At the point when entrepreneurs start their new business, there is a typical disarray between which type of entity they should choose which will be best suited for their business. One must have basic information on what are the pros and cons of these organizations. In this article, we have attempted to discuss the structure and compliance requirement by a company vis-a-vis an LLP which may be helpful for prospective entrepreneurs to determine the type of entity they would want to set up for their business.
1. Types of companies:
a. Private Company:
A private limited company has certain distinguishing characteristics. It must, in its articles of association, restrict the right to transfer shares; the number of members in a private limited company is minimum of 2 (two) and a maximum of 200 (two hundred) shareholders (excluding the present and past employees of the company). Also, its articles of association must prohibit any invitation to the public to subscribe to the securities of the company. It is required to have a minimum of 2 (two) directors in a private company.
b. Public Company:
A minimum requirement of 7 (Seven) members is necessary for a company to be a public limited company. There is no limit on the maximum number of members in a public company and a company may invite the public to subscribe to its securities. It is required to have a minimum of 3 (three) directors in a public company.
c. One Person Company:
A one-person company is a company which has only one person as its member. It is a new concept and as the name suggests there will be only one shareholder of the company, but there can be more than one director to manage the company. Only natural persons who are Indian citizens and residents are eligible to form a one person company in India. In case the paid-up share capital of one person company exceeds fifty lakh rupees or its average annual turnover of immediately preceding three consecutive financial years exceeds two crore rupees, then the one person company must mandatorily convert itself into a private company or a public company.
2. Public vs Private Companies:
A public company has a minimum requirement of 7 (seven) members and there is no limit on the maximum number of members. The public companies can also go for listing of their shares. Whereas, in case of a private limited company, it is owned and traded privately, therefore, it uses the suffix after its name as “Private Limited”. The minimum and maximum requirement of 2 (two) and 200 (two hundred) members respectively have to be fulfilled. The minimum number of directors in a private company and a public company is 2 (two) and 3 (three) respectively. Certificate of incorporation is necessary to commence business activities by both the companies. All companies incorporated on and after 02nd November, 2018 and having share capital shall file a declaration for commencement of business within 180 days from the date of getting certificate of incorporation. Further, as between a private company and a public company, a private company has more flexibility and less stringent rules in respect of various matters than a public company in conducting operations, composition of board of directors, holding of shareholders meetings, management of the company and the payment of managerial remuneration, etc.
3. Incorporation of a Company:
To incorporate a private limited company there must be a minimum of 2 (two) directors and 2 (two) subscribers and to incorporate a public company there must be a minimum of 3 (three) directors and 7 (seven) subscribers. Further, if the application is in order, then it takes not more than 2 days to approve the application by the Registrar of Companies ("ROC"). Following are the list of documents that are to be filed with the ROC within whose jurisdiction the registered office of a company is proposed to be situated:
- Application for name reservation is to be filed in Form SPICE PLUS PART A;
- Application for Incorporation of Company is to be filed in Form SPICE PLUS PART B;
- Form INC-33 (e-MOA) for memorandum of association;
- Form INC-34 (e-AOA) for articles of association;
- Form INC-9: Declaration by subscribers/first directors;
- Original copy of formal letter issued by ROC regarding availability of company name;
- Director Identity Number (DIN) of all the directors of a proposed company;
- DSC - Digital Signature Certificate mandatory for all the subscribers;
- Proof of registered office of the company - utility bills, electricity bills etc.;
- Identity proofs of directors and subscribers;
- Address proofs of directors and subscribers;
- Pan Card of directors and subscribers.
4. Fund Raising:
In companies, funds can be raised in two ways:
a. Rights Issue:
When the existing shareholders of a company are invited to purchase additional shares of a company it is called a rights issue. A rights issue is an invitation to the existing shareholders to purchase additional new shares in the company in proportion to their existing holdings. A company may issue equity shares only to its existing shareholders under rights issue by passing a board resolution and complying with the applicable provisions of Section 62 of the Companies Act, 2013 (“CA, 2013”).
b. Private Placements:
Issuance of shares through private placement means any offer of securities or invitation to subscribe securities (equity or securities that convert to equity) to a selected group of persons by a company, other than by way of public offer, through issue of a private placement offer letter. The issuance of securities through private placement is governed by Section 42 read with the Companies (Prospectus and Allotment of Securities), Rules 2014. As per Section 42 of the CA, 2013 the maximum number of persons to which private placement can be done in a financial year shall not exceed 200 (two hundred) in number and also the number of persons shall not exceed 50 (fifty) in one offer in a financial year.
5. Corporate Governance Structure:
Corporate Governance is defined as the system in which companies are directed and controlled. Corporate governance is a structure through which an entity manages itself and its affairs and achieves stability. Need for corporate governance arises to ensure that all the practices of the company are in place and are in accordance with the laws. Corporate governance helps in forming a good brand, lowers the capital cost, minimizes corruption and provides for risk management.
a. Legal Framework:
The CA, 2013 read with the rules prescribed thereunder and the Secretarial Standards. In case of listed public companies, such companies also need to comply with the applicable SEBI Regulations.
- Appointment of Directors.
- Conducting of the meeting of the Board of Directors in prescribed number and intervals.
- Annual General Meeting must be held once every year within 6 months from the date of closing of the financial year.
- Annual Return and Financial Statements must be filed every financial year mandatorily by every registered company irrespective of its turnover or activities.
- The registers and records of a company includes the register of shares, register of members, and register of directors, resolutions of the meetings of the board of directors, minutes of the Board of Directors meeting and Annual General Meeting. The registers and records of a company must be carefully maintained and kept open for inspection at the company’s registered office.
- Filing of income tax return.
C. LIMITED LIABILITY PARTNERSHIP ("LLP"):
Limited Liability Partnership must be a partnership of minimum 2 (two) individuals and has to be registered under Limited Liability Partnership Act, 2008 (“LLP Act”) and it has a separate legal identity. It is a form of business that gives flexibility of a partnership and limited liability benefits of a company. The liability of the partners in the LLP is only to the extent of their contribution in the LLP.
1. Incorporation of Limited Liability Partnership:
To incorporate an LLP, a minimum of two or more persons who intend to carry on a lawful business to make profit shall subscribe their names to an incorporation document. The process of incorporation of an LLP takes about 2-3 weeks. The required documents that need to be filed are:
- An application for name reservation in Form RUN LLP.
- DSC certificate of atleast one Designated Partner.
- Application for incorporation in Form FiLLiP.
- Identity proof of the designated partner or partners.
- Pan Card copy of the designated partner or partners.
- Address proof of the designated partner or partners.
- Passport size photograph of the proposed partners.
- Proof of registered office of LLP: Gas bill, electricity bill, mobile bill of last two month.
- NOC from the property owner of the registered office.
- Lease/Rental agreement.
- A statement also has to be filed in the prescribed form, made by either an advocate, or a Company Secretary or a Chartered Accountant or a Cost Accountant, who is engaged in the formation of the limited liability partnership and by any one who subscribed his name to the incorporation document, that all the requirements of the LLP Act and the rules made thereunder have been complied with, in respect of incorporation and matters precedent and incidental thereto.
2. How to raise funds for an LLP:
In LLP’s, contribution by partners is a very important aspect with regards to raising of funds by an LLP. Section 32 (1) of LLP Act enumerates the ways in which the partners can contribute in an LLP. It must be ensured that the contribution of the partners has been accounted for and disclosed in the accounts of the LLP. Further, addition of new partners into the LLP is another option to raise funds.
3. Compliances by an LLP under the LLP Act:
a. Annual compliances that need to be complied with by the LLP:
- Annual returns of the LLP under Form 11 pursuant to Section 35(1) of LLP Act have to be filed with ROC within 60 days of closing of the financial year.
- Statement of the Accounts of financial statements of an LLP under Form 8 pursuant to Section 34(2) of the LLP Act, have to be filed within 30 days from the end of six months of the closing of the financial year.
- Filing of income tax returns in ITR-5.
b. Event-based compliances as may be applicable:
- Appointment/resignation of designated partners/partners under Form 3 and Form 4.
- Name change of LLP under Form 5.
- Change of Registered office under Form 15.
- Amendments in LLP Agreement under Form 3.
- For striking off the name of the LLP under Form 24.
- Application for obtaining DIN under DIR-3.
- Changes to be made in the particulars of the Director under DIR-6.
D. TAXATION FOR LLP AND A COMPANY:
a. The income tax applicable to companies is based on their turnover:
- When gross turnover is upto 400 Crore, then tax rate applicable shall be 25%.
- When gross turnover is exceeding 400 Crore, then the tax rate applicable shall be 30%.
- The companies also have the option of paying tax at the rate of 22% in both the above categories, subject to the companies complying with certain prescribed conditions of the Income Tax Act. Further, the tax rates are different for domestic manufacturing firms.
Apart from the above, a company is also liable to pay surcharge and cess as may be applicable.
2. Limited Liability Partnership:
The LLP is liable to pay income tax of 30% on its income. In case the total income exceeds Rs. 1 Crore, LLP is also liable to pay surcharge and cess as may be applicable.
E. TABLE LAYING DOWN COMPARISON BETWEEN A COMPANY AND LLP:
|SL NO.||BASIS||PRIVATE COMPANY||LLP|
|1.||Governing Act||Companies Act, 2013.||Limited Liability Partnership Act, 2008.|
|2.||Minimum members requirement||Minimum two members and maximum can go till 200 members. A public limited company shall have a minimum of 7 members but there is no limit on maximum number of members||Minimum 2 designated partners, atleast one of them must be resident of India and no limit for maximum number of members.|
|3.||Registration||Compulsory registration required with the ROC. Certificate of Incorporation is conclusive evidence.||Compulsory registration required with the ROC. Certificate of Incorporation is conclusive evidence.|
|4.||Compliances||Tax compliances are similar for both a company and LLP. However, when it comes to compliance relating to the MCA, LLP enjoys significant advantages in terms of compliances, filings and maintenance of statutory records.||The nature of compliances, filings and maintenance of statutory registers is much more in a company.|
|5.||Legal entity and perpetual succession||It is a body corporate with a separate legal entity from its members and has perpetual succession.||It is a body corporate with a separate legal entity from its partners and has perpetual succession. An LLP agreement governs the mutual rights of the partners and a change in the partners of an LLP will not affect the existence of the entity.|
|6||Meetings||Board Meetings (“BM”): The first board meeting should be held within 30 days from the date of incorporation and for specified IFSC private company must be within 60 days.
Further, at least 4 BMs shall be conducted in a year and there shall be a gap of not more than 120 days between two BMs.
Exception to the above rule is that a one-person company, small company, dormant company, a private company which is a start-up and a specified IFSC private company shall conduct at least 1 BM in each half of the calendar year and gap between 2 meetings should not be less than 90 days.
1. Must be held every calendar year (every 12 months)
2. Gap between two General Meetings must not exceed 15 months.
3. Must be held within 6 months from the end of the Financial Year, that is by 30th September of the next Financial Year.
|No meetings are statutorily required to be held.
Depends upon the LLP Deed/Agreement.
|7||Audit||Compulsory, irrespective of share capital and turnover.||Required if:
(i) contribution is above Rs. 25 lakhs or
(ii) if annual turnover is above Rs. 40 lakhs.
|8||Tax Rate||The Corporate tax rate is 30% plus applicable surcharge and cess for companies with turnover of more than 400 crore and that avails exemptions while for companies that do not avail exemption, the tax rate shall be 22% and also MAT shall not be applicable. For companies having a turnover less than 400 crore INR and that avail exemption, the tax rate would be 25% plus MAT applicability and for companies that do not avail exemption, the company to pay income tax at the rate of 22% and also MAT shall not be applicable. The tax rates are different for manufacturing firms.||For all LLPs, the tax rate will be 30% plus applicable surcharge and cess, depending on the income of the LLP.|
|9||Governance and Control||Under the company regime, since the shareholders do not directly participate in the management of the company, there is a clear distinction between the owners of share i.e the shareholders and the management i.e the board of directors of a company.||In a LLP, there is no clear distinction between the owners and management since the LLP Partners hold ownership and also hold powers to manage the LLP though the same may be regulated by providing elaborate mechanisms in the LLP agreement.|
|10||DDT||Currently dividend is exempted in the hands of shareholders, but the companies have to pay DDT @20.56%. The Finance Bill 2020 has proposed to abolish the DDT regime for dividends declared, distributed or paid on or after 1 April 2020. Consequently, dividends will be taxed in the hands of the shareholders at applicable tax rates.||An LLP is not required to pay DDT on profits distributed to its members. The said distribution of profits would not be taxable in the hands of the members of the LLP.|
Doing business in India today is becoming simpler day by day as the initiatives taken by the government to reduce the complexities and by introducing methods to deal with the affairs of the company have increased. LLP is a new trend of doing business in India, as the incorporation of LLP is easier and faster, wherein the liability of the partners is limited only to the extent of the contributions made by the individual partners. As doing business in India has become easy therefore, many Indian and foreign entrepreneurs are planning to start their venture in India by resorting to the structures as discussed in this article.
Authors: Anita Dugar, Senior Associate; Jaisis Srikrishna Das, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) firstname.lastname@example.org (ii) email@example.com.
Updated as on May 01, 2020.
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