In the month of Indian Independence, as we stand tall in the 75th year of freedom, it is a good time to commemorate how Indian startups have helped shape the socio-economic prosperity of the nation and have represented the image of modern India in the global markets.
With revolutionary technology and competitive business dynamics, Indian startups have created millions of jobs in innovative business environments, to a greater extent than large enterprises.
So, if you are about to incorporate your startup, you should be aware that you are very important to the country, and it is therefore critical that you find good ground in your initiative.
The first step of building your startup is to choose the type of incorporation, and MPVD & Associates generally recommend a Limited Liability Partnership in India as the most suitable option to be run by partners with nominal regulatory compliance.
This article will steer clear of some of the crucial considerations for startup owners when deciding the type of company formation in India and whether to choose the LLP structure.
Getting Started With Your Startup And Types of Company Registrations in India
The essential components that define a startup are that, first of all, it has to be an incorporated or registered company; and secondly, it has to represent a unique idea through goods, services, or working methods that aren’t available elsewhere, at least not in the same way.
There are many different sorts of startups in India, and according to the Companies Act of 2013 in India, there are seven options for entities or company structures to facilitate their systematic operations, there are seven different types of company formation. that are listed below:
- Sole Proprietorship: One person manages the business as a single entity, and as proprietor, they are accountable for all revenues and expenditures. Grocery stores, salons, boutiques, small dealers, and vendors are just a few examples of local businesses that can form sole proprietorships.
- One Person Company (OPC): OPCs are a new option introduced by the Indian government that allows one person to run a business limited by shares. Despite not having partners, which is mandatory for other private limited corporations, It is distinct from a sole proprietorship, where the owner and the business are the same.
- Limited Liability Partnership (LLP): LLP is a corporate business structure that combines a partnership’s flexibility with a company’s restricted liability. Any changes in partners won’t impact the company’s operations. It has the authority to make agreements and own property in its name. The LLP is a distinct legal person, liable to the full extent of its assets, but the partners’ responsibility is only as great as their agreed-upon investment in the LLP. This is why LLPs are the ideal vehicle for a startup or small-to-medium firm to operate more flexibly.
- Private Limited Company: A private limited company, or Pvt.Ltd has several requirements for startups, including a minimum reliable capital fee of INR 1,00,000, a registered office address in India, and at least two directors including at least 1 director who must be an Indian national. In private limited companies, the shareholders can own the whole number of shares equal to their net capital and share the liabilities equally to protect their assets. The shares must be private and cannot be traded or transferred publicly. In a Pvt. Ltd. firm, there can be up to 15 directors or stakeholders, and multiple directors can be foreign or non-resident Indians.
Other than the above four, there are other types of company formation statuses under section 8, including public limited companies, partnership firms, and non-profit organisations. The LLPs cater to the broad spectrum of startups that give them a standard foothold in the competitive market.
What Makes a Limited Liability Partnership a Better Option for Startups in India
The fact that LLPs exist as independent legal entities from their owners is one of their strongest features. The company, and not the owners or partners, is solely responsible for all debts and legal fees incurred by the LLP. LLP partners often have little personal liability for one another’s failures and may only risk the capital and assets that they have contributed to the firm. LLPs, therefore, provide startup owners with the crucial balancing act of managerial control with minimal liability exposure.
LLPs Are Required to File Income Tax Returns and MCA Annual Returns.
Even though there is no activity or operations, LLPs are nevertheless required to file an annual
MCA form and an income tax return every year. A hefty charge could be imposed on the business if it is unable to pay the taxes.
To be a limited liability partnership company, there must be two partners. If one of the partners decides to leave the business, the LLP may need to be dissolved. And before transferring ownership rights, a partner must get approval from the other partners. It is vital to remember that FDI in LLP is only permissible with prior authorisation from the Reserve Bank of India (RBI).
If you are ready to incorporate your startup then seek personalized expert advice from MPVD & Associates, a CA Firm in Kolkata where we help you get complete solutions for company formation and tax registration in Kolkata and all other parts of India. We also work with NRIs looking to set up a company in India with Indian partners.