Which type of company registration to go for a new startup: Private Limited or LLP?

So you are finally on the track for opening a business of your own. Everything is set- you have made deals with suppliers and distributors; got the papers done and even got a small office of your own. But you realize that perhaps doing it alone is going to be a huge risk, so you invite some friends to become partners in your business. While it all seems good in theory, but it’s important to consider what type of registration your business will go under in such a case? Will you choose an LLP (Limited Liability Partnership) or will you choose a Private Limited firm? We are here to discuss and compare both these formats pros and cons below:

  1. The objective of the business: While starting a business, everyone starts with dreams. So, the team needs to ask itself, where does it see the startup five years or a decade down the line- do they see it expanding to include more stakeholders and investors? Or do they want it to cater to just a specific niche in a specific area? Those businesses which aim to expand- the company format is much more suitable since it allows for the seamless infusion of many investors and people. They feel confident while investing in a company since there are numerous laws protecting their investments. But if the aim is to be regulated in terms of produce and area, then the LLP system is most recommended.
  2. Incorporating cost: This is certainly going to be a big factor while deciding which format to go for and LLP’s get the edge in this case since their incorporating cost is less, whereas for a company it is RS 8,000. It should also be noted that LLPs don’t have to comply under laws which order a company to file registration papers immediately with a relevant document stating all the details of the partners nor is it liable to hold designated meetings at periodic intervals.
  3. Taxes: Here, both the formats are taxed at a flat rate of 30% including SHEC and EC. But, LLPs do not have to pay surcharge whereas companies liable to the same at the rate of 5% if their net income exceeds Rs 1 crore for the financial year. As an added bonus for LLP, they are liable for the Alternative Minimum Tax at 18.5% on the total adjusted income. Companies are required to pay advance tax for four quarterly instalments but LLPs are liable to only pay only in three instalments.

Thus, while the picture seems to be overwhelmingly in the favour of LLPs, but it should be remembered that this form of business is most favorable for startups on a small scale otherwise as the business expands the LLP format will give rise to cumbersome problems. So it advisable to think we’ll before applying.

You can also read: Is Pvt ltd good option for startups?

Private limited company registration online

All about Private Limited Company

PRIVATE LIMITED COMPANY

A private limited company is a legal entity. It is a company which is held by a relatively small group of people known as the shareholders of the company. Minimum of 2 people are required to start a private limited company but the total number of shareholders shall not exceed 200 during the life of the company. The company cannot raise fund through general public by issuing shares i.e. general public cannot take part in private limited companies. A private limited company have a mandatory compliance that has to be done every year. The company cannot raise fund through general public by issuing shares i.e. general public cannot take part in private limited companies.

ADVANTAGES OF PRIVATE LIMITED COMPANY

  1. Maximum limit of shareholder is 200 and there is no interference of general public

  2. Liabilities of members is limited to the extent of their shareholding

  3. Separate Legal entity: the private limited company has a distinct identity from its member and directors.

  4. Control on the ownership of the company: Usually, the directors are the shareholders of the company, therefore, control and ownership remains in their own hand and no outsider interfere in the management of the company

  5. Easy to get borrowings and financial assistance from banks and financial institutions by issuing securities like debentures, deposits etc.

  6. Death and inability to continue as a member do not effect the legal status of the company. As the company will remain in existence even if the members or directors die.

HOW TO DO REGISTRATION OF PRIVATE LIMITED COMPANY

Nowadays, the whole registration process is done online. Now no more paper work and physical verification are required to register a Company. We can register a Company without visiting any government office or department. An online request submitted to the Registrar of Companies for registration of a private limited company in Form no. INC-32 (SPICE) at the time of incorporation along with required documents and fees as prescribed under Companies (Registration offices and fees) Rules, 2014 which depend upon the capital structure of the company.

STEPS TO REGISTER A PRIVATE LIMITED COMPANY:

Step 1:- Application for allotment of DSC & DIN of the Directors of the company

Step 2:- Application for name reservation

Step 3:- Preparation of documents which are required for registration of company

Step 4:- Drafting of Memorandum of Association (MOA) & Article of Association (AOA)

of the company

Step 5:- Filing of Forms INC-32 (Spice) along with INC-33(MOA) & INC-34(AOA) to the ROC

Step 6:- Payment of application fees and Stamp Duty to the ROC

Step 7:- ROC will check and make verification of documents & Forms

Step 8:- ROC will issue Certificate of Incorporation

MANDATORY REQUIREMENT FOR REGISTRATION:

  1. Minimum two directors

  2. DIN & DSC of the directors

  3. Minimum 2 shareholders are required

  4. ID proof of the Directors (PAN Card)

  5. Address proof of the Directors (Aadhaar Card/ Driving License/ Passport)

  6. Address proof of the proposed company for registered office of the company:

  • If property is owned then sale deed or municipal tax receipt

  • If property is rented then rent agreement

  1. Utility Bill not older than 2 months

  2. NOC from the owner of the Property

  3. Contact details of the Directors and of the proposed company

  4. Certificate from Professional like Company Secretary, Chartered Accountant, Cost Accountant etc.

As per Companies Act, 1956 the minimum capital required for incorporation of a company is Rs 100000/- but, as per Companies Act, 2013 there is no minimum capital required i.e. a person can start his business with less than Rs. 100000/-.

The whole procedure is completed within 10-12 days

WHERE TO GET REGISTER

Registrar of Companies (ROC) comes under the Ministry of Corporate Affairs that deals with the administration of the Companies. There is total 22 Registrar of Companies in India. Usually, one state has one ROC, but there are some states having more than one ROC e.g. Maharashtra and Tamil Nadu and there are few states where one ROC for all of them e.g. Delhi & Haryana both has only one ROC. ROC maintains records related to the incorporation of companies, their compliances and oversees government policies on relating matters. The company will get registered with the Registrar of Companies in whose jurisdiction the registered office of the proposed company will fall.

ROC FILING

Certain information is required to file with ROC. All companies are required to file certain documents every year. Failure in filing these information and documents can attract the penal provisions on company, directors and other officers of the company. Hence it is advisable for the management of the company to take proper care of all necessary compliances. There is two type of ROC Filing one is mandatory filing and another one is event-based filing.

MANDATORY FILING:

  1. Within 30 days of incorporation of a company shall file information for the appointment of Auditor in Form ADT-1;

  2. Annual Return in Form AOC-4 and MGT-7 at the end of every financial year; and

If any company fails to file Annual Return to the ROC then the company will be punishable by a fine of Rs. 50,000/- which may extend to Rs. 5,00,000/-.

EVENT BASED FILING:

  1. Alteration or changes made in MOA or AOA;

  2. Appointment or removal of directors or changes in their designation;

  3. Appointment or removal of Auditor;

  4. Increase in Authorized Capital of the Company;

  5. Change the name or address of the company; etc.

CHECKLIST FOR ANNUAL COMPLIANCE

  1. Annual General Meeting of the shareholders must be held by the company within 6 months at the end of every financial year

  2. Balance Sheet & Profit and Loss A/c of the company must be audited by the Chartered Accountant

  3. Audit Report from Chartered Accountant

  4. A copy of notice for AGM

  5. Director’s Report

  6. List of shareholders along with their shareholding

  7. Report must be signed by professionals like Company Secretary, Chartered Accountant, Cost Accountant

These are some of the important compliances a Private Limited Company has to take care of.

Author: Shivani Singh