Business Structure: What Would Work Best For You?
Starting a new business follows a long to-do list. As you master your business part, I want to discuss a crucial part of this setup – choosing the right business structure. Checkout the main business structures in India.
To choose one from various structures can be a daunting task. But, the clarity about the vision and scale of business makes this choice easier. You must know the level of control you want, the level of compliance you will be able to follow, the amount of investment you will require, and more.
The business structure significantly affects the success path of your business. Even if you could change it later, you must make a wise choice in the first place. You need to visit and revisit many factors that determine the right business structure.
Business partnerships play a vital role in the success of new ventures. They come with an extra managerial support – a blend of intellectual, monetary capital and skills.
Two or more people when come together with a common idea of business by infusing the sources and funds together with the common goal of earning profit is termed as Partnership. Partnership Firm is one of the common forms of business in India as it does not require stringent procedure to be followed and avails the flexibility in administration to the Partners.
The formation of Partnership Firm shall be with mutual consent of Partners to the business. The firm shall be formed and registered by following the procedure prescribed in this regards under Indian Partnership Act, 1932. A partnership comes into being through an agreement between persons who are competent to enter into a contract. Under the Act, registration of a firm is not compulsory. (In most states in India, registration is voluntary). However, if the firm is not registered, certain legal benefits cannot be obtained.
LIMITED LIABILITY PARTNERSHIP
A limited partnership unlike general partnership is a corporate form of business organization. Here, the liabilities are limited to each partner according to their agreed contribution to the business. The personal property of a partner cannot be attached to pay back the firms debts. This hybrid organization is governed under the Limited Liability Partnership Act, 2008 and not under Partnership Act. LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession.
LLP stands for Limited Liability Partnership It is an alternative corporate business form which offers the benefits of limited liability to the partners at low compliance costs. It also allows the partners to organize their internal structure like a traditional partnership. A limited liability partnership is a legal entity, liable for the full extent of its assets. The liability of the partners, however, is limited. Hence, LLP is a hybrid between a company and a partnership.
Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.
PRIVATE LIMITED COMPANY
A Private Limited Company is a business entity held by small group of people. It is registered for pre-defined objects and owned by a group of members called shareholders. Startups and businesses with higher growth aspiration popularly choose Private Company as suitable business structure. The business entity gets recognized as a Company through its registration under Companies Act of 2013 in India. The governing body is Ministry of Corporate Affairs, widely known as MCA.
The definition of Private Company under the Act is provided here to understand its basics. Section 2 (68) of the Act defines a Private Company as under:
A Company having a minimum paid-up share capital as may be prescribed, and which by its articles —
(i) Restricts the right to transfer its shares;
(ii) Except in case of One Person Company, limits the number of its members to two hundred;
(iii) Prohibits any invitation to the public to subscribe for any securities of the company
|Particulars||Limited Liability Partnership||Partnership Firm||Company|
|Separate legal entity||LLP is a separate legal entity and can hold assets in its name.||The status of Partnership Firm does not have separate identity from its Partners.||Private Limited Company is a separate legal entity registered under the Companies Act, 2013.|
|Liability of Partners||The liability of Partners is limited to the extent of their contribution in LLP. Further, one Partner is not affected or not held liable for the actions of another Partner.||The liability of Partners is not limited and can extend to personal assets of Partners. The action of active Partner can hold another liable.||The Directors and Shareholders of a Private Limited Company are not personally liable for the liabilities of the Company.|
|Number of Partners||Minimum 2 Designated Partners are required to from LLP. However, there is no ceiling limit on number of Partners.||The ceiling limit on number of Partners is 50. Partnership Firm having more than 50 Partners are declared as illegal association.||At least two people are required to start a Private Limited Company.|
|Uninterrupted Existence||The existence of LLP is not affected by change in the Partners of LLP.||The Partnership Firm dissolves due to removal or death of Partner subject to clauses of Partnership Deed.||The existence of Company is not affected by change in the Directors of Company.|
|Registration||Registration of LLP is mandatory and it is registered with Registrar of Companies on online portal of MCA. Hence, it gets benefit of Centralized Registration.||Partnership Firm can be registered as well as unregistered. The registration, if required shall be done with local Registrar of Firm. No online portal is available for its registration.||Private Limited company will be registered with the Ministry of Corporate Affairs under the Companies Act, 2013.|
|Statutory Compliances||Statutory Compliances in case of LLP are in addition to compliance under Income Tax Act, as the LLP Act mandates the same. These compliances ensure transparency of operations and financials of the entity.||There are no additional compliances prescribed except laid down under Income Tax Act.||Maximum statutory compliance|
|Higher Creditability||Due to higher compliances and transparency in operation, the credibility of LLP is higher and thus it eases the fund raising from financial institutions.||Compared to partnership firms, other body corporates are having higher credibility and hence are less preferable.||More higher creditability due to transparency bcoz all details shows on MCA|
|Uniqueness of Name||The name of the LLP is unique and not identical or similar to any other company or LLP, which helps to establish distinctive image.||There is no restriction for using the name in case of Partnership, furthermore it does not necessarily help to establish distinct image of Partnership.||The name of the company is unique and not identical or similar to any other company|
|Agreement Signed:||Operations of both the LLP and Partnership firm are administered by Agreement signed between the Partners of the entity.||MOA & AOA signed by all directors and mandatory to upload on MCA.|
|Taxation Aspect:||LLP is considered as Partnership Firm for the purpose of Taxation Aspects. The taxation aspects are governed by Income Tax Act, 1961.||There is compulsory requirement to prepare financial documents as per Income tax rule. Various regulation applies like GST, ESI, PF, SERVICE, EXCISE, CUSTOM and all applicable department regulation as per companies nature.|