Fresh entrepreneurs and startup enthusiasts usually face a conundrum of what form of business should they start with. While they are usually clear about the idea they want to pursue, they are unable to decide how to go about company registration.
The other day, we got a call from the Founder of a tech-based startup established out of Gurgaon, saying they want to incorporate a legal entity in order to grow their business but they are confused between Limited Liablity Partnership and Private Limited company. Startups are economical, and have to be cost efficient. Many startups do not have legal knowledge of setting up a business and lack in ideas as to where to start from and what type of business should they deal in.
In the past three months we have seen that there has been almost a 26% rise in Private Limited company formation. Also, we have observed that there has been a continuous rise in the formation of One Person Company(OPC). Many startup founders now come and try to form OPC as they are becoming more aware than earlier about the legal consequences, and also because of the availability of single founder/promoter.
Below is a graphical representation of company formation growth from Nov ’14 to Jan ’15
Key factors to be considered to decide between PL and LLP
- Readiness to Bear Legal Compliances
For a startup, it is best to first consider whether they are ready to bear the legal compliances that come after the formation of a company.
- Who will be the promoters
Choosing the form of business also depends upon the number of people involved or going to act as the promoter in the initial stage.
- Capital Contribution/Capital Introduced
Capital is one of the main factors in choosing the form of business, like what amount of contribution you are willing to introduce in the company.
- Funding Requirements
If a startup seeks funding, it has to be planned at the very initial stage, for this will eventually become the deciding factor in the choice of business.
- The Feeling of Being a Stakeholder
In an LLP, the partner contributes the amount but does not have the feeling of holding a stake in the partnership, but on the other side Private Limited does come with a discussion of how many shares will the promoters have.
- FDI Restrictions
If somebody from a foreign country wants to start a business in India, and wants to introduce capital in LLP as FDI, then there are many restrictions which do not appear in making of a Private Limited one.
- Investor Friendly?
Most startups, start working on their venture in order to get investments in the near future. But what an investor thinks is also very important for the startups. Investors always invest in the business in lieu of some stake of the business which they can get only in Private Limited.
- Restrictions on Growth
One can go public by converting Private limited into Public limited company, but in the other case, LLP act does not permit the conversion of LLP into Private Limited or into Public Limited.
Choosing the best form of business is as important as the execution of the idea. Although, compliance cost and formation cost of LLP is lesser as compare to Private Limited, if your idea needs funding, then Proprietorship and partnership cannot not give what your business needs. So, before choosing, look at the overall aspects.
About the Author:
Agam Gupta, is a practicing Chartered Accountant, entrepreneur, expert and the Founder of Quickcompany.in. If you have any questions, let us know on the comment section or drop us a mail to email@example.com.
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