The initial task before commencing a company is to select the ideal type of company for the business. It is very important to decide on the type of firm or legal entity which you want such as LLP, OPC and Proprietorship etc. before commencing a business. The entrepreneurs should carefully examine and compare the types of firms and choose the ideal type of company which would fit their business. Let us understand the aspects of the different type of companies and list out the differences between them.
Meanings:
- Proprietorship:
This is the simplest type of business where one person operates the whole business. The sole trader owns, manages and controls all the business activities and is personally liable for all of the debts. There is no distinction between the owner and the business entity.
- Partnership:
A partnership is a form of business where two or more people with the same motive of making profits come together to run a business. The partners manage the business and contribute their capital, skills and resources and in return share the profits and losses.
- Limited Liability Partnership:
A LLP is a type of partnership in which all or some of the partners have limited liability i.e. each partner is not personally liable for some other partner’s misconduct or wrongdoings. A LLP is considered as a separate legal entity and has characteristics of both, a partnership as well as a company.
- Private Limited Company:
A private limited company is a company which is privately held for small businesses. It lies between a partnership and a public owned company. It offers limited liability and its liability is limited to the extent of shares held respectively by the members.
- One Person Company:
One person company is a company which has just one member who runs the company. It is incorporated as a private company but the only difference is that it has only one member in the whole company.
Now let us see the aspects that distinguish the above types of companies from each other.
REGISTRATION:
- Proprietorship:
There is no formal registration required for proprietorship.
- Partnership:
Under partnership, registration is optional. The partnership may or may not be registered. If registered, it has to be registered under the Partnership Act, 1932.
- LLP:
A LLP has to be registered with the Ministry of Corporate Affairs under the Limited Liability Partnership Act, 2008.
- Private Limited Company:
A Private Limited Company is to be registered with the Ministry of Corporate Affairs under the Companies Act, 2013.
- OPC:
An OPC is to be registered under the Companies Act, 2013 with the Ministry Of Affairs.
NAMING GUIDELINES OF THE ENTITY:
- Proprietorship:
It is up to the sole trader to choose any name for the proprietorship. He does not require the approval for using the name, however, trademarked names should be avoided.
- Partnership:
The partners can decide on any name for the partnership. There is no approval required for using the name though trademarked names should be avoided.
- LLP:
Under LLP, the name which they have chosen has to be approved by the Registrar of Company. All similar or identical names or names that are offensive or illegal must be avoided. The name of the company should include or end with the words LLP.
- Private Limited Company:
The name approval guideline for private limited is similar to that of LLP. All similar/identical names or illegal or offensive should be avoided. The name of the company should include or end with the words Private limited company.
- OPC:
The name approval guideline for OPC is the same as LLP and Private limited company. The name of the company should include or end with the words OPC.
LEGAL STATUS OF ENTITY:
- Proprietorship:
Proprietorship is not recognised as a separate legal entity. The sole trader is personally responsible for all the debts of the Proprietorship.
- Partnership:
Partnership is not distinguished as a separate legal entity and the partners are liable for the liabilities of the company.
- LLP:
LLP is considered as a separate legal entity under the LLP Act, 2008. The partners of LLP are not personally liable for the liabilities of the LLP.
- Private Limited Company:
Private limited company is a separate legal entity under the Companies Act, 2013 and the directors and shareholders are not personally liable for the liabilities of the Company.
- OPC:
OPC enjoys the status of a separate legal entity under the Companies Act, 2013 and the Director and the Nominee of the OPC are not personally liable for the liabilities of the OPC.
MINIMUM AND MAXIMUM NUMBER OF MEMBERS:
- Proprietorship:
Proprietorship can have only one member.
- Partnership:
The minimum number of members required are 2 for partnership and maximum number of members can be 20.
- LLP:
A minimum of 2 members are required to commence a LLP and there are no restraint on the member of members i.e. it can have unlimited partners.
- Private Limited Company:
The minimum requirement of members for Private limited company is 2 and it can have about 200 shareholders or members.
- OPC:
2 members are required to start an OPC. They are the Director and Nominee Director. OPC cannot have any members except the 2.
LIABILITY OF THE MEMBER(S):
- Proprietorship:
The proprietor has unlimited liability and is liable for all the liabilities of the proprietorship.
- Partnership:
Partners have unlimited liability and are responsible for all the liabilities of the firm.
- LLP:
The partners in LLP have limited liability and are liable only to the extent of their contribution in LLP.
- Private Limited Company:
The shareholders have limited liability and are liable only to the extent of their share capital.
- OPC:
The director and the nominee have limited liability and are liable only to the extent of their capital in the company.
- FOREIGN OWNERSHIP:
- Proprietorship:
Foreigners cannot start a proprietorship.
- Partnership:
Foreigners are not allowed to start a partnership.
- LLP:
The foreigners can only invest in a LLP with prior approval of RBI and FIPB.
- Private Limited Company:
Foreigners can only invest in a Private limited company under the Automatic Approval route in most sectors.
- OPC:
The only member of OPC i.e. the director and nominee director cannot be foreigners.
- TRANFERABILITY:
- Proprietorship:
The ownership cannot be transferred.
- Partnership:
The ownership of partnership is no transferable.
- LLP:
The ownership of a LLP can be transferred.
- Private Limited Company:
The ownership of a private limited company can be transferred by way of shares.
- OPC:
The ownership of an OPC can be transferred.
EXISTENCE OR SURVIVABILILITY:
Proprietorship:
The existence and continuation of the business depends solely on the proprietorship.
- Partnership:
The existence of a partnership firm depends on the partners. They can dissolve the partnership voluntarily or the firm can be dissolved in case of death of a partner.
- LLP:
The existence of LLP is not dependent on the partners. It can be dissolved voluntarily or by order of the Company law.
- Private Limited Company:
The existence of the company is not dependent on its directors or shareholders. It could be dissolved voluntarily or by Regulatory authorities.
- OPC:
Existence of an OPC is not dependent on the Director or the Nominee Director. It can be dissolved voluntarily or by Regulatory Authorities.
TAXATION:
- Proprietorship:
The tax in levied on the sole proprietor on the basis of his income.
- Partnership:
Partnership profits are taxed at 30% plus surcharge and cess as applicable.
- LLP:
LLP profits are taxed at 30% plus surcharge and cess as applicable.
- Private Limited Company:
Private Limited Company profits are taxed at 30% plus surcharge and cess as applicable.
- OPC:
OPC profits are taxed at 30% plus surcharge and cess as applicable.
ANNUAL FILINGS:
- Proprietorship:
There are no requirements for proprietorship to file for annual filing. Income tax must be filed on the basis of the income of the Proprietorship.
- Partnership:
There are no requirements to file annual filings. Only Income tax must be filed for the Partnership.
- LLP:
It is mandatory for LLP to file Annual Statement of Accounts and Solvency and Annual Return with the Registrar each year. Income tax must also be filed for the LLP.
- Private Limited Company:
A private limited company must file Annual Accounts and Annual returns with Registrar of companies each year. Income tax must also be filed for the company.
- OPC:
AN OPC must file Annual Accounts and Annual returns with Registrar of companies each year. Income tax must also be filed for the OPC.
