Comparison Between Business Forms

Introduction

Choosing a right business structure is a crucial step as it has a large impact on your whole business setup. There are a variety of business forms such as Private Limited Company, Limited Liability Partnership, Partnership, Sole Proprietorship & One Person Company. One can go for any business form for their business but it is advised to understand their various features in detail. In this blog, you’ll get a complete comparison between different Business Forms. 

Business Forms Comparison 

Different Business forms have unique features, advantages & disadvantages as well. Following is the detailed comparison between different business forms on the basis of:

• Governing Act: 

1. Limited Liability Partnerships are required to get themselves registered under the Limited Liability Partnership Act, 2008 with ROC on the MCA portal. 
2. Private Limited Companies must register themselves under the Companies Act, 2013 with ROC on the MCA portal.
3. Partnership firms are governed under the Indian Partnership Act of 1932. 
4. Sole Proprietorships need to register themselves under the Shop & Establishment Act of the state in which business is located. 
5. OPCs can register themselves under section 2(62) of the Companies Act, 2013.

• Management: 

1. LLPs are managed by the designated partners of the company. All the required decisions must be made by the consent of all the partners. 
2. In private limited companies, the decisions are made by the directors.
3. In Partnerships, partners are responsible to manage the business operation by themselves
4. In Sole Proprietorship, the proprietor takes all decisions solemnly. 
5. Day to day decisions taken by the owner of the company. 

• Audit Requirement: 

1. In LLP, audit is only mandatory if its annual turnover exceeds Rs. 40 lakhs or its contribution exceeds Rs. 25 lakhs.
2. In a Private Limited Company, a tax audit is mandatory. 
3. In Partnership, if the turnover exceeds ₹1 crore then the audit is mandatory. 
4. In Sole Proprietorship, if the turnover exceeds ₹1 crore then the audit is mandatory.
5. In an OPC, a tax audit is mandatory.

• Taxation: 

1. For LLP, the tax rate is fixed. LLP should pay 30% tax on its total income. 
2. Private Limited Company have to pay 25% tax if they earn less than ₹400 crores but if they earn more than that then they have to pay a total 30% of the income.
3. For Partnership firms, the tax rate is fixed. Partnership should pay 30% tax on its total income.
4. For Sole Proprietorship, 5% to 30% tax is applied depending on Income. 
5. For OPC, it is taxed as a Private Limited Company which is taxed at 30%

• Limited Liability Protection: 

1. In Limited Liability Partnership, partners have limited liability.
2. In Private Limited Company, limited liability is available 
3. In Partnership, partners do not have limited liability. 
4. In Sole Proprietorship, the proprietor is responsible for all liability. 
5. In OPC, it offers limited liability protection to its owner.

• Transfer of Ownership: 

1. In Limited Liability Partnership, ownership can be transferred on mutual agreement of all the partners. 
2. In Private Limited Company, Ownership is based on shares. 
3. In Partnership, ownership can be transferred through the consent of all partners. Also, new partners can join the firm based on the mutual agreement. 
4. For Sole Proprietorship transfer of ownership is not allowed. Only the Proprietor himself/herself can continue the firm.
5. In OPC, for transferring the ownership a nominee must be appointed. 

• Dissolution: 

1. LLPs can be dissolved voluntarily or by the National Company Law Tribunal (NCLT) order.
2. It is a complex process to dissolve the private limited company as it includes a time taking process. 
3. An agreement between partners, mutual consent of partners, court order, insolvency, etc., can dissolve a partnership firm.
4. Sole Proprietorship can be dissolved depending on the proprietor’s decision. 
5. Dissolution follows company winding up procedure for its dissolution. 

Note:  Also, there are some other differences than these major points, one can refer to the following image for better understanding.

Conclusion 

Different Business forms have different features and identities. It is recommended to understand the major difference between them before starting your business. Each Business is recommended for different purposes such as a Private Limited Company is suggested for Startups & Growing Business while an LLP should be formed as a Partnership firm with legal shield. A Sole Proprietor firm & OPC is managed by a single person while there can be multiple partners in LLP & Partnership firms. The decision of selecting the right business form totally depends on your Business aim & plan. 

Frequently Asked Questions (FAQs) 

1) Is Audit mandatory for Private Limited Company & LLP? 

Yes, for Private Limited Company Audit is mandatory while for LLP it is only required if the turnover exceeds ₹40 lakh and the capital contribution ₹25 lakh.

2) Can LLP have more partners than Partnership? 

Yes, an LLP can have unlimited partners while there can be a maximum of 100 partners in a Partnership. 

3) What happens to business if the partner leaves in a Partnership?

If a partner leaves a partnership, the organization can be continued with another partner or it may dissolve depending on the Partnership Agreement. 

4) Which structure is better for raising investment: LLP or OPC?

 OPC are considered more suitable for raising investment as they follow private limited company structure and can be converted in near future while LLP can’t attract investors for equity shares to raise investment like OPCs.

5) Can a Sole proprietorship continue if the owner dies? 

No, if the owner of sole proprietorship dies, it will come to an end while the company can continue if the owner dies.