contribution to the company/LLP.
Liability of shareholders is limited to the value of shares taken in the company. Therefore the personal assets of shareholders are free from the liabilities of the company. Liability of partners of a LLP is limited to his contribution. Their personal assets are free from the liabilities of LLP. However, if LLP has committed a fraud or a willful misconduct, the liability of LLP and partners committed fraud become unlimited.
B. Perpetual Succession
Business Dictionary defines perpetual succession as continuation of an incorporated firm’s existence, unaffected by the death of any of its owner(s) or the transfer of its shares to a new entity or person. This is the main feature of a corporate business form whether it is a company or LLP
Death of a shareholder / partner -----Company will continue and his shares will be transmitted to his legal heirs. LLP will continue with other partners. Legal heirs of LLP will get share of profit/contribution of the deceased partner. They are not entitled to become a partner of the LLP. LLP agreement can provide a clause enabling legal heirs to become a partner of LLP.
Transfer of Shares / Partner’s interest----Shares in a company are freely transferable. In Private companies, transfers can be regulated by articles of the company. A partner can transfer his share of profit/loss in an LLP wholly or part. Such transfers shall always governed by LLP agreement.
C. Tax implications
Based on the individual situation and goals of the business owner, what are the opportunities to minimize taxation?
There are many tax saving options available to corporations compared to proprietorship concerns or partnerships. Double taxation is a common disadvantage often associated with incorporation a company as the company has to pay tax on its profit and tax on distributed profit as well.
In case of taxation of LLP is concerned, there is a possibility of taxation as partnership. If the situation is this, the disadvantages of double taxation also get removed.
D. Cost of formation and ongoing administration.
Cost of formation and ongoing administration is another criteria to determine form of Business Structure. This cost includes cost of record-keeping and paperwork, as well as the costs associated with incorporation.
Cost of Incorporation----Higher in Pvt. Co
Compliance of law ----- In Pvt. Co. less compared to LLP
Audit---- For Pvt. Co. need to appoint auditor irrespective of size of the company . For LLP Only apply if turnover INR 4000000 or above or contribution INR 2500000 or above
Record Keeping -----Extensive record keeping compared to LLP --for LLP Statutory records are basically limited to books of accounts. Others records keeping are governed by LLP agreement
Your goal is to maximize the flexibility of the ownership structure by considering the unique needs of the business as well as the personal needs of the owner or owners. Individual needs are a critical consideration. No two business situations will be the same, particularly when multiple owners are involved. No two people will have the same goals, concerns or personal financial situations.
Change of ownership -Company is most flexible form as share can be transferred freely. LLP--Ownership transfer is governed by LLP agreement. Usually, it requires consent of all partners.
Management ----Company is managed by Directors by taking decisions in Board Meeting. Companies Act & articles regulate management of a company. LLP ----LLP agreement describes how to manage LLP. It can also be managed like a company subject to agreement. LLP agreement is the basic document regulating management of LLP.
Capital ----Capital of a company is sub divided into shares. Profit entitlement of based on the percentage of shareholding in the paid up capital of the company. Voting right also based on the shareholding. Capital of LLP is contribution from partner. The contribution can be cash, tangible, intangible assets and immovable properties etc. Profit share need not be based on contribution. Voting right also governed by LLP agreement
F. Future needs
When you’re first starting out in business, it’s not uncommon to be “caught up in the moment.” You’re consumed with getting the business off the ground and usually aren’t thinking of what the business might look like five or ten-let alone three-years down the road. What will happen to the business after you die? What if, after a few years, you decide to sell your part of a business? Corporate form of structure is the most suitable form of Business for future requirements as it enables the owners to bring capital, change the ownership, expansion, consolidation, merger with other firms etc.
Visibility and Brand, Capability to change with Time are the twin mantra of present business success. As corporate form have the advantage of separate personality from it members, you will get more acceptance from your clients, suppliers, financiers and customers.