Saturday, 11 July 2015
Proprietorship vs Partnership vs LLP vs Private Limited Company vs OPC
Selection of business entity is among 0the first legal decision taken by an Entrepreneur while starting a new business. With the introduction of the Limited Liability Partnership Act and the Companies Act, 2013, more choices of business entities are now available. Therefore, it is important for the Entrepreneur or Promoter to understand the pros and cons of each of the business entity and choose the right one. Among the choice of For-Profit entities available like Proprietorship, Partnership, Limited Liability Partnership, One Person Company, Private Limited Company and Limited Company, a few are ideal for most Entrepreneurs. In this article, we compare those types of entities viz. Proprietorship vs Partnership vs LLP vs Private Limited Company vs One Person Company.
Registration
Proprietorship
There is no formal registration for Proprietorship.
Partnership
Partnership can be registered or unregistered. Registration of Partnership is optional. If registered, Partnership is registered under the Partnership Act, 1932.
LLP
LLP will be registered with the Ministry of Corporate Affairs under the Limited Liability Partnership Act, 2008.
Private Limited Company
Private Limited Company will be registered with the Ministry of Corporate Affairs under the Companies Act, 2013.
One Person Company
One Person Company will be registered with the Ministry of Corporate Affairs under the Companies Act, 2013.
Name of the Entity
Proprietorship
The Promoter’s choice of name can be used for the Proprietorship. No approval is necessary for using name; however, it is good to avoid trademarked names.
Partnership
The Promoters choice of name can be used for the Partnership. No approval is necessary for using name; however, it is good to avoid trademarked names.
LLP
The choice of name provided by the Promoter must be approved by the Registrar of Company. Only names that are not identical / similar to an existing company or LLP name and names that are not offensive or illegal would be allowed. The name of the entity will end with the words “Limited Liability Partnership” or “LLP”.
Private Limited Company
The choice of name provided by the Promoter must be approved by the Registrar of Company. Only names that are not identical / similar to an existing company or LLP name and names that are not offensive or illegal would be allowed. The name of the entity will end with the words “Private Limited Company”.
One Person Company
The choice of name provided by the Promoter must be approved by the Registrar of Company. Only names that are not identical / similar to an existing company or LLP name and names that are not offensive or illegal would be allowed. The name of the entity will end with the words “OPC” or “One Person Company”.
Legal Status of Entity
Proprietorship
Proprietorship is not recognised as a separate legal entity and the promoter is personally liable for the liabilities of the Proprietorship.
Partnership
Partnership is not recognised as a separate legal entity and the promoters are personally liable for the liabilities of the partnership.
LLP
LLP is a separate legal entity registered under the LLP Act, 2008. The partners of a LLP are not personally liable for the liabilities of the LLP.
Private Limited Company
Private Limited Company is a separate legal entity registered under the Companies Act, 2013. The Directors and Shareholders of a Private Limited Company are not personally liable for the liabilities of the Company.
One Person Company
One Person Company is a separate legal entity registered under the Companies Act, 2013. The Director and Nominee Director of a One Person Company are not personally liable for the liabilities of the Company.
Member(s) Liability
Proprietorship
Proprietor has unlimited liability and is responsible for all the liabilities of the Proprietorship.
Partnership
Partners have unlimited liability and is responsible for all the liabilities of the Partnership.
LLP
Partners have limited liability and is liable only to the extent of their contribution to the LLP.
Private Limited Company
Shareholders have limited liability and is liable only to the extent of their share capital.
One Person Company
Director and Nominee Director have limited liability and is liable only to the extent of his/her share capital.
Minimum Number of Members
Proprietorship
Can have only one person as member.
Partnership
A minimum of two persons are required to start a Partnership.
LLP
A minimum of two persons are required to start a LLP.
Private Limited Company
A minimum of two persons are required to start a Private Limited Company.
One Person Company
A minimum of two persons are required to start a One Person Company, viz. Director and Nominee Director.
Maximum Number of Members
Proprietorship
Can have only one person as member.
Partnership
The maximum number of partners can be only 20.
LLP
A LLP can have unlimited number of Partners.
Private Limited Company
A Private Limited Company can only have a maximum of 200 shareholders or members.
One Person Company
A One Person Company can have only two people, viz. Director and Nominee Director.
Foreign Ownership
Proprietorship
Foreigners are not allowed to start a Proprietorship.
Partnership
Foreigners are not allowed to start a Partnership.
LLP
Foreigners are allowed to invest in a LLP only with prior approval of Reserve Bank of India and Foreign Investment Promotion Board (FIPB) approval.
Private Limited Company
Foreigners are allowed to invest in a Private Limited Company under the Automatic Approval route in most sectors.
One Person Company
Director and Nominee Director cannot be Foreigners.
Transferability
Proprietorship
Not transferable.
Partnership
Not transferable.
LLP
Ownership can be transferred.
Private Limited Company
Ownership can be transferred by way of share transfer.
One Person Company
Ownership can be transferred.
Existence or Survivability
Proprietorship
Existence of a Proprietorship business is dependent on the Proprietor.
Partnership
Existence of a Partnership business is dependent on the Partners. Could be up for dissolution due to death of a Partner.
LLP
Existence of a LLP is not dependent on the Partners. Could be dissolved only voluntarily or by an Order of the Company Law Board.
Private Limited Company
Existence of a Private Limited Company is not dependent on the Directors or Shareholders. Could be dissolved only voluntarily or by Regulatory Authorities.
One Person Company
Existence of a One Person Company is not dependent on the Director or Nominee Director. Could be dissolved only voluntarily or by Regulatory Authorities.
Taxation
Proprietorship
Taxed as individual, based on the total income of the Proprietor.
Partnership
Partnership profits are taxed at 30% plus surcharge and cess as applicable.
LLP
LLP profits are taxed at 30% plus surcharge and cess as applicable.
Private Limited Company
Private Limited Company profits are taxed at 30% plus surcharge and cess as applicable.
One Person Company
One Person Company profits are taxed at 30% plus surcharge and cess as applicable.
Annual Statutory Meetings
Proprietorship
No requirements to conduct annual statutory meetings.
Partnership
No requirements to conduct annual statutory meetings.
LLP
No requirements to conduct annual statutory meetings.
Private Limited Company
Board and General Meetings must be conducted periodically.
One Person Company
No requirements to conduct annual statutory meetings.
Annual Filings
Proprietorship
No requirements to file annual report with Registrar of Companies. Income Tax Return must be filed based on the income of the Proprietorship.
Partnership
No requirements to file annual report with Registrar of Companies. Income Tax Return must be filed for the Partnership.
LLP
LLP must file Annual Statement of Accounts & Solvency and Annual Return with the Registrar each year. Income Tax Return must also be filed for the LLP.
Private Limited Company
Private Limited Company must file Annual Accounts and Annual Return with the Registrar of Companies each year. Income Tax Return must also be filed for the Private Limited Company.
One Person Company
One Person Company must file Annual Accounts and Annual Return with the Registrar of Companies each year. Income Tax Return must also be filed for the One Person Company.
Registration Cost
Proprietorship
We offer Proprietorship Registration at an all inclusive price of Rs.4,000/-
Partnership
We offer Partnership Registration at an all inclusive price of Rs.6,000/-
LLP
We offer LLP Registration at an all inclusive price of Rs.10000/-
Private Limited Company
We offer Private Limited Company Registration at an all inclusive price of Rs. of Rs.16,000/-
One Person Company
We offer One Person Company Registration at an all inclusive price of Rs. of Rs.16,000/-
Things to consider before starting up a Business
The trend of starting up a new business in India is quite catching up, not in scale or pace that’s been seen in Silicon Valley. We see patterns wherein many want to start/build something new – working executives who have acquired enough skill sets and experience, along with a group of friends or Freshers who are talented and have a good business idea.
Although talented in their respective fields, knowledge or awareness to this crucial component that links everything in a business or organization (legal aspects) is missing quite often . The start-up guy must acquire some basic legal knowledge that puts various things into perspective and certain things can be avoided in the future.+
We’ll explore the key different scenario that may arise in the future and this article would help keep you well prepared for those eventualities. A common example to mention is a person ABC wanted to start a business and just for meeting the statutory requirement of minimum 2 partners; he invites his ex-colleague XYZ, to be a partner/director of the company. Later on, some conflict of interest crops up that leads to some disagreement.+
In this he/she could find scratching their head and what they have done, If ABC should have introduced his spouse/parents as another partner instead of his colleague that would have met the statutory requirement and the further issues may be avoided. There can be many instances that shall result in conflicts, due to misunderstanding among partners or purely lack of knowledge e.g. Determination of Capital, Director’s remuneration, Partner’s rights, roles & responsibilities, Expulsion of any partner etc.+
We have new legal structure options now – LLP apart from Private Limited for Startups. It gives the Entrepreneur to select according to his/her business needs, which goes well with the saying “one size doesn’t fit all”.+
In this MarketExpress Startup /SME Guide, I would like to share some of the aspects one should take care of or the points to be discussed among partners while forming a LLP or a Private Limited Company.+
In case of a LLP, it is important to note that all these points should be part of the “Limited Liability Partnership Agreement” to be made between the partners. Following points should be discussed before drafting of LLP agreement,+
- LLP funding/capital – Partners either may bring in Cash / money’s worth of any Property, Rights or render Services agreed to as per as separate agreement made between the LLP and such Partner. If the partner intends to render his services in the form of capital, it shall be valued by a practicing Chartered Accountant or by a practicing Cost Accountant or by approved valuer from the panel maintained by the Central Government. Also in this case, the clauses of service agreement should be drafted carefully between the partner and LLP.+
- Partner’s contribution – Proportion of contribution to be decided either equally or based upon the responsibilities. Partners shall have the rights, titles and interest in all the properties and assets of LLP in proportion to their Contribution.+
- Admission of new partner – Consent of all partners is necessary.+
- Rights and duties of partners – Mutual rights and duties of partners.+
- Indemnity (compensation) clause – Partner’s liability to indemnify for any loss to LLP due to his fraud in the conduct of business.+
- Expulsion (removal/displacement) of partner – To decide the circumstances when majority of partners can expel a partner.+
- Remuneration – The payment of salary / remuneration to be paid to the Designated Partners should be decided mutually based upon the responsibilities or services rendered.+
- Sharing of annual profits – Portion of profit payable to partner to be decided.+
- Termination and dissolution of partnership firm – The decision to terminate or dissolve the firm would be decided by the partner if it has incurred losses (if any).+
- Matters to be decided by a resolution passed by a majority in number of the partners – In this case affirmative votes of all designated partners would be considered.+
- Appointment of nominee in case of demise of existing partner – This clause can be inserted separately in LLP agreement, in advance. The Partners may nominate the persons / relative to inherit their respective interests by way of implicit assignment immediately upon their death or being declared insolvent.
Additionally to the above points, while forming a Private Limited Company, one should take care of following points to be discussed among partners;
- First directors – Whether they would be executive (working) or non executive (non working).+
- Resident Status of shareholders – Whether they are Indian resident / Non Resident Indian / PIO holder/ foreign national / body corporate – the incorporation procedure part varies for each type.+
- Shareholding structure – Type of issue (Equity or preference), face value, number of equity, contribution to be made by each shareholder.+
- Registered address for proposed new company – To decide mutually the place at which the company will be incorporated (i.e. in case the partners reside in different States). Based upon the place, stamp duty may vary. One should submit proof of residential address at the time of incorporation.
- Clauses of Memorandum of Association (MOA), Articles of Association (AOA) which are the important documents of the company, needs to be drafted suitable to the business of the company.+
- The capital clause should be mentioned carefully in MOA/AOA so that any clause can be inserted / deleted, if required later on.
So, are you start-up ready?
Limitations/ Disadvantages of LLP
Understanding the Limited Liability Partnership definition (LLP) limitations & disadvantages would help the entrepreneur get the additional perspective of this structure. The entrepreneur needs to understand these things quite in details as it may create various stumbling blocks, which may delay breakthrough related to Startup growth. Here in this article we would explore some of the limitations/disadvantages, that would help us avoid future hassles. +
Limitation in the formation of LLP
As the basic structure or model of the LLP is similar to that of any partnership firm but it requires minimum two partners to form it. LLP cannot be formed by a single person. NRI/ Foreign national who want to form an LLP in India then at least one partner should be a resident of India. Two foreign partners cannot form LLP without having one resident Indian partner along with them.+
It takes more days to form, as all the partners’ signatures are required for each and every document which is then to be attached to required e-forms. Therefore self attestation of each partner on documents is more as compared to the formation of any Private Ltd company.
Assets of LLP
Partners undertake to contribute some amount towards LLP firm which they contribute in the form of cash or assets, while executing the LLP agreement. Once cash or assets are contributed to LLP, it cannot be returned to the partners of an LLP unless there is any specific provision mentioned in LLP agreement.+
Difficulty in transfer of ownership
Ownership rights are not transferable easily without obtaining consents of all partners of the LLP.+
If any partner wishes to transfer some portion of ownership, he has to obtain consent of all partners. The resolution to be passed by majority in numbers of the partners in some of these cases – increase or decrease in contribution, increase or decrease of designated partners, alteration of working partners, amalgamation, shifting of the registered office of firm, opening or closing of bank account.+
Admission of new partner
The supplementary agreement containing details of new partners and his contribution has to be created and then accordingly the existing partners need to revise or change the contribution held by them due to admission of new partners in the LLP agreement.+
These changes have to be intimated to the concerned Registrar of Companies within whose jurisdiction registered office of the LLP is situated.+
Offenses and penalties
LLP Act has provided the provisions of offenses and penalties. For default/ non-compliance on procedural matters such as delay in filing of e-forms, one has to pay default fee for every day for which the default continues.
Such default fee would be payable at the rate of rupee one hundred per day after the expiry of the date of filing (as prescribed in relevant provision) up to a period of three hundred days. The offense can result in either (i) through payment of fine or (ii) through payment of fine as well as imprisonment of the offender.+
Permission of Foreign Direct Investment (FDI) in LLP
As per FDI Policy, FDI in LLP is allowed only through Government route, FDI in LLP under automatic route is not permissible.
Further FDI in LLP through Government route is allowed to only those sectors where 100% FDI is allowed under automatic route under the FDI policy.
Foreign company or individual can invest in LLP in India but it requires prior government approval.+
Limitation in External Commercial Borrowing (ECB)
LLP is not allowed to raise External Commercial Borrowing (“ECB”). Thus LLP cannot take commercial loans from its foreign partners, FII’s (Foreign Institutional Investors), banks from outside India, any financial institution outside India or any other entity outside India.
[ Author: Meenal Abhyankar ]
[ Source: http://www.marketexpress.in/2013/04/limitations-disadvantages-llp.html ]
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