Ease of doing business for MSMEs: Choosing between different legal structures in registering a business can play an important role in your compliance journey while starting and running your enterprise. Picking the right structure among limited liability partnership (LLP), sole proprietorship or one-person company (OPC) can determine various components in running a venture such as taxes, management, paperwork, liabilities and other ramifications. Read on to understand which one would suit your entrepreneurial ambitions:
One Person Company
Introduced in India by the Companies Act, 2013, OPC allowed many aspiring entrepreneurs to start their businesses and take riskier bets without affecting or suffering a loss of personal assets since the liability of OPC is limited to the extent of the value of the share the owner holds.
OPC, as the name suggests, means only one person (owner) is involved as a member, acting as both a shareholder as well as a director even as the director count can go up to 15. However, during OPC registration, the person is required to appoint a nominee who will act as the shareholder in the event of his/her death.
Importantly, there is no minimum requirement of minimum capital to be invested in the company. The owner can invest as per the requirement of the business.
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However, in case the company’s average turnover for three consecutive years exceeds Rs 2 crore or the paid-up share capital goes beyond Rs 50 lakh, it is mandatory for the company to convert into a private or public company.
OPC is essentially considered a private limited company, according to Section 3(1) (c) of the Companies Act with respect to legal matters. There are more benefits to getting an OPC structure such as a director can sign the annual returns instead of a company secretary; no need to hold annual general meetings and also financial statements don’t need the inclusion of cash flow statements.
In contrast, a high tax rate of 30 per cent in an OPC is among areas that might concern entrepreneurs. Further, maintaining proper books of accounts, audit of financial statements, filing of income tax return every year before September 30, filing Annual ROC return which includes form MGT-7 – Statement of Disclosure of Shareholders and Directors are among the compliances involved in an OPC structure.
Sole Proprietorship
Similar to an OPC, a sole proprietorship also has an individual on the top, however, the person is also liable for all the debts. This means that the liability is not limited unlike in an OPC and hence, the person bears all the losses as much as he enjoys all the profits. The owner can register the company under his/her own name or a fictitious name.
However, there are a few tax benefits with a sole proprietorship. For instance, a proprietor can claim business gains and losses on his/her own individual tax return instead of the company to file its own tax return. Moreover, a sole proprietorship is taxed using individual income tax rates rather than corporate, thus making tax obligations simpler and cheaper.
Further, owners have complete and direct control over all decision-making. Because the owner is the business, the owner makes all decisions for the business rather than sharing power with a partner or corporate board. Also, there is no requirement for minimum share capital.
In addition, sole proprietorships don’t require a director and a nominee except a member. There is also no need for board and annual meetings and also annual audits, making it easier to operate from a compliance perspective. However, in the event of the death of the proprietor, there are slim chances for the company to survive.
Limited Liability Partnership
LLP is among the popular business forms adopted because the liability of the partners is limited to the contribution made by them. Partners won’t be personally liable for any business loss. LLP protects their personal assets from business liabilities. Moreover, partners are also not liable for the liability created by other partners’ misconduct or negligence.
An LLP is also easier and cheaper to run with only two annual compliances – filing annual return by May 30 every year and solvency statement by October 30 every year.
It is also easy to close an LLP in two-three months vis-a-vis around a year in the case of a private limited company. Also, there is no minimum capital requirement involved and only two partners are required to set up an LLP.
However, there are some disadvantages as well in the case of an LLP. For instance, an LLP will be dissolved in case one partner leaves the organisation. Also, the fine for non-compliance can be up to Rs 5 lakh for a year. An LLP has to file income tax return and annual return every year even if it is dormant. The inability to file Form 8 or Form 11 (annual filing) attracts Rs 100 per day fine, per form.
Further, private investors including angel investors or venture funds cannot invest in an LLP because there is no concept of equity of shareholders in an LLP. Moreover, while the income tax levied on a company with up to Rs 250 crore turnover is 25 per cent, LLPs are levied income tax at 30 per cent irrespective of the turnover.