LLP, Company or Partnership- Which one should you choose for your business?

Chetan Tiwari , Last updated: 16 May 2019  

Across the world, with more and more booming start-up companies, legal entities are being incorporated. Accordingly, industrialists are now busy registering their business. But before you do that, it is crucial to know the difference between the types of existing business forms.  If you are certain that you wish to register your business, and then please read this article to be acquainted with business registrations, their differentiation, advantages, and inadequacies.

In the present scenario, you should prefer commencing a business, which does not command a sturdy preservation cost. With the emergence of new entrepreneurs, a new change can be observed in the business area.

Most startups lack the experience that is necessary to establish a business. Henceforth, they are unacquainted and ignorant of the legal entities and the legal status of such bodies. Therefore, at the time of incorporation, such businesses face difficulties to choose the entity suitable for their startup.

Did you know that 26% escalation is observed in the incorporation of Private limited companies?   Also, One Person Company (OPC) registration is escalating as well. Data suggests that almost more than five thousand businesses are incorporated in India.

Limited Liability Partnership

What is LLP registration?  Did you ever think why this registration is necessary?  Actually, since 2008, online LLP registration has been widely acknowledged by the people of India.

The Limited liability partnership or LLP was sanctioned in the Limited Liability Partnership Act, 2008. The Act allows the business entities to smoothly function while providing the owners with limited liability. In addition, under this Act, no partners are charged guilty of another partner's disregard.

Easy features of the LLP

  • LLP is an independent legal constituent. An LLP is acknowledged under the LLP Act 2008. In addition, LLP offers a minimum cost of the bargain with nil principal limitations.
  • In comparison to the privately owned company, the legal professional’s fees for LLP registration are not that high.
  •  It also protects individual assets of partners and the liability of LLP is fundamentally restricted to the assets of LLP firm only.
  • During LLP registration, no audit is required. When the turnover of a business is above     Rs. 40 lakhs or capital is above Rs. 25 lakhs, only then audit LLP’s accounts is mandatory.
  • An LLP sanctions "pass-through" taxation. LLP contributes immensely when it comes to tax matters. This means that the profits and/or losses to be redirected to the partner's tax return. Partners possess an extensive or inadequate interest in that company when they earn a benefit. In addition, loan to partners is not computable, however, when owners of any company extract benefits from the company, they are considered for additional tax accountability. This is collected in the form of DDT when 15% is to be paid by the company.
  • No tax is payable, besides when  profits of an LLP is withdrawn by the partners
  • The total expense in this type of registration is nearly around Rs 7,000 to Rs. 8000.

Private Limited Company

Lately, the government made some vital modifications to Companies Incorporation Rules, 2014. Private Limited Company is administered by the Companies Act, 2013 along with the Companies Incorporation Rules, 2014.

A private limited company is referred to a business unit held in private. This unit of company puts a limit on owner’s liability for his shares. Private limited company registration allows only 50 shareholders are allowed. Private Limited Company restraint the shareholders from trading their shares publicly.

As per Section 2(68) Private Company, Private Limited Company is classified as any company:

  1. with the least amount of paid-up share capital or in some instances higher capital than the capital approved.
  2. with 200 members. Members cannot be the employees of the company. Ex-employees of the company are not eligible to be members.
  3. where the public is not allowed to subscribe to any shares of the company.
  4. Which refrains invitation or acceptance of deposits from directors or their relatives? Only members of the company are allowed to do so.

Features of a Private Limited Company

  • The private limited company provides the shareholders with limited liability.
  • In a private limited company, shareholders may raise equity funds from this liability.
  • The private limited company maintains the status of a separate legal unit, which makes minor and intermediate sized businesses bodies choose this registration. 
  • Annual compliances and filings at ease
  • The total expense in this type of registration is nearly around Rs 10,000 to Rs.11000 up to authorized capital of Rs. 10 Lakhs as per new RUN System launched by govt of India.

One Person Company

Any individual who is the sole owner or founder can successfully start a company under One Person Company or OPC. This is based on the provisions mentioned under The Companies Act, 2013. Previously, the Companies Act, 1956 predetermined that a private limited company should consist of at least of two shareholders and two directors. However, the introduction of OPC by both the houses of the Parliament the Companies Act, 2013, encouraged self-employment within the permissible premises.

Characteristic of OPC

  • It is a convenient process since a single entity is required for OPC registration. Several shareholders, as well as the person registering, can both be the director and the shareholder.
  • A person who wants to be the sole controller of a business or does not have any trustworthy partner should opt for this registration.
  • The expense of this registration is comparatively low. A unit with a controlled budget may choose OPC registration rather than Private Limited Company registration.
  • There is no board of directors in these types of enterprises. The company is possessed and maneuvered by a sole person.
  • The total expense in this type of registration is nearly around Rs 10,000.

Sole Proprietorship Firm

Sole Proprietorship firms are effortless to establish and shut down with limited observance. You should choose Sole Proprietorship Firm registration in case of a new enterprise and then incorporate another legal entity.

Only one person is required for Sole Proprietorship Firm registration. The total expense in this type of registration is nearly around Rs 3,000.

Characteristics of sole proprietor: 

  • Proprietorship does not require a formal registration.
  • Only one person can be a member.
  • Approval is not necessary for using the name. Please note that trademarked names should be avoided. The Promoter’s preference of name can be used for the Proprietorship.
  • This firm is not recognized as a separate legal entity. The promoter is legally responsible for the liabilities of the Proprietorship.
  • The existence of Proprietorship business is dependent on the Proprietor.
  • The tax is decided on the basis of the total income of the Proprietor.
  • It is not obligatory to conduct yearly statutory meetings.
  • Foreigners are not qualified to start a Proprietorship.
  • Not transferable.
  • It is not necessary to file an annual report with Registrar of Companies. On the basis of the income of the Proprietorship, Income Tax Return must be filed

Partnership Firm

This registration is sensible for the old family business where the business constitution is very convoluted.

In order to complete Partnership Firm registration, a minimum of two persons is required. This can be the individual and any family member on the paper. The registration cost amounts to Rs 7,000 to 8,000, including the government charges, stamp, and notarization and hiring of the most important Registrar of Firms.

Characteristics of Partnership Firm

  • Partnership registration is not obligatory. A partnership can be registered under the Partnership Act, 1932.
  • At least two persons are required to start a Partnership.
  • No approval is necessary for using the name; however, it is good to avoid trademarked names. The Promoters choice of name can be used for the Partnership.
  • A maximum of 20 partners is allowed.
  • Partnership business is dependent on the Partners. It could be up for dissolution due to the demise of a Partner.
  • Partnership profits are taxed at 30% plus surcharge and cess as applicable.
  • It is not compulsory to conduct annual statutory meetings.
  • The partnership is not recognized as a separate legal entity. The promoters are personally accountable for the liabilities of the partnership.
  • Partners have limitless liability and are responsible for all the responsibility of the Partnership.
  • Foreigners are not permitted to start a Partnership.
  • Not transferable.
  • It is not essential to file a yearly report with Registrar of Companies. However, Income Tax Return must be filed with the Partnership.

"Private Limited Company Vs LLP Vs OPC Vs Partnership Vs Proprietorship- The Differences", is quite an insightful article. If you need help you to make a decision based on your requirement at the time of kick starting your new or existing business then article will direct you for correct strategy of doing business. It is necessary to accurately incorporate your company if you want to make your business prosper. This Article is contributed by Chetan Tiwari, Founder at Proworktree. Proworktree is one of India’s leading online business services platform. Our primary agenda is to assist people and enable them to enhance their business smoothly at a reasonable cost. If you think we missed out something then do let us know at Proworktree or comment below. Thanks for reading!  

Published by

Chetan Tiwari
(Founder at Proworktree)
Category Corporate Law   Report

5 Likes   12531 Views


Related Articles