This blog post is written by Mr. Gagan Kelhanka, a law graduate from at KC Law College and worked as in-house counsel at Xoxoday. He pursued Companies Act, 2013 & SEBI Law Course from Bettering Results (BR).
OVERVIEW
One of the most commonly and reasonably expected dilemmas of any new budding entrepreneur intending to start up a business venture in India is often the choice of form of entity structure that best suits their individual needs. Due to the plethora of alternatives available under the Indian legal regime, it can unsurprisingly be a daunting and thoughtfully challenging task, but equally important nonetheless. This particular decision has a significant impact on the profitability and sustainability of a business, in terms of different material aspects such as liability, control, cost, risk, etc. Therefore, it is absolutely vital that this decision be made diligently after taking all relevant considerations into account.
This article is intended to provide the readers with some clarity on two of the most popular business structures found in the country for more than a decade now, i.e., Limited Liability Partnerships (“LLP”) and Private Limited Companies (“PLC”), and why the former is usually a better option than the latter.
WHAT ARE THESE STRUCTURES?
LLPs
A LLP is a relatively new and unique form of business entity structure that combines the flexibility of a traditional partnership firm and the core benefits of a PLC, thus making it an attractive and popular choice among willing entrepreneurs for a considerable period of time now. Its inception dates back to 2008 with the passing of the Limited Liability Partnership Act (“LLP Act”) which was brought into force by the legislature to be the governing statute for LLPs. A LLP firm is registered by the Ministry of Corporate Affairs (“MCA”) as per the provisions of LLP Act.
The basic features of a LLP are as following:
➢ A minimum of two partners are required for the formation of a LLP. There is no such limit for the maximum number of partners.
➢ There is no minimum amount of capital requirement for the creation of a LLP. This implies partners enjoy the flexibility of determining how much capital they are willing to infuse in the business and also that they can contribute in terms other than money such as manpower, fixed assets, technical knowhow, goodwill, etc.
➢ As the name suggests, the liability of the partners in a LLP is limited to the extent of their contributions to the firm, which means that they are not liable beyond that in the event of losses or repayment of debts and their personal assets or property are safe from attachment in such a case.
➢ Unlike a traditional partnership, the partners in a LLP enjoy immunity from any responsibility in relation to acts done by their fellow partners. They can be held accountable only for their own individual conduct.
➢ There is no distinction between the ownership and management in the LLP structure. This is to say that partners are owners themselves who manage the affairs of the business. An LLP also has designated partners who are responsible for managing its affairs; there may be sleeping partners as well.
➢ The functioning of LLPs is governed as per the LLP Agreement, which needs to be filed with the MCA within 30 days of their incorporation.
➢ The name of a LLP should contain ‘LLP’ mandatorily.
➢ It is a suitable form of structure for small-to-medium sized businesses which do not require significant funding from external sources.
PLCs
A PLC is a form of business entity that is privately formed and held by its members/promoters that come together in furtherance of shared commercial aspirations. It varies from a public limited company as it is not permitted to invite subscription to its securities by the general public. Registration of a PLC is carried out by the Registrar of Companies (“RoC”), the statutory authority acting for the MCA, as per the provisions of the Companies Act, 2013 (“CA 2013”) along with ‘Companies (Incorporation) Rules, 2014’.
The basic features of a PLC are as following:
➢ A minimum of two members are requisite in order to incorporate a PLC who need to subscribe to the Memorandum of Association (“MoA”) to be filed with the Registrar of Companies. The membership can be extended to a maximum cap of 200 members.
➢ Similar to the membership needs, at least two directors are required for the formation of a PLC whereas the maximum threshold is 15. Directors are vested with managerial powers who are responsible for the day-to-day affairs and functioning of the company.
➢ There is no amount fixed as the minimum capital requirement for the registration of a PLC.
➢ The liability of members in a PLC is limited to the extent of their shareholding if the company is limited by shares or to the extent of the guarantee provided by them if the company is limited by guarantee.
➢ The internal management of a PLC is conducted as per its Articles of Association (“AoA”), which serves as the constitutional document of the company and lays the groundwork for material procedures and policies to be in place. AoA needs to be filed with the MoA and any other required documents at the time of incorporation.
➢ The name of a PLC should contain ‘Private Limited’ mandatorily.
➢ This form of business entity structure is ideal for ventures that are intended to operate on a relatively larger scale, expecting a sizable turnover and have a requirement of significant funding from external routes such as private equity, venture capital, angel investors, etc.
BENEFITS OF LLP STRUCTURE OVER PLC
- Registration and Management – It is considerably easier and cheaper to start as well as run a LLP business as compared to its PLC counterpart, as the mandatory requirements and costs involved are significantly lesser in quantum in case of a LLP. This makes choosing a LLP entity over a PLC one highly advantageous for the willing entrepreneurs, as they are able to save precious money at the nascent stages of their venture which can be utilised for key growth objectives in the future. In addition, they do not need to worry too much about the hassles of constant regulatory compliances, preserving valuable time and energy that can be invested in more essentially integral aspects driving business growth and expansion.
- Control – Another important merit of a LLP over a PLC is the control factor. Within a PLC setup, there is a much greater need of heavy funding from external sources such as private equity & venture capital firms, angel investors, etc., and control is often diluted to the hands of these resultantly mighty stakeholders, as they seek sizable chunks of shareholding in the company to protect their interests. This can end up with them having an influential say in the decision making process of the business, thus making life hard and unfair for the laborious founders who, in most cases, put in years of hard work, struggle as well as planning in order to convert an idea into a worthy profit making business venture. This misfortune is entirely impossible altogether in a LLP, where the founders are the very people who manage the complete functioning and decision making of the business, as partners in the firm. They are in full and sole control.
- Taxation – The taxation structure applicable in the case of a LLP is also simpler and more economic as compared to a PLC, resulting in further savings. PLCs need to first and foremost pay tax on its income at the rate of 25%, its obligations increase by another 7% as surcharge once the income exceeds INR 1 Crore and then 12% once it exceeds INR 10 Crores added to other taxes such as a Dividend Distribution Tax, Education Cess, Wealth Tax and a Minimum Alternate Tax (“MAT”), upon fulfilment of requisite criteria. Whereas a LLP is treated at par with a traditional partnership firm when it comes to the taxation aspect and majorly is required to pay only a fixed amount of 30% out of its taxable income, with the benefit of deductions in the form of remuneration, salary, bonus, commission or interest payable to its partners. It may be subject to a MAT which is lesser than normal obligations and is only applicable in the alternate scenario and a surcharge of 12% if the taxable income inclusive of capital gains exceeds INR 1 Crore, which is not very common.
- Compliances – LLPs enjoy greater leeway when it comes to statutory compliances than PLCs. For instance, a LLP is only required to get their accounts audited if its annual turnover exceeds INR 40 Lakhs or its capital contribution exceeds INR 25 Lakhs in any financial year, whereas a PLC needs to get the statutory audit done irrespective of its turnover. PLCs are also mandated to hold at least four board meetings and a general meeting of members every financial year, whereas no such obligations are imposed on partners of a LLP.
CONCLUSIVE REMARKS
Although no structure out of the two is a “one-size fits all” and the choice of any one depends entirely upon the needs of any particular case, a LLP is certainly likelier to be considered as the wiser alternative as it combines the benefits of a traditional partnership firm and a PLC in such a manner that is most ideal for the majority of entrepreneurs, as it facilitates preservation of invaluable time, money, energy and resources that can be pivotal to the long-term survival and growth of any business. In consideration of all relevant factors, the author strongly opines in favour of LLP and advocates for its election over a PLC structure to any willing entrepreneur intending to start a small-to-medium sized business with minimum regulatory burdens, considerable saving of material resources and maximum growth within a relatively shorter span of time.
Very well written. Keep it up buddy