Start-up founders may be overwhelmed by legal advice that is out there. The massive number of requirements the government places on businesses may be source of confusion. To make this process simpler, we have specified the primary characteristics of each construction and analysed which businesses they match best.
- Private Limited Company
Start-ups and expanding businesses pick this popular business arrangement because it allows outside financing to be increased easily, limits the liabilities of its shareholders and allows them to provide employee stock options to attract top talent. As these entities have to hold board meetings and file annual returns with the Ministry of Corporate Affairs (MCA), they have a propensity to be viewed with more credibility than an LLP or General Partnership.
- Characteristics of Private Limited Company
- For Businesses Elevating Funding: Fast-growing businesses which will require financing from venture capitalists (VCs) need to enroll as private limited companies. It is because only private companies could make them shareholders and provide them a seat on the board of company directors. LLPs would require investors to be partners and OPCs can't accommodate additional shareholders. If you’re raising financing, therefore, the factors which follow scarcely thing; your decision is made.
- Limited Liability: Businesses often will need to invest money. In constructions such as General Partnership, partners are personally liable for all the debt. If it can't be repaid by the company, the partners would need to market their personal possessions to do so. In a private limited company, only the amount invested in starting the company will be lost; the directors' property will be safe.
- Start-up Cost: A private limited firm prices around Rs. 8000 to start in the very least, excluding professional fees. Nevertheless, this will be greater in Punjab, Kerala and Madhya Pradesh, particularly, the fees are much higher. Additionally, you need some paid-up capital, which may be as little as Rs. 5000 to begin with. The annual compliance costs are around Rs. 13,000.
- Requires Greater Compliance: In exchange for the convenience of easily accommodating financing, the private limited company set-up needs to meet the requirements of the Ministry of Corporate Affairs (MCA). These vary from a statutory audit, annual filings with the Registrar of Companies (RoC), annual submission of IT returns, as well as quarterly board meetings, the filing of minutes of those meetings, and much more. In case your company isn’t yet geared to meet these requirements, you may wish to wait a while before you jump into registering a company & bull Tax Benefits! The private company is assumed to have many tax advantages, but this is the case. There are several industry-specific advantages, but taxation is to be compensated at a flat rate of 25 percent on earnings if gross receipts less than INR 2.5 billion, the dividend distribution tax (DDT) applies, as does Minimum Alternate Tax (MAT). If you’re looking for the structure with the lowest tax burden, the LLP does provide some better benefits.
- Limited Liability Partnership
A relatively economical approach to incorporate as compared with a Private Limited Company and requires fewer compliances; its chief improvement over General Partnership is that it limits the liabilities of its partners to their contributions to the company and offers every partner protection from negligence, misdeeds or incompetence of the other partners.
- Characteristics of Limited Liability Company:
- Start-up Price more affordable than starting a private company, with authorities fees of Rs. 5000, no paid-up capital and low funding costs.
- For Non-Scalable Businesses: Should you’re running a business that’s unlikely to need equity funding, you may wish to register an LLP as it unites advantages of the private company and general partnership.
- Fewer Compliances: The MCA has made given some concessions to the LLP. For instance, an audit has to be performed only if your turnover is greater than Rs. 40 lakhs or paid-up capital is greater than Rs. 25 lakhs. In addition, whereas changes Will Need to be communicated to the RoC in case of private companies, the requirement is minimum for LLPs.
- Tax Benefits: Particularly if your company is earning over Rs. 1 crore in earnings, the LLP provides tax benefits. The tax surcharge that applies on companies with earnings over Rs 1 crore doesn’t apply to LLPs, nor does Dividend Distribution Tax. Loans to partners are not taxable as income.
- Number of Partners: There's no limitation to the number of partners there might be in an LLP. If you’re establishing a large advertising agency, for instance, you need not worry about any limit on the number of partners.
- General Partnership:
A General Partnership is a business structure two or more individuals handle and run a business according to the terms and goals set out in the Partnership Deed. This structure is thought to have dropped its importance because the introduction of the LLP because its partners have unlimited liability, which suggests they're personally liable to the debts of the company. Nevertheless, low costs, ease of setting up and compliance requirement make it a sensible option for some, such as home based businesses that are not likely to take on any debt. Registration is optional in case of General Partnerships.
- Features of General Partnership:
- Unlimited Liability: On account of liability, the partners in the company are accountable for its debts. Which implies that if, for whatever reason, a partner is not able to pay back a bank loan or is responsible to pay a fine, this could be retrieved from their personal possessions. Hence the bank, institution or supplier would have right to their jewelry, home or car. In addition, aside from ease of setup and minimal compliance, the partnership provides no benefits over the LLP. If one chooses to enroll it, which is optional, it may not be more economical. Consequently, unless one is operating a very small business (let’s say you provide a lunch package service in your area and would like to set a profit ratio with your partner), you should not select for a partnership.
- Easy to Start: Should you pick not to enroll your partnership firm, all you need to get started is a partnership deed that you may have ready in just two to four working days. Even registration, for that matter, can be completed in a single day once you've the consultation with the accounts. As compared with LLP or a private company, the process for starting-up is a lot simpler. A General Partnership is more economical to start than even and an LLP over the long-term, due to the compliance requirements that are minimal, is inexpensive. You will not have to apply an auditor. This Is the Reason Why, despite its shortcomings, home based businesses may opt for it.
- Sole Proprietorship:
A sole proprietorship is a business that's owned and handled by one person. You may have one up and running within 10 days, that makes it quite popular among the unorganised sector, particularly traders and merchants. There's no such thing as registration; proprietorships are recognized by other registrations, like a service or tax registration.
- Characteristics of Sole Proprietorship:
- Unlimited Liability as a partnership, a sole proprietorship has no existence. Consequently, all debts can only be recovered from the sole proprietor. Consequently, the owner has unlimited liability with respect to each of the debts. This ought to heavily discourage any risk-taking, therefore suited to only tiny businesses.
- Easy to Start: There's no separate registration procedure for proprietorships. All that you want is a government registration pertinent to your company. In the event that you’re selling products on-line, a proprietor would only need a sales tax registration. Consequently, starting up as a sole proprietor is easy.
- One Person Company:
The constitution of a One Person Company (OPC) was lately introduced as a strong improvement over sole proprietorship. It gives a single promoter control over the business whilst limiting his/her liability to contributions to the company. This person will be the only director and shareholder (there's a nominee director, but with no power till the first director is incapable of entering into contract). Therefore, there's no scope of raising equity financing or supplying employee stock options.
- Features of One Person Company:
- For Solo Entrepreneurs: A major improvement over the sole proprietorship firm, given your liability is restricted, the OPC is meant for solo entrepreneurs. Nevertheless, do notice that if it's revenues of over Rs. 2 crore and paid-up capital of more than Rs. 50 lakh, then it needs to be converted into a private limited company. In addition, given that there must be a nominee director (to enable perpetual existence of the OPC), you might as well consider starting a private limited company, which will have flexibility of raising financing.
- High Compliance Requirements: Even though there are no board meetings, you'll be required to conduct a statutory audit, submit returns and adhere to the different requirements of the MCA.
- Minimum Tax Benefits: The OPC, such as the limited company, has several industry-specific advantages. But taxes are to be compensated on earnings, the DDT applies, as does MAT. If you’re searching for a construction with the lowest tax burden, the LLP does provide some better benefits.
- Start-up Costs: Almost the same as a private limited company, with government fees, a little less than Rs. 7,000. Nevertheless, this will change for states that are various, for instance in Punjab, Kerala and Madhya Pradesh particularly, the fee is higher.