CONFUSION!! Yes, this word always stays with us whenever we need to start something new. Here we are talking about business ventures. Our thoughts of opening a new business ventures gets stuck somewhere in middle of opting which business entities would suits us or which would yield higher gains with minimal risk of losses, liabilities, compliances, taxations etc. Well here comes some advantages along with disvantages of different kinds of business entities so that your burden gets reduced and you would be able to make wise choices before selecting a particular business entity.
Though, there are so many types of business concepts like Sole Propreitorship, Partnership, Limited Liability Partnership (LLP), Private Limited Company, One Person Company (OPC), Public Limited, Section 8. But if you are really willing to start one, then one of these three business concepts will suits you the best:-
- Limited Liability Partnership (LLP)
- Private Limited Company
- One Person Company (OPC)
Let’s discuss above three of them in details with some favorable advantages and some minor disadvantages. After reading these points your confusion will get vanished and you better become able to start up your new venture with keeping standardized benefits in focus.
- Limited Liability Partnership (LLP)
This concept is meant for all those people who don’t want to let their personal assets on risk. In short this concept is a combination of both – Partnership firm and a Private limited company. Mostly LLP type of concept is chosen by Professionals. Now, lets discuss some points in brief:-
- Members Required – Minimum two members are required in forming LLP and there is no bar in maximum number of members.
- Liability – As LLP is a combination of partnership firm and a company. So, in this type of business entity, you can enjoy several benefits without letting your personal assets on risk. Means in LLP, Liability remains limited and to the extent of their Partner’s contribution to LLP.
- External Funds – In LLP, generally external funds are not required by the partners. And in case if they really feel the need for the same then they may convert LLP into Private Limited Company.
- Foreign Ownership – Foreign ownership is allowed in LLP. But it is also mandatory to seek permission from Reserve Bank of India (RBI) and from Department of Foreign Investment.
- Taxation Rate – Profits of LLP are taxed at 30% Plus surcharge and cess.
- Audit – In LLP, If your Capital is less than Rs 25lakhs or your annual turnover is less than Rs 40 Lakhs then Audit is not necessarily required.
- Compliances – The main benefit of LLP is that there are no hectic compliances as compared to Private Limited Company and One Person Company. You just need to file Annual Return and Statement of Accounts and Solvency also called SAS.
- Annual General Meeting – Annual General Meeting (AGM) is not required in LLP. However, it is necessary to have at least one General Meeting and two Executive Meetings in every financial year.
- Annual Filings – Annual Return should be filed with Registrar of the Company (60 days before the closure of the financial year).
In LLP, you cannot raise external funds. Hence, this may lack the virtue of raising external funds. However, if you really wish to raise the funds then you may first require converting your LLP into Private Limited Company.
- Private Limited Company
This concept is meant for all those people want to grow their business faster by raising outside funds. Today a large percentage of many big companies or startups start from Private Limited Company. Here some points are mentioned below:-
- Members Required – Minimum two members are required in forming Private Limited Company and maximum of 200 members can be the part of Private Limited Company.
- Liability – In Private Limited Company, partners have limited liability and to the extent of their share in the capital.
- External Funds – Private Limited Company can easily raise outside funds due to gaining more respect in the business market. So many investors always remain interested in investing Private Limited Companies.
- Foreign Ownership – Foreigners are allowed to do investment in Private Limited Companies.
- Taxation Rate – Profits of Private Limited Company are taxed at 30% Plus surcharge and cess.
- Audit – In Private Limited Company, both Statutory Audit and Tax Audit is mandatory. However, Tax Audit is required if turnover goes beyond the limit of Rs 1 Crore as per Income Tax Act.
- Compliances – If we talk about compliances then Private Limited Company has to fulfill typical process of various compliances. Like appointing of Auditor, opening bank accounts, issue share certificates, arrange quarterly Board Meetings, Statutory Audit and Tax Audit, Holding Annual General Meetings, Filing Annual Returns and Financial Statements.
- Annual General Meeting – In Private Limited Company, Annual General Meeting is required to be done within the 6 months from the end of financial year.
- Annual Filings – Annual Return should be filed with Registrar of the Company in the Form MGT-7 at the end of financial year.
It is so costly to form Private Limited Company be in terms of setup and compliances. As Private Limited Company have much legal compliances as compare to Limited Liability Partnership and One Person Company.
- One Person Company
This concept is almost similar with Private Limited Company. The only difference is that in this concept, as the name says only 1 person is enough to form One Person company. This concept is meant for those people who are capable of starting a new venture by their own. Let’s discuss some points in details:-
- Members Required – Minimum one members is required to form One Person Company and maximum 2 members can be the part of this concept.
- Liability – Just like Private Limited Company, members of One Person Company have limited liability and to the extent of their share in the capital.
- External Funds – Just like Private Limited Company, One Person Company can also raise outside funds.
- Foreign Ownership – Foreigners are not allowed to start One Person Company. Means the Director and Nominee Director must be India Nationals and hold Indian Citizenship.
- Taxation Rate – Profits of One Person Company are also taxed at 30% Plus surcharge and cess.
- Audit – In One Person Company, Statutory Audit is required every year.
- Compliances – In One Person Company, there are less compliances as compare to Private Limited Company. You just need to conduct statutory audit and submit annual return and Income Tax Return as per the requirements of Ministry of Corporate Affairs (MCA).
- Annual General Meeting – Annual General Meeting is not necessarily required in One Person Company.
- Annual Filings – Annual Return of One Person Company is required to be filed with Registrar of the Company.
The main disadvantage of One Person Company is that Partnership cannot be formed In this type of Concept. Also if its annual turnover goes beyond the limit of Rs 2 Crore or if its paid up Share Capital goes beyond the limit of Rs 50 Lakhs, then it is mandatory to convert One Person Company into Private Limited Company.