“The true entrepreneur is a doer, not only a dreamer!”
Several entrepreneurs look for an answer to this question, it is time we shed light on the pros and cons of these 2 business entities.
Planning on starting your Business soon? Here are your options:
- One Person Company
- Traditional Partnership
- Limited Liability Partnership (LLP)
- Private Limited Company,
A proprietorship firm is an entity which is run by a single person. It is generally employed in traditional businesses. It is more of a one-man-show which is not scalable beyond a certain point. Additionally, there is no statute or law which governs its registration and functioning.
One Person Company:
The concept of a One-Person Company was introduced by The Companies Act, 2013. It’s a company run by a single person who is also the shareholder and the director. It has lower compliance as compared to a Private Limited Company. However, it is always better to register as a Private Limited Company than a One Person Company as more or less, both have the same taxation and compliance requirements, and a Private Limited Company is not only dependent on one person for its existence and continuance.
A Traditional Partnership firm has at least two people as partners and is governed by the Indian Partnership Act, 1932. It WAS a preferred form of business earlier but now businesses prefer registering themselves as LLPs. We DO NOT suggest registering as a Traditional Partnership Firm as it has Unlimited Liability which is its biggest drawback. This means that the personal assets of the partners can be attached to repay the liabilities of the firm.
An LLP or a Limited Liability Partnership is like a Traditional Partnership Firm but with limited liability. It has become a preferred choice of businessmen who, earlier used to register as partnership firms. It blends the benefits of a traditional firm (less regulations, more control, etc.), and of a corporate entity (limited liability of the partners).
Private Limited Company:
A Private Limited Company is an entity type which is formed by at least two shareholders. As compared to a LLP, it has Equity shares instead of a Profit sharing ratio. The main advantage is that it becomes a separate legal entity, independent of its shareholders or directors, and does not cease to exist on the death of any of its shareholders or directors. However, it is a very compliance-heavy form of an entity.
The main question: Private Limited Company and LLP –Differences and Similarities:
Governing Law or statute: – A Private Limited Company is governed by The Companies Act, 2013 whereas a LLP is governed by The Limited Liability Partnership Act, 2008. However, all approvals relating to both Private Limited Companies and LLPs are given by the Registrar of Companies (ROC).
Limited Liability and Perpetual Succession: – A Private Limited Company and a LLP both have Limited Liability and perpetual succession. In other words, the liability of the Shareholders / Directors / Partners / Designated Partners of a Private Limited Company or a LLP is limited. They have the advantage of perpetual Succession which means that the death or incapacity of the Shareholder / Directors / Partners / Designated Partners does not affect the existence a Private Limited Company or a LLP.
Separate Legal Entity: – A LLP and a Private Limited Company are separate legal entities. They have a separate identity as per law and are different from their Shareholders / Directors / Partners / Designated Partners. They can hold properties, sue or be sued upon etc. in their own name.
Venture, Seed and Angel Capital: – A venture, seed or an angel fund will ONLY fund a Private Limited Company. If you are a LLP, it is impossible to raise venture capital. Thus, if you are certain to raise venture capital in the future then make sure that you form a Private Limited Company and NOT a LLP.
Income Tax: – The rate of Income Tax is 25% in case of Private Limited Companies if they have a turnover of less than Rs. 50 crores and is 30% in all other cases. The rate of Income tax for a LLP is 30%. On the face of it, a Private Limited Company looks more a tax efficient structure but if you take Dividend Distribution Tax (DDT) into account then a LLP turns out to be economical. A Private Limited Company has to pay DDT @ 20.36% if it wants to give dividend to its shareholders. Thus, if you do the math, for every Rs. 100 earned, shareholders of a Private Limited Company take home Rs. 60/- and at the same time, Partners of a LLP take home Rs 70/-. A LLP works out to be 10% more tax efficient than a Private Limited Company.
Audit: – Audit is compulsory for a Private Limited Company every year. A LLP has to get its books audited if its Capital exceeds Rs 25 lacs or if its Turnover exceeds Rs 40 lacs.
Compulsory Compliance: – A Private Limited Company has to file 3 e-forms with the ROC every year while a LLP has to file two. Both have to file their Income Tax Returns every year. They also have to file TDS returns every quarter.
Meetings: – A Private Limited Company MUST have 1 Board meeting every quarter (i.e. 4 Board meetings per year) and one Annual General Meeting every year. There is no such condition for LLP’s. A LLP may or may not have meetings in a year.
Maintaining Registers: – A Private Limited Company has to maintain certain Books and registers as stipulated by the ROC whereas there is no such requirement for a LLP.
We hope that post reading our blog you would have arrived on a decision as to whether you should register your Business as a Private Limited Company or a LLP. To make your job easier, we are illustrating which entity type is ideal for what.
A Private Limited Company is ideal for: –
-Entrepreneurs who want to raise Seed or Venture Capital.
-Entrepreneurs who want to create a Separate Legal Entity with Limited Liability and Perpetual Succession.
-Entrepreneurs who want to issue ESOP’s to their employees.
An LLP is ideal for: –
-Family Owned Businesses.
-Entrepreneurs who want a Separate Legal Entity with Limited Liability and Perpetual Succession.
-Entrepreneurs who DO NOT wish to raise Venture Capital, Seed or Angel Funding.
This article has been contributed by ‘Business Guru’ – it you’re still not clear on whether you should form a Private Limited Company or a LLP you can contact them on +91 79778 63125 or write to them on [email protected].
You can also visit their site https://www.businessguru.co.in/.
P.S: Join KYABAE for a ‘Facebook Live Chat’ with the Founder of Business Guru on 27th of April 2017 at 6 pm. And interviewing him is a very special (and cute) guest – Parzaan Dastur (Facebook Profile https://www.facebook.com/parzaan.d) who is best known for his Dhara Jalebi ad (1995) and the role of the ‘Tussi Ja Rahe Ho’ Sardar Kid in ‘Kuch Kuch Hota Hai’ (1998). He is currently doing films and theatre.