INTRODUCTION
Startups make a huge contribution when it comes to the growth of our country’s economy. It is usually seen that starting a business through innovation or a unique way of making everyday life easier is considered risky as there is a high chance that people might not accept such a change in their lives. But taking such a risk can also lead to massive success for the startup. For instance, no one would have imagined a few years back that fresh vegetables could be bought at home without even visiting a vegetable market, money could be transferred through online mode, coaching could be possible virtually without visiting coaching centres, hotel booking, flight booking, etc., all of this can be done at home through online mode by using apps.[1] This was possible because of entrepreneurs who dared to bring their innovation to life.
The important aspect for a startup at the initial stage is to focus on uplifting its business by reaching its potential customers and getting the required funding. It is, therefore, necessary for a startup to opt out and register with an organization that is friendly and hassle-free. A startup can be registered as a Sole Proprietorship, or a Partnership Firm, or a One Person Company, or a Private Limited Company, or as a Limited Liability Partnership. Among all the forms of organization, Private Limited Companies and Limited Liability Partnership are the forms of organization that are most suitable for startups.[2] There are plus points and minus points for both types of organization. But when it comes to choosing one it is important to study how both the organization works, what all compliances are required to be fulfilled, what are the obligations of members of the organization, etc. The Limited Liability Partnership Act, of 2008 governs the limited liability partnership (LLP) form of organization whereas the Companies Act, of 2013 governs the private limited company form of organization.
PRIVATE LIMITED COMPANY
The Companies Act, 2013 under section 2(68) states that a private limited company should have a minimum paid-up share capital and the articles of association of the company should restrict the right to transfer shares, limit the number of its members to 200, and prohibit public to subscribe its securities.[3] A private limited company provides certain plus points that can be beneficial for a startup and also certain minus points that may lead to the formation of hurdles during the functioning of a startup.
Some plus points include:
- Shareholders enjoy limited liability which means that their assets are free from any kind of liability incurred by the private limited company.
- The private limited company enjoys its own legal identity.
- The business of a private limited company continuous even in case of demise of any member of the company.
- The private limited company enjoys easy access to capital through the issuance of shares.
- Various tax benefits like incentives, deductions, and exemptions can be achieved in this form of organization.
Some minus points are:
- Shares cannot be subscribed by the general public which results in a limited amount of capital.
- Various compliances are required to be fulfilled within the expiry of deadlines. Failure of the same will result in making payment of fines and penalties.
- The limitation to transfer shares makes it difficult for shareholders to exit the business.
- Directors of the company may face personal liability.
- No disclosure of information is required which makes it difficult for investors to keep a record of the growth of the company.[4]
LIMITED LIABILITY PARTNERSHIP (LLP)
A limited liability partnership is a form of organization that is a compilation of features of two forms of organization: a company and a partnership firm. This form of organization enjoys the plus points of the company while exercising as a partnership firm. Here the agreement can be either between the partners like in a partnership firm or it can be between the partners and the LLP.
- Some of the plus points are:
- LLP enjoys limited liability as a company and flexibility as in a partnership firm.
- Unlike a partnership firm, LLP enjoys continuity in business while partners may enter or exit the firm. Thus it is separate from its partners.
- A partner is protected from another partner’s wrongful and unauthorized activities. Thus unlike partnership firms, no joint liability exists between partners.
- There is less compliance procedure that is required to be fulfilled.[5]
- No minimum limit on capital or maximum limit on the number of partners.
Some minus points are:
- Just like in a company, noncompliance with certain filings like income tax and annual returns may lead to the applicability of a penalty.
- As there is the absence of shareholding in LLP, some kinds of investors are unable to invest in it and thus the LLP has to depend on debt funding.
- LLP faces a higher income tax rate as compared to a company.[6]
Just like in a partnership, LLP dissolves when number of partners goes below two.
COMPARISON BETWEEN PRIVATE LIMITED COMPANY AND LLP
It can be seen that both forms of organization are similar in certain aspects but also differ in some other respects. Both forms of organization are required to be registered with the Ministry of Corporate Affairs (MCA). Both of them enjoy limited liability and don’t have any minimum limit of capital to be invested in business. There is continuity of business in both forms even though members enter or exit the organization. There is a requirement to fulfil certain compliances, failure of which will result in the imposition of a penalty. These were some of the similar aspects in both forms of organization. They differ in aspects like the maximum number of members in the private limited company should be 200, whereas there is no such maximum limit for partners in LLP. No board meetings are mandatory when it comes to LLP, but the private limited company should hold board meetings at least four times having a gap of 120 days between such board meetings. The audit is not mandatory for the LLP unless a certain slab of turnover or partner’s contribution is crossed by the LLP. Statutory audits should be mandatorily conducted in the case of a private limited company.[7]
It is observed that LLP is more advantageous than a private limited company in some aspects. A private limited company needs to go through more tedious compliances and needs to pay higher government fees for incorporation as compared to LLP. In LLP, the partner is the owner and the manager of a business, whereas in the private limited company, the board of directors manages the business and the shareholders are regarded as the owners of the business. However, when it comes to capital funding in LLP, the only solution available are banks or financial institutions as it is not possible to raise funds from Venture Capitalists or Angel Investors because to raise funds from them would require them to be partners in the LLP.[8]
CONCLUSION / OPINION
The decision to choose a form of organization for a startup is a crucial step to be taken while commencing the business. This decision should not only depend upon the specific requirements that will arise during the everyday functioning of the business, but also it should rely on the goals set by the organization to be achieved in the future. Both the forms of organization are most preferred to be opted by the startups.
In my opinion, it can be observed from the above explanation that the LLP form of organization seems to be friendlier, hassle-free, and fit to be opted by a startup. If there are two or more members in a startup having enough funding required then the LLP form of organization can be suitable. However, if the members are planning to issue shares or to raise funds from investors then a private limited company can be suitable form.
Author(s) Name: Kavita Rajendra Amin (Savitribai Phule Pune University (DES’s Shri Navalmal Firodia Law College)
References-
[1] Tejaswita Sahoo, ‘All about legal status of startups under corporate jurisprudence in India’ (Ipleaders, 5 January 2024) <https://blog.ipleaders.in/all-about-legal-status-of-startups-under-corporate-jurisprudence-in-india/> accessed 03 July 2024
[2] Shreya Tripathy, ‘7 Useful Tips on Setting up a Startup in India’ (Ipleaders, 10 July 2018) <https://blog.ipleaders.in/tips-on-setting-up-a-startup/ >accessed 04 July 2024
[3] The Companies Act, 2013
[4] ‘What are the advantages and disadvantages of a private limited company’(India Filings) <https://www.indiafilings.com/learn/what-are-the-advantages-and-disadvantages-of-a-private-limited-company/ >accessed 04 July 2024
[5] ‘FAQs On Nature of Limited Liability Partnership’(Ministry of Corporate Affairs) <https://www.mca.gov.in/MinistryV2/natureoflimitedliabilityparterneshipllp.html> accessed 04 July 2024
[6] ‘LLP Advantages and Disadvantages’(India Filings) <https://www.indiafilings.com/learn/llp-advantages/> accessed 04 July 2024
[7] ‘LLP Vs Pvt Ltd: What Should I Choose?’(HDFC Bank)<https://www.hdfcbank.com/personal/resources/learning-centre/sme/what-is-difference-between-pvt-ltd-and-llp> accessed 04 July 2024
[8] Mayashree Acharya, ’Private Limited Company vs LLP’ (Cleartax, 20 June 2024)<https://cleartax.in/s/private-limited-company-vs-llp> accessed 04 July 2024
