The startup scene currently is very dynamic. And with more and more people choosing to go for funding, the scene is only expected to get even more competitive, going forward. However, every big idea needs a stepping stone; so will yours if you happen to be thinking of starting your own business and be your own boss. One of the first questions you will be faced with is “What type of company should I register?”
As an entrepreneur, you’d have a wide option to choose from when registering your company, but knowing what can work best for you and how may go a long way in helping you establish your business and enable you a dream run while you are at it.
Whether you choose to register your company as a Private Limited or as Limited Liability Partnership firm, each has its pluses and minuses. Each differs on legal as well as control aspect. Hence requires you to weigh your options carefully before taking your pick. To help you understand the pros and cons each of these firm types have and help you make a better and informed choice, follow the below given guidelines. They might just prove advantageous for you.
Private Limited Company:
A private limited company is a company which is privately held for small businesses. The liability of the members of a Private Limited Company is limited to the amount of shares respectively held by them (Hence the name!). Shares of Private Limited Company cannot be publicly traded.
- A minimum of 2 members are required to start a PL company
- The liability of each member or shareholder is limited & in the face of the loss, the personal assets of the members are not at risk
- A PL company never dies. Even in the event of a death of one or all of its members it remains the same entity despite a complete change in ownership. The act of perpetual succession only adds life to it.
- At the time of annual filing, no need to prepare a report on the Annual General Meeting The provisions relating to the contract of employment with managing or whole-time directors does not apply to a private company No need to appoint Independent directors on its Board
- It restricts transferability of shares by its articles.
- In a PL company the number of members in any case cannot exceed 50.
- It cannot issue prospectus to general public.
- In stock exchange, shares cannot be quoted.
Limited Liability Partnership:
A limited liability partnership is a form of business partnership where all of the owners have limited personal liability for the financial obligations of the business. There is no cap on the number of partners in the firm, hence they are not liable or responsible for other’s misconduct. Everyone is liable for their own acts. It is a separate legal entity distinct from its owners. It can enter into a contract and acquire property in its name.
- Lower registration cost and hassle free filing. Minimum fee required to form it is Rs. 500 and the maximum that you would need to spend is Rs. 5600
- The partners of the LLP have limited liability which means partners are not liable to pay the debts of the company from their personal assets
- There is no restriction upon joining and leaving the LLP and also no limit on the number of partners that can join as members
- A LLP firm is exempted from various taxes such as dividend distribution tax and minimum alternative tax and the rate of tax on it is less as compared to other kind of company
- There is no mandatory audit required. The audit is required only in those cases where the turnover of the company exceeds Rs. 40 lakhs and where the contribution exceeds Rs. 25 lakhs.
- Even if a LLP does not have any activity, it is required to file income tax return and Ministry of Corporate Affairs annual return each year. In case of failing to do so, it becomes liable to pay higher penalty for non-compliance.
- Inability to have equity funding comes from the fact that since LLP does not have the concept of equity or shareholding like a company; angel investors, HNIs, venture capital and private equity funds cannot invest in a LLP as shareholders. Thus, most LLPs would have to rely on funding from promoters and debt funding
- Majority states pose large tax limits on LLPs. These taxes can come in as additional taxes when registering as well as issues with personal tax filing.