Should register as company or llp under startup?

Should register as company or llp under startup?

Benefits Of LLP over Company:-

1. No limit on owners of business

LLP requires minimum 2 partners. There is no limit on maximum partners unlike a private limited company wherein there is a restriction of not having more than 200 members.

2. No requirement of minimum contribution

As against company in which one needs a minimum conribution of Rs. 1,00,000 in case of private limited and for public limited company for which the minimum contribution is Rs. 5,00,000, there is no minimum capital requirement in LLP. An LLP can be formed with least possible capital.

Moreover, the contribution of a partner may consist of tangible, movable or immovable or intangible property or other benefit to the LLP.

3. Lower cost of Formation

The cost of registering LLP is low as compared to cost of incorporating a private limited or a public limited company.

4. No requirement of compulsory Audit

All the companies, whether private or public, irrespective of their share capital, are required to get their accounts audited. But in case of LLP, there is no such mandatory requirement. A Limited Liability Partnership is required to get the audit done only if:-

a. If the contributions of the LLP exceeds Rs. 25 Lakhs, or

b. If the annual turnover of the LLP exceeds Rs. 40 Lakhs

5. Lower compliance burden resulting in savings

Approximately at least 8 to10 compliances per annum are required to be made by a private limited company whereas a Limited Liability Partnership is required to file only the Annual Return & a Statement of Accounts & Solvency.

6. Taxation Aspect on LLP

For income tax purpose, LLP is treated at par with partnership firms. Thus, LLP is liable for payment of income tax and share of its partners in LLP is not liable to tax. Thus no dividend distribution tax is payable. Provision of 'deemed dividend' under income tax law, is not applicable to LLP.

Section 40(b): Interest to partners, any payment of salary, bonus, commission or remuneration allowed as deduction in the hands of Limited Liability Partnership.

7. Dividend Distribution Tax (DDT) not applicable

In the case of a company, if the owners to withdraw profits from company, an additional tax liability in the form of DDT @ 15% (plus surcharge & education cess) is payable by company. However no such tax is payable in the case of LLP and profits of a LLP can be easily withdrawn by the partners.

8. Converting from Partnership to LLP

LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions , the provision of capital gain will apply.

9. Converting from company to LLP

Conversion from company is possible. The capital gain on conversion of company in to LLP is exempt if the conditions of section 47(xiiib) are followed.

10. Demerits of LLP

LLP as well have some limitations within. Some of them can be summarized as below.

a. Any act of the partner without the other partner, may bind the LLP

b. LLP Cannot raise money from public.

Benefits of Companies over Limited Liability Partnerships:-

  1. Private Limited Companies are well established phenomenon across the world and enjoy widespread recognition. Almost every country on the globe has well established procedures regarding them, which helps in expanding the business. LLPs, on the other hand, have emerged recently. The rules and regulations regarding them are still evolving.
  2. LLP’s cannot have any third-party shareholders or any new shares issued. Transfer of shares is more complicated matter in terms of LLP’s over the Companies. Hence, in case of issuing stock options to employees or to recieve funding from any other resource, one needs to consider Private Limited Company over the Limited Liability Partnership.

Hence, it can be concluded that both Companies as well as Limited Liabiity Partnership’s have their own merits and demerits and it is also the nature of business to be carried on which should be considered before getting the business registered or incorporated.

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