Registering the right type of company is crucial for the success of any business. This article briefly looks at the options that you can go for.
The startup scene in India might not be that much on fire as it was a couple of years back; however, that does not mean that the enthusiasm has died, or that, there is a scarcity of talent or risk takers.
The funding may have dried out a bit, but the next batch of entrepreneurs sure are all raving and ready to launch their next big idea.
However, every big idea needs a stepping stone; so will yours if you happen to be thinking of starting your own business and being your own boss. One of the first questions will be faced with is “What type of company should I register?”
Strictly going by the books, there are 3 types of companies that you would be looking at LLP, Private Limited and OPC; all of which have their own distinct advantages and disadvantages.
However, to understand what would suit your type of entrepreneurship, we will have to look at each of the types separately (You can also refer to this Guide to Companies Index for a complete in-depth analysis of company types and the pros and cons associated with each one of them)
LLP or Limited Liability Partnership
Limited Liability Partnership is registered with the MCA (Ministry of Corporate Affairs) and is done under the LLP Act, 2008.
Partners in an LLP firm have limited liability i.e. one partner is not responsible for the deeds of another. However, keep in mind, that raising funds can be an issue if you’re registered as an LLP.
Point being, if you wish to raise funds in the future, then ideally you should be looking at a Private Limited Company or an OPC, which we will discuss in a short while.
However, before we do that, let’s have a look at some of the key features of an LLP:
Easy to form: LLP’s are easier to form in comparison to a private limited company as there are minimum requirements to create one; moreover, there is no limit to capital assigned in a limited liability partnership.
Flexible: The LLP Act 2008 gives the partners complete authority to run and manage the business the way they like. Moreover, there is no bar to participate in business meetings or have consultations with anyone they do not want to.
Lesser Compliances: An LLP has lesser compliances to follow compared to a Private Limited Company. There are only two regulatory formalities that are to be filed i.e. the Annual Return & Statement of Account & Solvency.
There are No Compulsory Audits: Unlike a private or limited company; LLP’s are not required to have mandatory audits unless their capital exceeds 25 lakhs, or their annual turnover exceeds 40 lakhs.
Private Limited Company
By definition, a private limited company is one which has a minimum of 2 members and a maximum of 200 and offers legal protection to its members.
It's defined by its name, the number of members, shares, directors, meetings, etc.
Now that you have a brief idea of what it is, let’s look at some of its principal features:
Easy to Setup: With the introduction of the form INC-29, it’s become relatively easier to set up a private limited company as part of the government’s plans to fast track business setups and help boost entrepreneurship in the country.
Shields its Members: A Private Limited Company has a separate legal identity which protects its members from financial and other related risks. The liability of the owners is also limited in this case.
Market Dominance and fundraising: Private Limited Companies command more respect in the market, and that is why investors are more likely to invest in this form of business when compared to an LLC or an OPC. Therefore, if you are considering raising funds in the future; this should ideally be the type of company you should register.
Tax Benefits: Private Limited Companies are entitled to certain tax benefits.
One Person Company
You can consider this one as a hybrid of Sole Proprietorship and a Private Limited Company; wherein, one person owns the business exclusively but can still enjoy the benefits of that of a Private Limited Company without all the restrictions of a Sole Proprietorship.
In an OPC or a One Person Company, a single individual can be both the owner as well as the shareholder and does not need any partners.
Moreover, because it functions like a Private Limited Company, you can quickly raise funds to scale up the business.
Let’s have a look at some of the features of an OPC:
Lower Cost of Registration: The cost of registering an OPC is relatively lower when compared to a Private Limited Company. This means, anyone with a limited budget can register a company and establish his/her business and enjoy numerous benefits without having to resort to being a sole proprietor which is not recommended at all for serious entrepreneurs.
No Need for Partners: An OPC requires only one person for registration, which makes it easier to set up. There isn’t any requirement for multiple shareholders and the person registering it, can both be the director and the shareholder. It is really helpful for people who want complete control over their business or don’t have anyone reliable enough to include them as a partner in their venture.
The Absence of Board of Directors: Since the company is owned and operated by a single person, the concept of a board of directors is non-existent in these type of enterprises.
Post incorporation: This is probably one of the only drawbacks of registering an OPC. Being a relatively newer form of company, you will find yourself cornered as it may be difficult to obtain licenses, registrations and other post incorporation filings.
Registering the right type of company is crucial to the success of your business as it will help you avoid any complications later on. Every entrepreneur needs to closely consider his/her needs before even thinking of registering a company because every business is unique and the type of company you choose can go a long way in ensuring its success!