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Choosing the right business entity is a crucial decision when starting a business. This decision should be revisited periodically as the business grows and evolves. Private Limited Company, Limited Liability Partnership, and One Person Company are popular forms of business entities that offer specific benefits and limitations to business owners. It is essential to carefully consider the pros and cons of each option before making a decision.

Registration:

A Private Limited Company must be registered with the Ministry of Corporate Affairs in accordance with the provisions of the Companies Act, 2013. 

A Limited Liability Partnership must be registered with the Ministry of Corporate Affairs in accordance with the provisions of the Limited Liability Partnership Act, 2008.  

One Person Company must also be registered with the Ministry of Corporate Affairs in accordance with the provisions of the Companies Act, 2013.

Name of the Entity:

The name of a Private Limited Company must be approved by the Registrar of Companies. The chosen name must not be identical or similar to an existing company or LLP name, and it must not be offensive or illegal. The entity's name will end with the words "Private Limited Company".

Similarly, the name of a Limited Liability Partnership must also be approved by the Registrar of Companies. The chosen name must not be identical or similar to an existing company or LLP name, and it must not be offensive or illegal. The entity's name will end with the words "Limited Liability Partnership" or "LLP".

A One Person Company must also have its chosen name approved by the Registrar of Companies. The chosen name must not be identical or similar to an existing company or LLP name, and it must not be offensive or illegal. The entity's name will end with the words "OPC" or "One Person Company"

Number of Members:

A Private Limited Company must have at least two shareholders and a maximum of 200. The number of directors can range from two to fifteen.

Limited Liability Partnership must have at least two partners to be formed and can have an unlimited number of partners.

A One Person Company can have only one member, but for succession purposes, a Nominee Director must also be appointed. A single person will own all of the shares in a One Person Company. At any given time, OPC cannot have more than one shareholder. The number of directors can range from one to fifteen.

Liability of members:

In a Private Limited Company, shareholders have limited liability, meaning that they are only liable to the extent of their share capital. 

In a Limited Liability Partnership, as the name suggests, partners have limited liability, meaning that they are only liable to the extent of their contribution to the LLP.

Similarly, In a One Person Company, both the Director and the Nominee Director have limited liability, meaning that they are only liable to the extent of their share capital.

Foreign Ownership:

Foreign investment in a Private Limited Company is generally allowed under the Automatic Approval route in most sectors. 

However, foreign investment in a Limited Liability Partnership is only allowed with the prior approval of the Reserve Bank of India and the Foreign Investment Promotion Board (FIPB).

In a One Person Company, both the Director and the Nominee Director must be Indian citizens and resident in India. Foreigners are not allowed to hold these positions.

Which one to choose?

Private Limited Company

A Private Limited Company is an ideal choice for start-ups that are looking to raise funding, particularly from venture capitalists. In addition to this, there are several other benefits to choosing a Private Limited Company, such as:

Ø  The ability to rapidly develop a business with adequate funding.

Ø  A higher level of compliance compared to other forms of business, which may include annual filings with the ROCs, statutory audits, annual submission of income tax returns, and the requirement to hold quarterly board meetings with submitted meeting minutes.

Ø  Tax advantages that are applicable to the specific industry in which the company operates.

Limited Liability Partnership (LLP)

Enterprises often choose a Limited Liability Partnership (LLP) when they do not require initial funding. In addition to this, there are several other benefits to choosing an LLP, such as:

Ø  A low tax burden and better benefits compared to other forms of business.

Ø  LLPs are suitable for professional companies that operate as advisory businesses and do not require equity funding.

Ø  LLPs offer a simple structure and limited liability

Ø  LLPs have fewer compliance requirements, such as the need to perform audits unless the turnover exceeds 40 lakh rupees or the paid-up capital exceeds 25 lakh rupees.

Ø  There is no maximum limit on the number of partners that can form LLP, making it suitable for large-scale entities such as advisory firms, law firms and advertising agencies etc.

Ø  LLPs have low compliance costs, no requirement for paid-up capital, and are generally cheaper to maintain than a Private Limited Company.

One Person Company (OPC)

A One Person Company (OPC) is similar to a Private Limited Company, with the main difference being that there is only one member/director acting as the sole shareholder. There are several benefits to choosing a One Person Company (OPC), such as:

Ø  OPCs are suitable for sole entrepreneurs and sole proprietorship firms.

Ø  Liability is limited in an OPC.

Ø  OPC is suitable when there is no need to raise funds.

Ø  The process of filing income tax returns, annual filings, and statutory audits is simplified due to the presence of only one member.

Ø  This may be noted, OPCs with a paid-up capital of 50 lakh rupees or more and revenues of over 2 crore rupees must be converted into a Private Limited Company.

In conclusion, the choice of business structure will depend on the specific needs and circumstances of the business and its owners. Private limited companies, LLPs, and OPCs each offer different advantages and disadvantages, and it is important to carefully consider the pros and cons of each before making a decision.

References:

https://www.mondaq.com/india/shareholders/1058404/demystifying-the-difference-between-one-person-company-limited-liability-partnership-and-private-limited-company

https://www.cagmc.com/difference-between-llp-and-opc-and-private-limited-company/