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Pvt Ltd or LLP — Choose your Start-ups Registration wisely!

Many entrepreneurs when starting a new business will be confused about choosing  the business entity they should adopt. As startups are ventures which are young and developing, the business entity you choose will make a profound impact in the future of the venture.

Limited Liability Partnership (LLP) Vs Private Limited Company for Startup

The decision regarding the selection of a business entity for your startup should be made by keeping in mind the long-term objectives of a startup. Every business starts small but one has to be a visionary enough to see themselves in a period of five or ten years down the line.

Startups face dilemma, whether to choose a private limited company or a llp. Limited liability partnership is more suitable for startups intending to run a small scale concern covering a particular area. But it is still an indisputable fact that even though the number of Limited Liability Partnership ventures is increasing day by day, a private limited company still enjoys better credibility and confidence amongst investors, stakeholders and professionals due to the very strict norms and compliances mandated by the legislation in force.

What is Limited Liability Partnership?

A limited liability partnership is a business organization that has flexibility of a partnership but with limited liability. LLP registration of the company allows the partners enjoy a limited liability which means one partner is not considered responsible for another partner’s misconduct or negligence. This is perhaps the single most important factor which distinguishes it from normal partnerships. Thus in a limited liability partnership, the partners enjoy the benefits of the limited liability of that of a company at the same time it allows the partners to facilitate internal management through a mutual agreement similar to that of a partnership firm.

What is the need of LLP?

For startups which are intending to run a small scale venture, the structure of a Limited Liability Partnership is the most suitable because of the following advantages:

 o Incorporation and Procedural Compliances

The cost of incorporation is lower and the procedural compliances required for incorporating a Limited Liability Partnership is much relaxed than that of a Private Limited  Company. While the minimum statutory fee prescribed for incorporation of a company is Rs. 6000, for a limited liability partnership it is only Rs. 800.

Further, as per the Companies Act, 2013, a company is required to incorporate with a minimum paid up capital of Rs. 100000 whereas no such minimum limit is required to be followed for a Limited Liability Partnership. Furthermore, a Limited Liability Partnership requires lesser compliance than that of a company. All the procedural compliances relating to the holding of meetings, directors etc are not applicable to a Limited Liability Partnership.

 o Tax Compliance

 Limited Liability Partnership is more tax efficient than that of a company. Dividend Distribution Tax is not applicable to Limited Liability Partnerships whereas it is applicable to the Company. Further, the accounts of a Company are mandated by the Companies Act to get audited annually whereas in the case of a Limited Liability Partnership, it is only required for partnerships having turnover more than Rs. 40 Lakhs or Rs. 25 Lakhs in a financial year to get their accounts audited annually.

 o Ownership and Management

 In a Limited Liability Partnership, the partners can directly manage the affairs of the firm which is not possible in a Company. In a company, there is no direct nexus between ownership and management and the Board of Directors are appointed to run the affairs of the Company.

What is Private Limited Company?

A Private Limited Company in its most basic form is an association of at least two and not more than two hundred members. Such business organization get pvt ltd company registration done that allows its members to have a limited liability and the transfer of shares is limited to the members and they are not open to general public to subscribe to its shares or debentures.

Need for Private Limited Company

o In a Private Limited Company, there is clear distinction between the shareholders and the management, the shareholders do not directly take part in the management of the company. Thus, a Private limited company is beneficial  with regards  to ownership and management.

Liability of members has limited to the shares in the Pvt. Ltd. company. Therefore the personal assets of shareholders are free from the liabilities of the company.

A private limited company has more flexibility with regard to transferring or sharing of ownership.

A Private Limited Company is best recommended for the startups when you want :

 o Legal status of a company for the startup;
 o To open a subsidiary company outside India;
 o To make your startup a global company; or
 o To run a Multiple Business Segment on different brand names and companies;
 o To sell your business in future or take over any other company.


Conclusion

Many entrepreneurs when starting a new business will be confused about choosing the business entity like which one is better. There is no fixed rule that makes one business entity better than the other. Selection of your business organization should be based on factors like the business rationale, various compliances, funding requirement, ownership requirements and such other factors.

In Spite of the fact that, compliance cost and formation cost of LLP is significantly less than in Private limited if your idea needs funding and in future, you have the plan to grow big or to make your startup a global company then must go with the Private Limited Company only else you can choose the LLP. Also, regarding Private limited companies, there are well-established procedures and processes. LLPs, on the other hand, is a recently introduced entity in India. Therefore some of the rules and procedures are only evolving.

1 comment:

  1. Suhas Wagle6/28/2018

    informative for start up incorporation.. thanks

    ReplyDelete

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