Many startup entrepreneurs and business owners have a common question about which entity to vehicle/ form and the compliance cost of the entities. And there are 3 most important business entities in India, they are the OPC (One Person Company), Private Limited Company and the LLP (Limited Liability Partnership).
All these business entities have different business structure and running costs and they also have a different set of regulations and laws that maintains the business entities.
The One Person Company and the Private Limited Company come under the Companies Act of 2013 along with the laws and regulations. There are several rules right from maintaining the books of accounts to that of the financial statements and obtaining the significant events of the organization approved by the means of conducting the general meetings and the board meetings along with the filings of the RoC (Registrar of Companies).
The LLP is governed by the Limited Liability Partnership Act 2008 and the Rules of LLP. Once the entity is incorporated, it should follow all the norms and rules that are put forth by the LLP Act and to achieve it, the entity’s accounts, changes in the partners, records of the partner’s meetings and the agreements must be assessed by the legal advisors of the entity.
An entrepreneur must be aware of all the compliances and regulatory frameworks of their organization and understand the difference between all the business entities so that they can take the right decisions.
One Person Company
OPC enables the business owners and the entrepreneurs to carry out their business in sole proprietor form of business to venture into the corporate framework. And according to the Companies Act of 2013, the entities get the relaxation requirements and the concessional requirements.
Features of OPC
Single Shareholder: A person who is a citizen and resident of India are eligible to incorporate the One Person Company. Resident of India refers to a person staying in the country for not more than one hundred and eighty two days during the immediate preceding year.
Shareholder’s Nominee: The shareholder can nominate a shareholder in case of death or absence of the true shareholder and those nominees can give their consent for being chosen as the nominee for the sole shareholder. Even the nominee appointed by the shareholder must be a citizen and resident of the country, only then they can be the nominee of the sole member of the OPC.
Director: The sole shareholder can also be the sole director of the entity or company and the company must have atleast one director. A maximum of fifteen directors can be appointed by the company.
Limitations of OPC
A person is eligible to incorporate in only one OPC or they can become a nominee of only one OPC and are not allowed to become a part of more than one company and a minor candidate cannot hold the share of an OPC or be appointed as a nominee of the one person company. According to Section 8 under the Companies Act, a one person company cannot be converted or incorporated into a company.
They are not allowed to carry out any non-banking financial activities inclusive of the investment in securities of any corporate. They also cannot convert or move into any kind of organization unless they have crossed 2 years from being incorporated as an OPC, except that the capital share is more than fifty lakh or the average turnover between the time period exceeds two crore.
Then the one person company has to file the form with the Registrar of Companies for incorporating or converting into a public or private company within 6 months for breaching the capital limit.
Incorporate into OPC
An entity or a business can become a one person Company by following few basic steps, to do so they have to obtain the DSC (Digital Signature Certificate) and the DIN (Director Identification Number) for the proposed Directors. They must select the name of the company and also apply to the Ministry of Corporate office to check the availability of the company name. Then they have to draft an AOA (Articles of Association) and MOA (Memorandum of Association). Including the AOA and MOA, the entrepreneurs must sign many other documents with the ROC electronically.
After the electronic attestation of the documents in the ROC, the payment of the Requisite fee to the MCA and the Stamp duty. Then the ROC examines the documents and sends a receipt of certificate of incorporation or registration.
Limited Liability Partnership
Before the introduction of the LLP, there were only two forms organizations in the industry, the Limited liability organization which comprises of the companies and the unlimited liability partnership which includes the proprietorship and the Partnership. And when compared to the partnership or proprietorship, the owners of the limited liability were very less and it was easy to form and operate. On the contrary, the small business owners and professional selected the partnership because they found that type of organizations were easy to form and organize.
As business sector expanded, the need for a hybrid organization was mandatory for the market and also the increased service sector demanded the need for the new organization which brought the concept of LLP which has both the benefits of the partnerships and companies.
Features of LLP
Unique legal entity: The Limited liability partnership and the partners are a different from each other and hence they have different set of legal entity.
Partners: The LLP requires two partners to be a part of the organization, but they can include as many partners as they can because there is no limit on the number of partners in an LLP.
Relaxation of LLP Act: The LLP does not require any minimum capital contribution of the partners to start their entity. The LLP Act of 2008 does not restrict from obtaining the benefits of the LLP structure of certain standards of professionals and it can be used by any enterprise.
Significance of LLP
According to the agreement filed during the creation of the limited liability partnership, the liability of each and every partner is limited to their share and it is similar to the Partnership firms that has unlimited liability. And it is easy to form the limited liability partnership and the formation is cost effective. The main aspect of the LLP is that, the partners are responsible only for their actions and are not responsible for the activities done by the other partners.
But in the case the Partnerships, they are held responsible for the actions performed by the rest of the partners. Since the LLP comprises of the Juristic Legal Person, the LLP can be sued in their name or in by the others, but the partners must not be sued for the dues against the limited liability partnerships. When compared to the restrictions enforced to the companies by the government, the compliances and the restrictions enforced to the limited liability partnership is limited.
Taxation of LLP
According to the Indian government, the taxation format for the limited liability partnership is similar to that of the Partnership, which means that the tax is imposed on the LLP while the partners are exempt from the taxation. Because the tax format is similar for both the Partnership firms and the LLP, the tax will not be levied for the incorporation or conversion of the partnership firm into the LLP. The designated partner will verify and sign the Income tax return every time, but in the absence of the designated partner due to unavoidable reasons , any other partner of the LLP can sign the tax return.
If people are expecting to take their business slow and steady, and do not have funds, then opting for the Limited liability partnership is the simplest and easiest option.