When entrepreneurs start a new business or a venture, they are often in a fix when it comes to choosing whether their business should be branded as a private limited company or a limited liability partnership. Both offer very similar features but are also vastly different.
Sole Proprietorship is the conventional form of business and is still one of the most common forms of business in India. The formation procedure is easy and the compliance requirements kept to minimum, making it an easy option. But start-ups fails to foresee the major disadvantages associated with it in their early days and repent later.
In common knowledge, Private Limited Company (PLC) is preferred over Limited Liability Partnership (LLP) for very strong reasons. We explore the whys in this article.
But before we delve into the advantages of Private Limited Company over Limited Liability Partnership, let us recap quickly what each of them is.
Funding: Attracting capital forms the basis of success of any business. Proprietorship, partnership firms, and Limited Liability Partnerships aren't empowered to issue shares and hence find it difficult to attract equity funding.
In India, Venture Capitalists and Angle Investors are not yet very comfortable with firms or start-ups operating under Limited Liability Partnership and this bias proves to be highly disadvantaging. Hence, PLC is a wiser option for start-ups.
Improved credibility of doing business: In case of a Private Limited company, the transparency is very much evident. Information such as name of the company, registered office address, date of incorporation, status of the company and many other information are listed in publicly available database.
People just have to look. And so, customers or vendors or investors alike are willing to place more credibility and more trust, something so important for mutual benefits through business.
Multiple opportunities: Successful people simply don't stop. Entrepreneurs have one successful venture and then go in search of repeating the success they have achieved. Now, businesses which are operated under proprietorship or partnership would have trouble in getting other opportunities under their umbrella.
This is because a proprietorship or partnership is not considered as a separate legal entity and is associated with the promoter. This is not the case with a private limited company, which allows you pursue other opportunities as it itself evolves over time.
Exit plan: When people start a business, all they are into is thinking about expanding their business. Thinking about an exit plan is deemed pessimistic, and for right reasons, and hence it is necessary to have that by default. Private limited companies offer that which can said to be the best exit strategy of all promoters.
The exit plan is something like this: only the shares of the company can be sold, or transferred, partially or wholly, to others without much fuss. The business goes on meanwhile, providing a readymade emergency plan whilst also not hindering with the business. This is where Private limited companies have tremendous edge over LLP.
Foreign Direct Investment: In this modern age where Foreign Direct Investment is an important wheel for development, private limited companies allow that to be done without any tacky government approvals.
Any foreign person or entity can thus invest, making the business success prone. On the other hand, proprietorship, partnership and limited liability partnerships need you take government permissions before an FDI can be done. So, if you plan to take your business international now or later, always go for a public limited company over LLP.
So, all in all, private limited companies allow easier investment opportunities, inspire trust and credibility through their open nature of business, sustain the business or have the potential to be sustained through Foreign Direct Investment, and also have a tailor-made oven-ready exit plan should your business not work out.
All these make a private limited company widely favourites over LLP and when you make a choice, choose wisely, keeping the above pointers in mind.
Of course, there is a way to change from LLP to a private limited company, but why not be careful from the start. Does not hurt to be wise.