Unsure Which Type Of Company Suits You Best? Here’s the Difference Between LLP vs Pvt. Ltd. vs OPCJanuary 12, 2022
With the Companies Act, the Indian government has made it easy to set up a venture in the subcontinent. As the economy is the backbone of any nation, a developing country like India surely benefits from having companies that aid the overall financial development of the country. Moreover, the start-up initiative and various other schemes by the Ministry of Corporate Affairs provide flexibility and an ease of starting up a business in India. However, as a new entrant, it is difficult to choose which type of company suits you the best. So, here’s a look at LLP vs. Pvt. Ltd. vs. OPC types of companies, and their advantages and disadvantages.
As registering a business is the first step towards entering trade, an owner has the option to choose from various organisation structures. You can set up your enterprise as a private limited company, an LLP or as an OPC. However, it is important to make the right choice depending on your scale of business and the number of owners. Once you’ve registered the business in any category according to the Companies Act, making a shift is a long and tedious process. We will walk you through the different types of companies you can form and their pros and cons.
Private Limited Company
A private limited company is the best option for startups who might be looking for fundings from venture capitalists. According to law, only private limited companies can allot shares or add fundraisers to their board of directors. Correspondingly, if the company is estimated to have a gross revenue of over two crore rupees, and a paid up capital of over fifty lakh rupees, it needs to be registered as a private limited company.
However, a private company needs to meet certain requirements as set by the Ministry of Corporate Affairs. This includes a statutory audit, annual submissions of IT Returns, and annual filings with the Registrar of Companies. A private limited company also needs to organise quarterly meetings and filings of minutes of these meetings. Furthermore, a private limited company has to pay a flat rate of 30% as tax on profits. The company is also subject to Dividend Distribution Tax and the MInimum Alternate Tax.
Generally, the setup cost of registering a private limited company is around ₹8,000/-. However, certain states in India like Punjab and Madhya Pradesh charge the highest amount of fees. Nevertheless, a private limited company can be registered with a paid up capital of ₹5,000/- to begin with and the annual compliance cost is around ₹13,000/-.
Limited Liability Partnership (LLP)
When a company doesn’t require additional equity funds, it is best to register the enterprise as a Limited Liability Partnership (LLP) firm. The LLP type of company is gaining popularity as it combines the benefits of a partnership firm and a private limited company. Similar to a private limited company, an LLP has limited liability and it incorporates a simpler structure like a partnership firm.
As per the Ministry of Corporate Affairs, an LLP only requires submission of an audit if the turnover exceeds ₹40 lakhs or has a paid up capital of ₹25 lakhs. Unlike the statutory requirements of submitting structural changes to the Registrar of Companies, an LLP firm has minimal requirements. An LLP also enjoys certain tax advantages like a tax surcharge is only applicable to companies with profits exceeding ₹1 crore but not on LLPs. Equivalently, the Dividend Distribution Tax is not applicable, and the loans given to partners are not taxable as income.
There is no limit on the number of partners of an LLP and the startup cost is well under ₹5,000/-. Similarly, you do not have to submit a paid-up capital and the annual compliance cost is much lesser than a private limited company.
One Person Company (OPC)
A One Person Company is similar to sole proprietorship but an OPC has certain improvements. Any individual can register their enterprise as an OPC. However, an OPC must have a paid up capital less than ₹50 lakhs or a revenue below ₹2 crore. If the paid up capital or the revenue exceeds the given amount, it will be converted into a private limited company.
You do not need to have a board of directors, but entrusting a nominee director that enables the perpetual existence of an OPC is mandatory. Furthermore, an OPC cannot enjoy fundraising from venture capitalists, as only a private limited company is allowed to have shareholders.
Since there is no board of directors, an OPC is exempt from holding quarterly meetings and filings of the minutes. However, an OPC is required to submit the annual audit reports and the Income Tax Returns along with various other requirements to the Ministry of Corporate Affairs.
As far as taxation is concerned, it is mandatory for an OPC to pay 30% tax on profits. A One Person Company is also eligible for Dividend Distribution Tax and Minimum Alternate Tax. The fees charged for an OPC is less than ₹7,000/- in most parts of India.
To sum it up, if your enterprise may require additional fundings in the future, it is best to choose the private limited company option. On the other hand, if your company will function only by you, and the revenue and paid-up capital is going to be less, it is best to go in for an OPC. However, to enjoy the least amount of compliances and higher tax benefits, an LLP makes the most sense.