3 Best Company Incorporation Types For Indian Startups: Private Limited Vs LLP Vs Sole Proprietorship

_{Detailed insights about which type of an organization registration should Startup Founders choose during incorporation of their company, and how using the FLIRTT model helps clear the doubts.}

You are a budding entrepreneur and you have finalized your disruptive idea. You have also probably done your market research and even planned a MVP. The idea is validated and you are ready to enter the market. What’s the next big step you take towards achieving your goal of turning the vision into actuality? That will obviously be to register your company/organization, to legitimate and finalize your startup incorporation. But the most crucial doubt in this matter is, which type of organization should you register to make it most advantageous towards your long term goals?

This is not a decision to be taken impulsively, which many founders make the mistake of choosing one without any proper planning or research. This is where most of the startups put themselves at risk.

Yes, you read it right – Risk.

Risk of Compliance: A risk that is a threat to an organization’s finances, organization, and reputation due to violations of rules, regulations, and laws governing its activity.

You as an entrepreneur might have usually come across these below doubts such as:

• “I should probably choose a Private Limited Company. What a solid trust it will create with my clients.”
• “I should open a LLP. I already have a partner and we don’t want too much compliance burden.”
• “I have a small business, and I am not looking for any short term significant growth. I also want to save on running costs, Sole Proprietorship is best for me.”

Now how do you go about making a good decision which is perfect for your business? Is there any formula or some tip which can help you decide once and for all which one is better for your startup?

The Answer is YES! 

What If I told you that the Answer lies in FLIRT.  Yes, you read it right FLIRT. I have personalized it further, naming it as the FLIRTT model.

How to use the FLIRTT Model during incorporation of your company. (PLC/LLP/Sole Proprietorship)

Let us first understand what the FLIRTT Model is, and how it helps us in arriving at a conclusion about what to choose.

• F Stands for “Funding“
• L Stands for “Liability“
• I Stands for “Investor“
• R Stands for “Revenue Sharing Model“
• T Stands for “Taxability and Related Compliance“
• T Stands for “Transferability“

As you have now got a basic understanding of what I’m talking about, let me break it down further one by one.

F for Funding :

Is your Startup looking for an external funding or seed capital or any government assistance? Are these the first thoughts that immediately strike in your mind?

If the answer is YES, then it is always recommended to go for a Private Limited registration without considering other options. The Sole Prop. or LLP both carry less weightage compared to Private Limited among the Angel Investors or Venture Capitalists.

Hence, you should always consider a Private Limited Option in case you require an external funding for your business. If you are happy being bootstrapped, you can go for Sole Proprietorship form.

L for Liability :

Do you know what the word Limited stands for in Private Limited and Limited Liability Partnership? It basically means that the liability of the shareholders are limited only up to their shareholding. 

What does that even mean?

Well, it means that if ever there is a suit filed against a Pvt. Ltd. or LLP, then no personal assets of the shareholders or partners shall be attached in this case. They are only liable up to the share they hold in the company/LLP.

Such is not the case in Sole Proprietorship. Your personal assets can also be attached in case there are any dues in repayments.

Thus, take a decision wisely according to your risk appetite.

I for Investor :

Entry or exit of the Investor is always a concern when you are running a business. 

Generally you tend to see more of the investors oriented businesses organizational status as “Private Limited Company“. Did you ever wonder why?

A Private Limited provides a more organized form of doing business, where it is easy for an Investor to hold any kind of ownership in the business along with an easy route of exit, whenever they decide to leave.

LLP being a partnership form does not accept the entry of an Investor through share holding/membership, so there is no point of going with that option.

Also a Sole Prop. is being run by a sole owner, and usually does not look for another Investor.

If you really need to, you can still opt for investments in both LLP and Sole Prop. through agreements.

R for Revenue Sharing Model:

Always make it a rule of thumb to open a LLP for your business if and when you are starting a business which works on a revenue sharing model (Revenue sharing model means a business model whereby you agree to share your revenue with the other parties), and make sure that you share the revenue with your partners.

As a second priority, you can also be a Private Limited Company.

T for Taxability & Related Compliance:

• Private Limited Companies are taxed at 25% Special rate.
• LLP’s are taxed at a Special rate of 30%.
• However, Sole Proprietorship businesses are taxed at a slab rates with highest slab of 30%.

Apart from these, the compliance is highest in case of incorporating and running a Private Limited Company. The compliance in LLP is lesser than the Private Limited company, but more than the Sole Proprietorship Business. Sole Proprietorship business also have the lowest amount of compliance and expenses among all three of them.

However, it should also be considered that Startups falling under Startup India Initiative, which are approved by DPIIT (Department for Promotion of Industry & Internal Trade) are usually provided with a good amount of tax exemptions. 

So, you should always take advice from your tax consultant whether you are in the applicability of a Startup Scheme or not.

T for Transferability :

One should always remember that a Sole Proprietorship Business is not transferable to anyone else. The Sole Proprietorship business runs up till the Sole Proprietor is alive and working, after which the existence of the sole proprietorship comes to an end. 

However, the transferability is actually flexible in the case of LLP and Private Limited companies. In these two options, one can always transfer their business with a proper guidance of an expert from one member/partner to another through filing of the required forms.

Hence, you should also keep in mind the succession planning or future prospects of your business and then make a decision of incorporating your startup.

By the application of FLIRTT Model in your startup scenario, you will have the best idea about the options you should be looking forward to during your business incorporation. Hope these above points help clear your doubts as a Desi Founder. Check out more insights about Startups here.

Jasmeet Singh
Chartered Accountant
_{Article edited by Desi Founder Team}