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A Project Report On

Suppose you are going to start a venture then what form of business from the given list would you like to choose and why? Proprietorship, Partnership, Company or LLP. Submitted by :
Group 4 1) Debasish Khargharia (015/2) 2) Kumar Gautam (026/2) 3) Piyush Saraogi (035/2) 4) Satyarth Jaiswal (046/2) 5) Vaibhav Bansal (056/2)

CONTENTS
Serial No. 2 PARTICULARS OF THE PROJECT Introduction Page No. 3

Choosing the Business Form For the Venture

A Table Comparing Partnership, LLP & Company

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Major Advantages and Disadvantages of an LLP 7 as compared to Partnership Major Advantages and Disadvantages of an LLP 8 as compared to a Company Conclusion 9

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References

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INTRODUCTION
There are 4 major types of business entities in India. They are : 1) Sole Proprietorship : A sole proprietorship, also known as a sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor's. This means that the owner has no less liability than if they were acting as an individual instead of as a business. It is a "sole" proprietorship in contrast with partnerships. 2) Partnership : "Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

3) Limited Liability Partnership (LLP) : A corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership. 4) Company : i) Private Limited Company : A private limited company is a voluntary association of not less than two and not more than fifty members, whose liability is limited, the transfer of whose shares is limited to its members and who is not allowed to invite the general public to subscribe to its shares or debentures. ii) Public Limited Company : A Public Limited Company is a Company limited by shares in which there is no restriction on the maximum number of shareholders, transfer of shares and acceptance of public deposits. The liability of each shareholder is limited to the extent of the unpaid amount of the shares face value and the premium thereon in respect of the shares held by him.

Choosing the Business Form for the Venture

In case, the venture is a one-man initiative, then partnership, company & LLP are effectively ruled out as their formation requires a minimum of 2 people. Here, an important feature of sole proprietorship must be brought to light. It is: The principles of taxation of income for a sole proprietor is same as that for any ordinary individual and they are-: Income Tax Rates/Slabs Rate (%) for men:

Up to 1, 80,000 = NIL , 1,80,001 5,00,000 = 10%, 5,00,001 8,00,000 = 20%, 8,00,001 upwards = 30%,

For LLP, Companies and Partnership firms, income is taxed at a flat rate of 30% for Indian companies, with a 5% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). So, if the initial profits are not expected to go beyond Rs.8 lakhs, then taxation-wise, it is logical to go for sole-proprietorship of business and not to enter into partnership with any other individual just for the sake of forming an LLP. In case, the number of people involved in the venture are two or more, then there are three business forms to choose from : Partnership, Company or LLP. There are various parameters that need to be considered before zeroing onto a business form. We did a comparison of LLP, Partnership Firm and Company on various parameters and after the analysis of the comparison, we came to conclusion that among the three business forms, for a start-up of two or more people, Limited Liablility Partnership is most suitable as it gives the benefits of limited liability of a company and the flexibility of a partnership. The analysis that we did is covered in the subsequent pages.

Comparison of LLP with Partnership Firm and Company Parameter

Registration Requirements

Partnership
Optional under Indian Partnership Act 1932. No. Partners are representatives of firm Depends upon the duration as stipulated in the partnership deed or will of partners

Company
Mandatory. Under the Companies Act, 1956 Yes. It is a separate entity distinct from owners or directors. It has perpetual succession till it is wound up through legal process by owners or creditors. Memorandum and Article of Association A company is a legal entity which can sue and be sued in its own name Allowed 2 to 50 members for Private Company and 7 to unlimited for Public Company. In the name of the Company only Governed by Articles of Association read with resolution passed by

LLP
Mandatory. Under the LLP Act, 2008 Yes. It is a separate entity distinct from Partners / Designated Partners. It has perpetual succession till it is wound up through legal process by partners or creditors. LLP Agreement / Schedule I to LLP Act in the absence of LLP Agreement LLP is a legal entity and can sue and be sued in its own name Allowed Minimum 2 partners; maximum is unlimited. In the name of LLP only

Separate Legal Identity

Duration

Basic Legal Document

Partnership Deed

Legal Action Foreign Investments Minimum and Maximum Number of Owners / Partners Ownership of Assets

Only registered partnership firm can sue third party Not allowed from Foreign Nationals 2 to 20 Jointly by all partners with respect to the assets of partnership firm Governed by Partnership Deed

Responsibilities and Authorities

Governed by LLP Agreement

shareholders or directors Unlimited and hence all Partners are severally and jointly liable including claims on personal assets of partners 30% flat As per Deed or mutual consent, insolvency, certain contingencies and by court order. Possible to convert to Company or LLP Limited to the extent of amount unpaid on the shares held by the respective shareholders 30% flat Limited, to the extent of contribution of Partners stipulated in the LLP agreement. 30% flat

Liability

Taxation on profits

Winding up

Voluntary or by order of Court Possible to convert to LLP

Voluntary or by order of Court Possible to convert into Company

Conversion

Upon analysing the above comparison among Partnership, Company and LLP on various parameters, we figured out both the advantages and disadvantages of LLP as compared to Partnership and as compared to a Company and have covered them in the subsequent pages.

Major Advantages of LLP over Partnership Firms 1) Limited Liability - Under traditional partnership firm, every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is a partner. Under LLP structure, liability of the partner is limited to his agreed contribution. 2) Partners are not agents of other Partners - No partner is liable on account of the independent or un-authorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partners wrongful acts or misconduct. 3) Perpetual Succession - It has perpetual succession till it is wound up through legal process by owners or creditors. 4) Separate Legal Identity - An LLP is a legal entity which can sue and be sued in its own name. 5) Raising Money: Financing a small business like sole proprietorship or partnership can be difficult at times. The LLP being a regulated entity like a company can attract finance from PE Investors, financial institutions etc 6) Popular form of business - Though the concept of Limited Liability Partnership has been recently introduced in India but it is very known concept in other countries of the world especially in service sector, realty sector, etc.

Major Disadvantages of LLP As Compared To Partnership Firms LLP doesnt have any notable disadvantage as compared to partnership firms.

Major Advantages of LLP over Private Limited and Public Limited Companies 1) Giving Loans : LLP can give loan to its partners or its related entities, unlike a company where deemed dividend concept is a known problem. 2) Dividend Distribution Tax : Unlike a company where Profits can be repatriated back only if the company pays dividend distribution tax of 15% ,an LLP need not pay this tax. 3) Flexible to Manage : LLP provides more flexibility as compared to a company. LLP Act 2008 gives LLP the liberty to manage its own affairs. Partner can decide the way they want to run and manage the LLP via LLP Agreement. The LLP Act does not regulate the LLP to a large extent. Rather, it gives the partners the liberty to manage it as per their will. 4) Less Compliances : LLP has less compliance requirements as compared to a company, particularly public limited company. 5) No Minimum Capital Requirement : Unlike in the case of a company (both private and public limited companies), there is no requirement for minimum capital contribution for a LLP. 6) Avoidance of Double Taxation : Profits from corporations are subjected to "double taxation," whereby the income from the corporation is taxed, as are the profits distributed to shareholders, while LLPs are not subject to this double taxation. Major Disadvantages of LLP As Compared To Private Limited and Public Limited Companies 1) Loan Creditworthiness : The perceived status of an LLP is not as high as that of a company and the general perception with banks as of today seems that they prefer companies over LLP to give loans. 2) Requirement of One Resident Indian : At least one resident Indian is required to manage its affairs in India, unlike a private limited company where no Indian resident is required 3) Cannot Raise Funds from the Public : LLP cannot raise funds from public, but neither can private limited company. Either of them can raise funds from the public by converting themselves into a public limited company 4) A Partner Can Bind LLP : Every partner of LLP is an agent of LLP but not of other partners. Thus, he can bind LLP by his acts, though not the other partners.

Conclusion
Thus, we see that the advantages of LLP clearly outweigh its disadvantages as compared to both of Partnership and Company. It provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. The LLP form would enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. Owing to flexibility in its structure and operation, the LLP would also be a suitable vehicle for small enterprises and for investment by venture capital. And since it permits multi-disciplinary professionals from two or more fields to come together and form an LLP, people can reap the advantages of providing a complete package to the corporate houses as well as other clients and reap the benefits of outsourcing in the present business framework. Moreover, as the LLP grows in size and value, it can issue an IPO and hence convert itself into a Public Limited Company.

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References
1) http://www.llp.gov.in 2) http://www.mca.gov.in 3) http://www.incometaxindia.gov.in/