So many options, so hard to decide on, isn’t it? We enlighten you on the pros and cons of the three most popular types of business entities in India and facilitate yours through the ABCs of forming a corporation.
Since adopting the 2013 Limited Liability Partnership (LLP) Act and also the Companies Act, there’s now more flexibility for corporate organizations. Therefore, it’s critical that the entrepreneur or promoter knows the pros and cons of every commercialism and chooses the correct one.
When a business takes the primary step into the globe of trade, the initial task is to register its firm. As a business owner, you’re required to settle on the kind of company you wish to line up. you’ve got the choice of starting an LLP, OPC, Partnership, Sole Proprietorship, or others.
However, because the new owner of a startup, paperwork is often overwhelming. Fortunately, the govt. of India has worked towards ensuring easy business becomes a reality. Despite this, there are some legal hassles that new company owners can get misled by. These include:
# Registering themselves as private limited companies when a financial obligation partnership (LLP) would suit them better
# Whether or not it’s too early, and whether or not an easy founders’ agreement would do exactly fine.
To make this process simpler, We’ve full-clad the most features of every structure and analyzed which businesses they suit best.
Features of Private Limited company:–
In short, consider this legal structure by start-ups looking to lift funding or attract the most effective within the job market with ESOPs.
For Businesses Raising Funding:
Fast-growing businesses that may require funding from venture capitalists (VCs) have to register as private limited companies. This can be because only private limited companies can make them shareholders and offer them a board of directors.LLPs would require investors to be partners, whereas OPCs would be unable to accommodate additional shareholders. Therefore, if you’re raising funding, the points that follow scarcely matter; your decision is created.
Requires Greater Compliance:
In exchange for the convenience of easily accommodating funding, the private company set-up must meet the Ministry of Corporate Affairs (MCA). These range from a statutory audit, annual filings with the Registrar of Companies (RoC), annual submission of IT returns, similarly as quarterly board meetings, the filing of minutes of those meetings, and far more. Suppose your business isn’t geared to satisfy these requirements. Therein case, you will want to attend ages before you jump into registering a personal company (some businesses first register an LLP because the compliances are fewer).
Few Tax Advantages:
Private Ltd. is assumed to own many tax advantages, but this is often not the case. There are some industry-specific benefits, but profits are taxed at a flat rate of 30%, the dividend distribution tax (DDT) applies, as does the Minimum Alternate Tax (MAT) (MAT). If you’re trying to find a structure with a rock bottom tax burden, the LLP offers better benefits.
To begin, a private limited company costs roughly Rs. 8000, excluding professional fees. However, this may be higher in some states; in Kerala, Punjab, and Madhya Pradesh, the fees are much higher. It’d help if you furthermore might have some paid-up capital, which may be as little as Rs. 5000 to start with. The annual compliance costs are around Rs. 13,000.
Features of an LLP:–
The LLP is supposed for professional and advisory firms with no need for equity funding. If this applies to your business, pick the LLP; it’s been gaining in popularity since 2008 because it combines a number of the higher aspects of partnership firm and personal Ltd.
For Non-Scalable Businesses:
If you’re running a business that’s unlikely to need equity funding, you’ll want to register an LLP because it combines several benefits of the private Ltd. and general partnership. sort of a private company, it’s a financial obligation and contains a simpler structure, sort of a general partnership.
The LLP has made some concessions from the MCA.as an example, an audit has to be performed as long as your turnover is larger than Rs. 40 lakh or paid-up capital is quite Rs. 25 lakh. Furthermore, whereas all structural changes have to be communicated to the RoC within the case of personal limited companies, the need is minimal for LLPs.
The LLP provides tax benefits if your company earns more than Rs. 1 crore in profits. The tax surcharge, levied on companies with profits of over Rs 1 crore, does not apply to LLPs, nor does the Dividend Distribution Tax. Loans to partners also are not taxable as income.
Number of Partners:
A limited liability partnership (LLP) can have an infinite number of partners. So if you’re building an outsized ad agency, for instance, you needn’t worry about any cap on the number of partners.
Much cheaper than starting a personal Ld., with government fees of Rs. 5000, no paid-up capital, and low compliance costs.
Features of an OPC:-
An OPC isn’t much different from a personal Ltd., except that there’s only 1 director (although there must be a nominee), who also will be the only real shareholder.
For Solo Entrepreneurs:
A significant improvement over the only real proprietorship firm, on condition that your liability is restricted, the OPC is supposed for solo entrepreneurs. However, It is important to note that if the revenue exceeds Rs. 2 crores and the paid-up capital exceeds Rs. 50 lakh, it must be converted into a non-public Ltd. Furthermore, only if there must be a nominee director (to enable the perpetual existence of the OPC), you will also consider starting a non-public company, which can even have the pliability of raising funding.
High Compliance Requirements:
While there are not any board meetings, you have got to conduct a statutory audit, submit annual and IT returns, and befit the various requirements of the MCA.
Minimal Tax Advantages:
The OPC, just like the private company, has some industry-specific advantages. But profits must be taxed at a flat rate of 30%. The DDT applies as well as does MAT. If you’re trying to find a structure with a rock bottom tax burden, the LLP offers better benefits.
Nearly identical as a private Ltd., with government fees of a little less than Rs. 7,000. However, this may change for various states; in Kerala, Punjab, and Madhya Pradesh, the fees are much higher.
Tax Liability Comparisons:
|Title||Pvt Ltd Co.||OPC||LLP|
|Income Tax Rate||30%||30%||30%|
|Surcharge||7% when total income exceeds INR 1 cr but less than INR 10 cr.12% when total income exceeds INR 10 cr.||7% when total income exceeds INR 1 cr but less than INR 10 cr.12% when total income exceeds INR 10 cr.||12% when total income exceeds INR 1 cr|
|Taxed as||Domestic Company||Domestic Company||Partnership Firm|
|salary||Director’s salary is allowed as an expense||Director’s salary is allowed as an expense||Partner’s salary allowed as deduction|
|Interest and Remuneration||is taxable income||is taxable income||Allowed as deduction|
|Loans||Loans to the directors are taxable when repaid||Loans to the director are taxable when repaid||Loans to the partners are not taxable when repaid|
|Distribution Dividend Tax||Applies||Applies||Does not apply|
A private limited firm requires more compliance, while an LLP has fewer rules to stick to. OPC is suitable for one business owner but does have a hefty rate. A partnership company and sole proprietorship both are easy to begin but include unlimited liability.
At Finaxis, we concentrate on helping you incorporate a corporation whether it’s LLP registration or Private Ltd. or OPC registration together with GST registration and ITR filing. With our daily updates on the blog, We make it much easier for you to stay and remain up to date with the most recent legislative changes, compliance requirements, and taxation. refer to us about your company registration or send us an email at –https://finaxis.in/company-registrations