In the last column, we saw how you can start up a simple proprietorship or a partnership firm. This week we’re looking at the other options to set up the legal status of your company. Find out more about private limited companies, limited liability partnerships and more.
One Person Company
During the makeover of Companies Act, a new form of entity that is called One Person Company i.e. OPC was introduced. This is a relatively new concept in India but a very prevalent concept in the other parts of the world like the US, Singapore, China etc. The very reason to introduce this concept is to mitigate the risk involved in running a business wherein the owner i.e. a sole proprietor as seen in my last article is solely responsible to make good all the losses his or her business had made. OPC gives a legal status of a company, which is run by one person only who is both, the shareholder as well as the director. The process of setting up an OPC is the same as a private limited company and the name will carry a suffix OPC similar to “Pvt Ltd.”
The biggest advantage of a company is that it has a separate legal identity than that of its owner and in case the company is involved in a legal controversy then its owner cannot be sued in his personal capacity for any payments defaults. But setting up OPC requires lot of paper work as compared to its raw version ie sole proprietorship and another disadvantage is that it is taxed at 30 per cent flat. (More on this later)
Limited Liability Partnership (LLP)
To mitigate the drawback of a partnership firm i.e. unlimited liability of its partners, a new form of partnership had been recognised by an Act of the Parliament which is similar to Partnership but with a difference of limited liability of its partners. The liability of each partner is limited to the extent of their investment in the firm and it commands a legal status. I would say this is an upgraded version of a simple partnership firm and a lower version of a private limited company, it lies in between. This needs to be registered with the registrar of companies and cost including stamp duty etc. will range from Rs.10000 to Rs. 15000. This is relatively a new concept in India and needs to be used carefully as it comes with certain legal obligations, which you have to mandatorily follow, like filing regular form 8 and 11 irrespective of whether you are making profits or not and any defaults will run into a per day fine. Apart from that this is more suited for a business wherein third party liabilities are more or a franchise kind of a business where you would like to protect your personal liability getting attached in case of any business payments defaults or losses.
The only challenge is that if you are bullish on your business and sure that you can scale it up and you can build a brand similar to a great successful start up like flipkart, zomato or Red Bus, then you definitely need outside funding/investors to pump money to manage and scale it up and these venture capitalists or different group of investors do not prefer investing in LLPs. Mostly they ask you to have a private limited company. So be clear about your long term plan before you decide to go with LLP looking at all the parameters as mentioned above.
Private Limited Company
It is a form of company registered under Companies Act with limited members between 2 to 200 and starts with a minimum capital of Rs 100,000. It is also a separate legal entity & liability of the shareholders is limited to their share capital or agreed amount. For carrying out the business, directors are appointed by the shareholders and legal compliances in case of a Private Limited Company are much more as compared to a Partnership firm or an LLP. These are mostly held by family, friends and relatives and now a days investors because private companies can issue stock, however these shares does not trade on any stock exchange and it cannot issue any public offering, IPOs.
It also has limited liability for its shareholders which mean that if the personal assets of shareholders will not be attached in case of defaults in payments. The biggest advantage is that a private limited company gives a very strong legal identity to the entity of any organization and it has the best scope for expansion because it is easy to raise capital from investors. The only issue is that it has lot of legal obligations to be complied round the year like getting the books audited even though the company does not earn or filing regular ROC forms or regular minutes of meetings or resolution for every other thing or annual general meeting etc. This is suited for a mature business or in case a startup which is promising and need funds to expand or mange operations, either case private limited will only serves the purpose. The cost to register a private limited company ranges from Rs. 20000 to 25000 and it also has a high cost of maintaining its legal obligations round the year and the most importantly if you decide to close it down, then that would be a herculean task in itself, so choose carefully.
Public Limited Company
It is similar to a private limited company with a benefit of having an unlimited no. of shareholders with a minimum of 7 members to start with. Establishing a public limited company is advised only after achieving a scale in a business as it has lot more compliance to be fulfilled than the other entities. It can be either listed in a stock exchange or not. This is suited purely when the funds needed are of huge amount and has achieved a very high maturity in terms of operations. Opening or closing a public limited company takes a lot of time and cost and managing its day to day legal obligations again calls for high maintenance. It is an ultimate destination for any entrepreneur to start his or her company and take it to a level wherein it can be made in to a public limited company.
Conclusion
As we have seen various options for giving a legal status to your business or a startup and if you are one of those budding entrepreneur looking forward to set up his or her business and still confused about how to go about registering the company then I would strongly suggest you to start small and take baby steps and never register your entity without knowing about what you are getting in to. This is because choosing a legal entity can have far more implication than you might have thought more especially in terms of
1. Scaling up
2. Funding, Investors
3. Exit option
4. Introduction of new co-founders
5. Legal compliances
6. Others
Keep the above factors in mind and if you are alone and in the very initial stage of your business, start with a sole proprietorship to keep your time and monetary cost at a very low level. As you progress gradually and you need to get more people in the form of partners/founders or investors, then you can go to the next level and form a partnership or a private limited company suiting to your long term goals with respect to your company.
Be careful while fixing the nuts and bolts in setting up the legal structure of your company as it has far more implications as mentioned above.
Image courtesy: Shutterstock
More On >> Careers
