Company registration for dummies: should startups choose Private Limited/OPC over LLP?
We at Quickcompany receive queries on daily basis from Startups, that with what form of business they should go with.
Last day, we have got a call from a tech based startup based in Gurgaon, the founder said that they want to incorporate a legal entity in order to grow their business but they are confused whether they go for OPC/LLP/Private Limited one.
As a startup, they are very much money minded and cost saving people, they want such form of business which gives them a full independency to do business in India but also at the same time does not involve much annual maintenance cost.
Out of 10 startups, more than 5 do not have knowledge about legal terms and what type of business they should incorporate
I am sure many are sailing in the same boat, where they have an idea, but are not sure how to and from where they should start.
Present Scenario of Incorporation of Legal Entities in India
In the past three months we have seen that, there is almost 26% rise in private limited company formation and also, we have seen that there is also, continuous rise in formation of One Person Company (OPC) formation, Every month more than 5,000 business incorporated in India and Out of these all legal entities more than half is formed in three states only i.e. in Delhi, Maharashtra, Uttar Pradesh.
Let us look at the facts:
Questions to be asked while choosing which legal form to create:
1. Are we ready to bear the legal consequences/ coming Compliances?
For a startup it is best to first consider, whether they are ready to bear the legal consequences and compliances in the form of annual filings, balance sheet signing, that come after formation of company.
2. How many Persons are going to act as a promoter in the company?
First thing, that will create the value of the company is the founder team structure, and Choosing the best Form of Business is also depend upon the no. of persons involved or going to act as the promoter in the initial stage of startup.
3. How much Capital Contribution/Capital to be Introduced by the promoters?
Seed funding is the first seed that a promoter plants to reap the startup tree and bear the success fruit. Capital is the seed fund and also the main factor of choosing the main form of business like what amount of contribution promoters are willing to introduce in the company.
4. Is there any Funding/Investment Requirements in the future?
Funding is also the deciding factor for every startup, If in near future, funding is required in the startup, then it has to be planned in the initial stage of business as it will also become a deciding factor which form of business should be choose.
What factors derive the Private Limited/One Person Company (OPC) more favorable then LLP?
1. Sense of Ownership
Like in OPC/Private Limited, Shareholder contributed the amount and got shares of the company 100% in OPC, and in proportion in Private Limited, but in LLP , everytime partners contributes the amount and does not come up with the result who is major partner or who is minor one.
2. Acceptance of Foreign Payments/Investments
Likewise, in Pvt. Ltd. Not in OPC, any foreigner can become a shareholder and can easily routes the money from foreign to India but in LLP there are many restrictions, If somebody is from foreign countries, and want to start business in India there are many restrictions which do not appears in making of Private Limited One.
3. Atmosphere for Investors
In the initial stage, most Startups, started working by taking in their mind to get the investments in the near future, but what a investor thinks is also very important for the startups, Investors always invest in the business in lieu of some stake of the business which he can get only in Private Limited. Investors main motive is to got the stake in the business which in LLP can’t be possible. In OPC, it is possible only after conversion of OPC into Private Limited one by file INC 6 form to MCA which is a easy step.
4. Going Public in Future
In the recent Budget and new notifications from SEBI, Like earlier the government has plan to loosen the strictness of going public for startups which is not possible in LLP. In Private Limited, one can go public by converting Private limited into Public limited company, but in LLP, LLP act does not permit the conversion of LLP into Private Limited or into Public Limited.
One can choose One Person company (OPC) in the initial stage of startup if he/she is the single owner of the company, and later with the introduction of new person in the company, OPC can easily be converted into Private Limited Company once, but that can’t be possible in the case of LLP, once cannot convert a LLP into Private Limited.
While choosing the best form of business keep in mind that this selection is as important, as the execution of the idea. Although, compliance cost and formation cost of LLP is much less as compare to One Person company (OPC)/Private limited but if your idea needs funding and in future you have the plan to grow big, then Proprietorship and partnership cannot not give the right plough back what your business needs, every time your business needs a company identity which a Private Limited or OPC can give.