A classic dilemma which an entrepreneur faces today is whether to choose between a Pvt. Ltd. Company and an LLP. In addition to Partnerships and Proprietorships, these two have become popular options for people starting businesses. Since we get asked this question all the time, and have heard quite a few stories and helped entrepreneurs choose, we thought we would clear the air a little bit with a few case studies to help you choose between these options. Please note that none of these are real client case studies and no confidential information has been discussed.
Case Study 3: We all come from a family business background, and are looking to branch out and do something ourselves. We want to invest heavily but want to keep the senior management team very small. What do we do?
Interesting question; we would recommend in this case that you start with either an LLP or a Private Limited Company, preferably a Private Limited Company.
Reasons in favour of choosing an LLP: An LLP is relatively simpler in its structure than a Company. It does not seem like you are looking to create a giant corporation; you want to create a small and profitable entity, and an LLP will suit your needs.
The other minor advantages of an LLP are that it is relatively easier to form, and marginally cheaper too. But since you mention that your investment is going to be high, that should not be too much of a concern.
Reasons for choosing a Private Limited Company: From the facts mentioned by you, it looks like you want to enter into a space where there is huge potential for future profits; hence the initial investment is high.
In such a scenario, a private limited company has the following advantages. The legal rules and regulations governing a private limited company are much more defined and crystallized when compared to the rules surrounding a LLP. So when you want to bring an investor in, to help boost the Company’s financial strength, you will be able to do so with more clarity.
On the point of investors, they prefer investing in Private Limited Companies for the reason mentioned above and also because it is much easier to take a stake in a Pvt. Ltd. Company than it is in an LLP. For instance, Facebook (an extreme example, admittedly, but a good one nevertheless), can attract investment of hundreds of millions of dollars by selling less than 1 per cent of the Company. That kind of flexibility is not available in the case of a LLP.
The other advantage of a private limited company is that you can attract a great advisory board by making the advisors directors in the company (independent or otherwise). This way, you can get the benefit of experience and expertise, even if you do not have it yourself.
Case Study 4: I am a single trader looking to expand my business, and I believe that you can form a single person company in India. Is this true? How can I get started?
To begin with, this is not true. There is a proposal to introduce OPCs in the recent Company Bill, 2011 but the fate of the bill remains uncertain. In the meanwhile, as a proprietor, you can start either an LLP with your wife / mother or a Company, with your wife or mother as the other director.
In the next part, we will be looking at more examples and helping you decide which one to choose. We shall specifically be looking at e-commerce companies and what structure would suit them best, in different situations.
[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]