Dreaming about building a startup is one thing and actually making this come true is another. One of the most important decisions that a startup needs to make is, whether to go for a Limited Liability Partnership (LLP) or Limited Company (Company). Choosing this, determines the roles and powers of owners of the business firm.
Determining which business entity your startup will be, is very important. To quench our thirst for knowledge and make the distinctions clear in our minds about these firms, we decided to talk to Achal Ghai, who is a bigwig in the investment world (visit www.achalghai.com to know more about him). The main differences between the two firms are listed below:
Founder’s Vision Of The Firm: LLP is a firm that gives you the benefits of limited liability company along with the flexibility of a general partnership. A startup must decide this by envisioning where they see their startup after a few years (say five). It may happen that you would want to infuse more people or entity in the business on some later stage.
Because of its very structure, infusing stakeholders, investors and professional in a Company is easier. If it is an LLP, it is expected that it won’t go large scale and across geographical boundaries. It is also worth mentioning that a company enjoys more credibility of investors and stakeholders whereas, the same is lacking in the case of an LLP.
The Procedure Of Incorporation: The cost of incorporating a Company is Rs. 6000, whereas for an LLP, that amount is just Rs. 800. Incorporation of both the entities require filling of the form like Form 3. Other than Form 3, the following formalities are applicable:
- Name Approval
- Details of directors/partners
- Place of registered office
In the case of LLP, there is no lower limit that is required as a paid up capital at the time of incorporation whereas, for a Company, it is One Lakh Rupees. Also, holding meetings such as, quarterly board meetings and statutory meetings is not required in the case of LLP, which is a must for a Company.
Ownership And Control Over The Firm: The right to manage the business is directly upon its partners in LLP. In Companies, there is no direct relation between the management and the owner, instead, they appoint a board of directors to run and manage the company.Thus, in many ways, forming an LLP is a better option for a startup rather than a Company since there is full control over the firm in an LLP and not in a Company.
Auditing Requirements: The LLP Act provides the flexibility that if the partners don’t want an audit of the accounts done, a statement needs to be included in the Statement of Account and Solvency by the partners in the LLP to the effect that the partners acknowledge their responsibilities for compliance with the Act. But this is can be done only if the turnover of the LLP does not exceed 40 Lakh and the contribution does not exceed 25 lakhs. There is no such relaxation for a company.
Concluding Lines: There is no absolute rule which makes one entity better than the other. You need to learn about the merits and demerits of each entity carefully before finalizing which one to go with. The decision should be taken on the basis of business rationale, the funding and the potential market, and the ownership and management control.
I hope this article was very insightful to you, and have brought a clearer understanding of the two business entities. Thanks for reading!