LLP vs. Private Limited Company for a Startup

LLP vs. Private Limited Company for a Startup

Startups are entrepreneurial ventures which are usually young and growing. They aim to meet or create a marketplace by developing or offering an innovative products, processes or services. Startups are usually companies such as small businesses, partnerships or organizationsthat are designed to create a scalable business model. These companies are considered as in their first stage of operations. They are often financed by their founders for the development of the particular product, process or service for which they believe there is a demand. Due to limited income or high costs, most of the startups are not sustainable in the long term without additional funding from other enterprise capitalists.

LLP for a Startup

Limited Liability Partnership or LLP, is a type of business format that combines the flexibility of a partnership and the edges of limited liability of a company at a low acceptance cost. It is a partnership in which the partners have limited liability. In a LLP, a partner is not considered responsible for another partner’s misconduct or negligence. This is an important factor which differs it from an unlimited partnership.

Features of LLP

• It is a corporate and legal body separate from its partners. It has a separate legislation (LLP Act, 2008), thus the rules of Indian Partnership Act, 1932 does not apply to it.
• Every Limited Liability Partnership shall use the words ‘Limited Liability Partnership’ or ‘LLP’ as the last words of the company’s name.
• It shall have a minimum of two designated partners and all the partners shall be the representative of Limited Liability Partnership but not of other partners.

Need for LLP

LLP is an alternative corporate business tool that provides the benefits of limited liability of a company but allows its owners the facility of organizing their internal management on the basis of a mutual agreement, as in the case of a partnership firm.

This format would be quite useful for small and medium companies in general and for the companies in services sector in particular. LLPs are similar in some ways to the standard Partnerships, apart from the fact that the individual members have lesser liabilities to any debts which may arise from running the business. There are more administrative duties as compared to the Partnership business model.

In fact, LLP is similar to a Limited Company, with regards to its operation. In terms of liability, the Limited Liability Partnership is itself liable for debts incurred in running its operations, rather that the individual members of the LLP. As a result, LLP’s are mostly recommended for profit running businesses.

You can register your LLP here

Conclusion

It is a form of business, which allows individual partners to be constrained from joint liability of partners in a partnership enterprise. The Liability of the partners incurred in the normal operations of business is that of LLP and it does not extend to the personal assets of the partners. The hybrid model of LLP will ease the entrepreneurs, service providers and professionals to organize and work in an innovative, creative and efficient manner for effectively competing in the global market.

Private Limited Company for a Startup

A private limited company is a popular form of business among investors, joint ventures or 100% owned company in India. These companies are privately held by the people and are the most preferred as a common business organization in India. For the startups to have a strong foundation and raise finances in the future, this format of business is a viable option.

Features

• Atleast 2 and Atmost 200 members are required
• No requirement for minimum capital
• Should have a minimum of 2 directors
• The word ‘Private Limited’ should be added after the name of the company.

Need

The formation of a private limited company facilitates formation and friendly working environment of the enterprise. All the directors of the company can be life time directors and the requirement of retirement does not apply. The special 14 days’ prior notices for the appointment of a new director in place of a retiring one does not apply in case of this format of company.

A private limited company is free to allot the new shares even to outsiders unlike the public companies which confines to its existing members.

The private limited companies can be sold to another individual or another entity, either partially or fully, without any disruption to the current business operations.

You can register your Private Limited Company here

Conclusion

A startup would need its own enterprise and for the startups, private limited companies are no less than a boon having its various advantages. After the changes in the Companies Act, the government is providing more and more opportunities to the startups to enter in the market by easing the rules and regulations and by providing a healthy working environment.

Author: This blog is written by Ms. Ankana Mukherjee, a passionate blogger & intern at  Aapka Consultant.

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