Planning for a startup? Should it be LLP, private limited or OPC?

Naresh got a idea about a business. He has also met few talented people to work with him. Now, being from technology background, he doesn’t have any idea about how to start or register his new business? He goes to Rajeev, his friend from school who is a corporate lawyer in the city. After few minutes of casual talk, Naresh shares his plan for new business.

Rajeev: Congratulations Naresh! Glad to know that now you are ready to live you dream that you always wanted to do.

Naresh: Thank you Rajeev! I need a help from you for the same.

Rajeev: At your desk sir! Tell me, how can I help you?

Naresh: I am not sure how should I start my business, I see there are various form of business that I can register and run it. But, I am not sure What should I go for?

Rajeev: What exactly you are planning for? Do you have any partner with you or you want to do it alone as owner?

Naresh: Cyber Security consulting, I have talked with my friend Ramya, who is an expert in business handling and also interested. But she is not willing to leave her job now. However, she can join me in coming time after 6 months.

Rajeev: If you are starting alone, OPC could be an option for you

Naresh: What is OPC? What are the advantages and disadvantages of OPC

Rajeev: OPC is abreviation for one-person-company, it’s not much different than private limited, except the fact that there is only one director, who will also be sole shareholder. Advantage of OPC over sole proprietorship is your liabilities are limited.

Compliance requirement are very much same as private limited and taxation is set to be 30% flat on profit.

Naresh: You said, there can only be one shareholder. Can’t Ramya join me in my business as shareholder?

Rajeev: No, OPC is limited to one person. You can register for a nominee director but at a time, there can be maximum one director. Also, you should know that if your revenue crosses 2 Crore or paid-up capital reaches 50 Lakh, you must convert OPC to private limited.

If you want someone else also to be a shareholder, you have 3 options.

1. Partnership
2. Limited liability partnership (LLP)
3. Private limited

Naresh: Interesting, I don’t want to go with partnership as it brings unlimited liabilities. What is LLP?

Rajeev: LLP is alternate corporate business form that gives the flexibility of a partnership and benefit of limited liability of a company. Like private limited, LLP is separate legal entity and liable to the full extent of its assets but liability of partners is limited to their contribution. You can add or remove partner without any change in company name and LLP can enter in a contract of its own.

Since LLP contains elements of both “A corporate structure” and “Partnership firm”, you can call it hybrid between company and partnership. When compared with company, it have many benefits like, if your profit is more than 1 Crore, you get multiple tax benefit for profit and dividend distribution, there are other benefits as well, like audit requirement, board meetings and other compliance.

Naresh: Wonderful, looks like LLP is very good model, but if it is so good as you say, there must be some catch, Isn’t it?

Rajeev: ha ha ha, yes. LLP has some limitation too. It’s not meant for scalable business. You can’t look for equity investment from VCs. You can’t offer ESOP to employees and so being talent to business could be a challenge

Naresh: I see, so starting as LLP could be a good idea, but for scalability, the only option left with us is private company!

Rajeev: yes, you got it right. For scalable business, the best form of business is, running as a company. You need at least two members to start a company. A company offers multiple benefit but also need to follow many compliances (like quarterly board meeting, proper filing of IT return, audit etc) from MCA. Taxation is also a big burden for companies. If your business is yet not geared up for all these, you can wait a while before jumping to register as company.

Naresh: Thank you so much Naresh for all this information. Could you also provide me some reference reading, so that I can read them in detail and take a call.

Rajeev: Sure, why not, here’s the list of URLs for further reading , you can also call me anytime for any doubt.

1. http://www.mca.gov.in/MinistryV2/llpefiling.html
2. https://vakilsearch.com/advice/pvt-ltd-co-vs-llp-vs-opc/
3.  www.mca.gov.in/
4. http://www.mca.gov.in/MinistryV2/onepersoncompany.html

Naresh: Thank you Rajeev, time to go, lets catch up sometime next week before proceeding ahead. Good bye

Rajeev: See you Mr. Entrepreneur.