Why company not limited liability partnership or partnership?
A Business Venture is a huge investment and as such zeroing in on the appropriate structure is the most important bargain which needs to be realized first. This would depend on a variety of considerations like the nature of the business, the human resources involved, the desired level of the control by the top management, the capital requirements, and the fund raising, however, the top priority facet is the kind and extent of liability the owner wants to take. There are several forms in which a business venture may be constituted; however having a private limited company is beneficial over LLP and Partnership forms of business as it has certain advantages:
Distinct Legal Entity
Convenient transferability of shares
Minimum Requirement of shareholders
Raising Capital is easier
Flexible Human Resource Use
DISTINCT LEGAL ENTITY: A private company limited is a body corporate under the Companies Act, 2013 which provides it a separate legal entity as a juristic person. This allows a private limited company to acquire property, incur debts; contracts etc, as an entity separate from its members.
PERPETUAL SUCCESSION: This is a facet of being a separate legal entity which ensures that irrespective of the members holding positions in the private limited company, it does not extinguish with the leaving or death of a member but continues with the new member who acquires the position until legally dissolved.
CONVENIENT TRANSFERABILITY OF SHARES: Since the private company is limited to the shares, transactions of shares by a shareholder is extremely convenient in cases where one member wants to reduce, increase or wind up his share in the company. All he is required to do is transfer the shares to the person intended to by filing and signing a share transfer form.
MINIMUM REQUIREMENT OF SHAREHOLDERS: In order to incorporate a private limited company, only two shareholders are required who can also act as Directors, this makes incorporation absolutely easy and starting a private limited company extremely convenient especially through the SPICE( Simplified Proforma for Incorporating Company Electronically) mechanism these days.
RAISING CAPITAL IS EASIER: If a private limited company is looking to raise capital, they can raise it through both secured and unsecured debentures, publics, Banking and Financial Institutions, etc. Along with having multiple options, due to the stringent procedures required by the Companies Act to ensure good corporate governance, credit ratings of private limited companies is better and availing capital easier.
FLEXIBLE HUMAN RESOURCE USE: There are no classifications and requirements of persons being assigned and managing specific roles in a company, which ensures that a shareholder can act as a director or take on administrative functions of the company and this allows optimum utilization of human resources available to the private limited company.
ADVANTAGES OVER LLP AND PARTNERSHIP:
Attract and Retain the Best Talent: If you want to succeed, start early and if you are aiming to be something, aim to be the best. A private company differences between shareholders unlike the partnership concept of LLP and a Partnership firm, this enables a company to attract the best talent and retain it through ESOPs which is not possible in LLPs and Partnerships. It is imperative to know that in the long run ESOPs are advantageous and more rewarding than any short term bonus.
Capital Fundraising: The biggest requirement for any business venture is capital and that is the biggest advantage that private limited company offers over LLP and Partnership firm. Investors invest in shares and that is only possible in a company, although private limited caps the number of shareholders at 200, it still allows scope for sufficient capital investment. However in Limited Liability Partnership which the provision of mandatory conversion after the prescribed turnover and Partnership depending on the contribution of partners only there isn’t much scope of capital fundraising for partnerships and LLPs while retaining their business identities.
Limited Liability: Partners in a partnership firm have unlimited liability, in a limited liability firm to the extent of their contribution to the LLP and in Private Limited Company to the extent of their share capital.
Conversion: It is imperative to understand that the way to convert from being a Company or a private limited company to a limited liability partnership is easier as compared to moving the other way and as such it is a better strategy to start out as a private limited company and then if the compliances or the costs become too difficult to bear the company can go for depreciation and move for a Limited Liability Partnership. Since Partnership is not an identity distinct from its partners there cannot be a conversion without dissolving the essential nature of the business.
Better Credit Ratings: Due to the stringent reforms attached with the private company it has better credentials in terms of being a legal entity and the cap of 200 shareholders ensures a healthy and conducive work environment with effective control and better and improved chances due to various necessary compliances and procedural requirements. LLP due to its stringent nature of really limited liability and Partnership firm due to the limited nature of operations do not enjoy the same credibility in the market.
The Private Limited Company in India is the most popular form to start a business venture when you are planning on one as there are major advantages associated with it but at the same time a limited liability partnership is preferred when you are approaching the market with a new idea or service which you may believe might just not work, even then starting with a private limited company is more beneficial because changing over from a company is more convenient than vice versa. A Partnership firm on the other hand is very restricted both in it’s operations and approach and does not enjoy major growth possibilities due to the same, hence even in a family business as the minimum requirements for Private Limited Company is the same as a Partnership Firm hence it is better to start a Private Limited Company.