The number of startups in India has increased steadily since the COVID-19 pandemic. This is a positive trend, but it raises two important questions: is it necessary to register a startup, and if so, should it be incorporated as a private limited company or a limited liability partnership (LLP)?
Many new entrepreneurs see startup registration as an unnecessary burden that invites endless legal compliances. Additionally, startups often don’t have a lot of money, so they may hesitate to spend it on registration. Furthermore, if a startup fails and the owner wants to shut it down, the process can be complicated and more cumbersome than it would be if the business had been registered.
Even though entrepreneurs may be hesitant to register their startups, there are several benefits to doing so
Startup Company Registration (PVT LTD or LLP) in India: Is It Necessary To Give the Startup a Legal Personality And which is Better
A business is most trusted and credible when it is incorporated as a legal entity, such as a private limited company. Additionally, trademarking the company name gives the business a unique identity in the market.
Startup Company Registration (PVT LTD or LLP) in India Which is Better Bank Account Opening
A business must be legally registered to open a current account at an authorized bank, which is required for conducting essential financial transactions.
Entering Contractual Obligations
When a startup enters into contracts with customers or other businesses, it is best for the startup to be a separate legal entity. This will shield the startup’s members from personal liability.
To Acquire a Proper Channel for Payment Gateways
Once a business is established and financial transactions begin between parties, it becomes necessary to accept online payments through various payment gateways, such as PayU, CCAvenue and Razorpay, which authorize credit and debit card transactions. To collaborate with payment gateways, a business must be validly registered.
Funds Availability
Registered businesses have easier access to funding than unregistered businesses. For example, private limited companies can raise funds from venture capitalists.
Choosing the Right Business Form for the Start-Up
Once a business owner decides to register their startup, they face a choice between a private limited company and a limited liability partnership (LLP). Why are other entities, such as sole proprietorships and one-person companies (OPCs), excluded from this choice?
Startups can also be registered as sole proprietorships or one-person companies (OPCs), but these entities are not recommended for startups because they are not conducive to attracting investment. Additionally, in a sole proprietorship, the owner has unlimited personal liability. This leaves two viable options for startups: a private limited company or a limited liability partnership (LLP).
Incorporating a Startup As an LLP
LLPs are the most viable corporate entity for startups because they combine the limited liability of private limited companies with the flexibility of partnerships. LLPs have perpetual existence, can enter into contracts on their own, and can purchase and hold property.
While LLPs have fewer compliance requirements than private limited companies, they also have some disadvantages. For example, LLPs must file income tax returns annually, regardless of whether or not they are active. Additionally, LLPs must have at least two partners, which may be a challenge for solo entrepreneurs.
Incorporating a Startup As a Private Limited Company:
Private limited companies are a popular choice for businesses because they make it easy to raise funds and sell or transfer the company if needed. There is no minimum capital requirement for private limited companies, and they can utilize foreign direct investment (FDI). Additionally, private limited companies are the most credible corporate entities in the eyes of customers.
However, private limited companies also have some drawbacks. They are subject to a number of compliances during and after registration, such as filing annual returns and maintaining statutory registers. They must also comply with tax and labor laws. This can be overwhelming for a startup.
Given the pros and cons of both private limited companies and limited liability partnerships (LLPs), it is difficult to say definitively which one is better for incorporating a startup in India. The best choice depends on the specific needs and priorities of the business.
Private limited companies offer a wider scope for raising investment, while LLPs offer more control and flexibility. Therefore, entrepreneurs should carefully weigh the pros and cons of each entity before deciding which one to incorporate. This will save them the time and cost of converting from one entity to another later on.
