Firm, Company or LLP : Which one is better

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Firm, Company or LLP : Which one is better

Entrepreneurship and start up culture is getting all the more strong momentum with the fall in the job sector. Individuals with varied backgrounds are joining hands for the innovative ideas, new ventures, & novel concepts, as against individual based proprietary working earlier.

If two or more persons come together for a business, the important question arises is whether to form a partnership firm or a company or an LLP. It is tough to decide which one is ideal as every form of entity have some benefit as well as disadvantage attached to it. Which business structures will be better is a question which cannot be answered in isolation as it depends upon multiple factors like number of promoters, relationship, existing tax structure of promoters, risk & liability involved, capital / fund raising pattern, duration of business, vision, nature of business, future expectations, etc. As of now, company and Firm are the most commonly used business vehicles for carrying out the business. Let us first compare between the two – Firm Vs. Company.

Taxation:

Taxation is one of the key factors which affect the business decisions. The corporate tax rate has been reduced drastically to 22% as against 30% rate applicable to partnership firms & LLP. Partnership firm can get deduction on payment of salary / remuneration to the partners but there is a ceiling of maximum amount which is not so in the case of company. Any reasonable amount of salary paid by the company to its directors is eligible for deduction.

The partnership firm can pay interest to partners on their capital introduction which is not possible in the case of company. Company cannot pay any interest on its share capital. Of course, it can pay dividend to the shareholder but it is subject to Dividend Distribution Tax (DDT).

 Registration & Identity:

For formation of company, the name approval is required to be taken first. The name of the company is always is unique and not identical or similar to any other company which enables it in establishing a distinctive image. All this is not there in the case of partnership firm. Partnership firm is easy to float and operate as against company which requires little more cost, compliances and cautions.

Compliances:

There are multiple compliances which is required to be done in the case of companies like filing of annual return & annual accounts, holding of meeting and AGM, resolution for opening of bank accounts or issue of share capital & share certificate, etc. This is not so in the case of firm. Irrespective of the turnover, companies have to get its books of accounts audited.

Liability:

Companies have a separate & distinct legal entity. The biggest advantage of having a company is that the liability of the shareholders is limited as against partnership firm wherein the liability of the partner is unlimited.

Dissolution /Winding up:

The partnership firm is very easy to dissolve without much cost and efforts. Winding up of the companies is time consuming, costlier and long legal process as company is a separate legal entity & since law gave a birth to company, only legal process could kill it.

Capital induction and its withdrawal:

Partners have a flexibility of introducing & withdrawing the capital in/from the firm without any hindrances. This is not so in the case of companies.

Control & Management:

In the case of a company, the board of directors appointed by the shareholders can independently run the company whereas in the case of a firm, normally consent of all partners is required to carry out any important decisions.

About Limited Liability Partnership (LLP)

LLP is a business structure that combines the flexibility of a partnership and the advantages of a company with low compliance cost. In short, it is the middle way of firm and company with advantage of both the world. LLP is treated as a Partnership Firm for the purpose of Income Tax with no tax on withdrawals of its profit. Similarly, like in case of company, name of the LLP is unique & the liability of Partners is limited to the extent of their contribution in LLP.

Selecting the right business vehicle is as significant as selecting the right business. Above brief parameters & discussions can surely help the new entrepreneurs in making the right decisions for choosing the best suited business structure to achieve the desired business goals.

[Readers may forward their feedback & queries at nareshjakhotia@gmail.comOther articles & response to queries are available at www.theTAXtalk.com]

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