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 form? We are here to discuss and compare both these formats pros and cons below:
- 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.
- 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.
- 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.