- September 21, 2020
- Posted by: admin
- Category: Business plans, Competitive research, Corporate Law, Finance & accounting, Funding trends, Shareholders
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While the below table seeks to familiarise you with the modalities and requirements of doing business, it is to be understood that the same is only illustrative and the choice of business may largely depend upon the scale of operations and other relevant factors.
| CHOOSING THE BEST ALTERNATE BUSINESS MODEL | |||||||
| Sl. No. | Particulars | Sole Proprietorship | Partnership Firm | Limited liability Partnership (LLP) | Company | ||
| 1. | Governed by | No Separate Law on Sole-Proprietorship. It is governed by Ancillary Laws such as Shops & Commercial Establishments Act of respective state and/or MSME Act, 2006. | The Indian Partnership Act, 1932 and its relevant rules governs a Partnership Firm | The Limited Liability Partnership Act, 2008 and various Rules made thereunder | Companies are governed by Companies Act, 2013 and the various Rules made thereunder | ||
| 2. | Registration/Incorporation | Not Mandatory for Registration | Registration of a Firm provides certain benefits under the Indian Partnership Act, 1932. If partnership firm is not registered it will lead to the following consequences: a) It will not be possible to sue one partner against another partner or against the firm and vice versa in the court of law to claim right. b) Partnership firm cannot sue third party in the court of law for enforcement of it’s right |
The steps for incorporation of a LLP are: | The steps for incorporation of a Company are: | ||
| 1. Obtaining Digital Signature Certificate (DSC) for the proposed Partners. | 1. Obtaining Digital Signature Certificate (DSC) for the proposed Shareholders/Directors. | ||||||
| 2. Obtaining Director Identification Number (DIN) / Designated Partner Identification Number (DPIN) for the proposed Partners, | 2. Obtaining Director Identification Number (DIN) for the proposed Directors, name approval, GST, etc from MCA through Simplified Performa for Incorporating Company electronically and AGILE). | ||||||
| 3. Obtaining name approval from MCA and | |||||||
| 4. Filing for incorporation. | |||||||
| 3. | Registration Cost | Registration Cost ranges between 500-1000 | Stamp duty of Rs.100 shall be paid if capital of the firm does not exceed Rs.500 and Rs.500 of capital exceeds Rs.500 for the document. |
LLPs have been introduced to meet the needs of small businesses and hence LLP enjoy lower government fee for incorporation and a lot less paperwork. | The government fee for incorporation of a Company is more and involves a comparatively greater paper work. | ||
| However, relaxation in fees are given for companies that have a Share Capitalof Rs. 10,00,000 | |||||||
| 4. | Name | No restriction as such; Trade-Name and Owners Name are used interchangeably | Registration entitles the usage of Firm Name. | Suffix ‘LLP’ or Limited Liability Partnership has to be added to the name. | Suffix ‘Limited’ or ‘Private Limited’ has to be added to the name | ||
| 5. | Features | 1. One Man Ownership. 2. No Separate Business Entity. 3. So Separation between Ownership and Management. 4. Unlimited Liability. 5. All Profits or Losses to the Proprietor. 6. Fewer Formalities. |
1. No separate existence from partners | 1. Separate Legal Entity | 1. Separate Legal Entity | ||
| 2. Unlimited Liability | 2. Have assets and liabilities that are separate from that of the partners, however the partners are liable to the extent of their agreed contributions to the LLP | 2. Have assets and liabilities that are separate from that of the promoters. | |||||
| 3. Pronciple of Agency and Sharing of Profits | 3. Has perennial life, unless and otherwise closed by the partners or a competent authority. | 3. Has perennial life, unless and otherwise closed by the promoters or a competent authority. | |||||
| 6. | Ownership | Owned by Proprietor | Partnership firm may have assets in its own name. | Partner in a LLP will be both – owner and manager. | Company offers more flexibility for the promoters when it comes to ownership and ownership sharing. The ownership of a Company is determined by its shareholding and a Company can have upto 200 shareholders. | ||
| 7. | Proof of Ownership | All properties are held in name of proprietor, so no requirement of any additional proof. | It is the duty of the Partners, to prove that the property is held in the name of the firm. | There are no provisions for issuing of Share Certificate. Rights/ Interest of the Partners in the LLP are evidenced by Partnership agreement. | Right/ Interest of the members in the company is denoted by share certificate | ||
| 8. | Participation in Management | Sole Manager, no procedural requirement | Determined by the Partnership Deed, and the role of partners. | In a LLP, there is not a clear distinction between the owners and management. In a LLP, the LLP Partners hold ownership of the LLP and also hold powers to manage the LLP. | Shareholders do not directly participate in the management of the company, there is a clear distinction in a Company between the owners of share and the management. Hence, Company is advantageous when it comes to ownership and management features. | ||
| 9. | Transfer of Ownership | Business may be transferred easily. | May require dissolution of Firm/Reconstitution of Partnership. | Entity is transferable but not as flexible. Rights/ interest of partners are transferable only as per the provisions of LLP agreement. | Company offers more flexibility when it comes to transferring or sharing of ownership | ||
| 10. | MCA Compliance | NIL | NIL | LLP enjoys significant advantages as many compliances are not mandated for LLP | A Company has to comply with the various provisions of Companies Act and make necessary filings from time to time with the Ministry of Corporate Affairs Portal. | ||
| 11. | Audit of Annual Accounts | Audit is mandatory where where turnover or gross receipts in business for the year exceed or exceeds Rs. 1 Crore.
From Assessment Year 2020-21, the threshold limit for Audit shall be Rs. 5 Crore in case where cash receipt and payment made during the year does not exceed 5% of total receipt or payment, as the case may be. |
Audit is mandatory where where turnover or gross receipts in business for the year exceed or exceeds Rs. 1 Crore.
From Assessment Year 2020-21, the threshold limit for Audit shall be Rs. 5 Crore in case where cash receipt and payment made during the year does not exceed 5% of total receipt or payment, as the case may be. |
A LLP does not have to have its accounts audited if the annual turnover of the LLP is less than Rs.40 lakhs and the capital contribution is less than Rs.25 lakhs. | A Company on the other hand would have to audit financial statements and file the same with the Ministry of Corporate Affairs each year | ||
| 12. | Fines and Penalties | Fines or Penalties are as per genreal law, as covered under Income Tax Act, 1961 or GST Act, 2017 | Penalty for Non-Compliance with Registrar are minimal and negligible. | The penalty for non-compliance or late filing of documents with the Ministry of Corporate Affairs are most of the times higher for a LLP. | The penalty for non-compliance or late filing of documents with the Ministry of Corporate Affairs are comparatively lower for a Company. | ||
| LLPs could incur larger penalty or fines from MCA due to non-compliance as a flat fee of Rs.100 per day is levied when the non-compliance continues with no cap on the liability. | |||||||
| 13. | Rules, regulations, process and procedures | Easy compliance and maintenance. No strict rules of process. | Easy compliance and maintenance. No strict rules of process. | LLP rules, regulations and procedures are still continuing to evolve. The integration with the MCA Portal has caused tremendous boost to the process. | Companies have been in existence for longer and there are well established processes and procedures for Private Limited Companies | ||
| 14. | Funding from Banks and Foreign Direct Investment | FDI is not allowed. | FDI is allowed subject to restrictions. | FDI is allowed after getting approval from the RBI. | Company enjoys widespread recognition in India and the world. It offers its promoters a better image or standing than that of a LLP. Company also enjoys better access to funding from banks and foreign direct investment. | ||
| LLPs may obtain ECB (External Commercial Borrowings) | |||||||
| 15. | Other Relevant Aspects | There is no separation between business and the individual. | Partnership Firm cannot be a shareholder in a company. | For purposes of Companies Act, 2013, an LLP cannot be a subsidiary of another company. | For purposes of Companies Act, 2013, a company can be a subsidiary of another company. | ||
| 16. | Applicability of Start-Up Scheme | Ineligible | Eligible if registered | Eligible | Eligible | ||