Whether to Form a Company or LLP?

How to select a suitable business vehicle?

Selecting a suitable business vehicle is the first step in setting-up a business.  A business vehicle can be a Company, a Limited Liability Partnership (LLP),  a partnership or even be a proprietorship. This decision is based on a number of factors including, perceived risks, nature of business and transaction, capital structure and investment nature.

The first and foremost intention of business or business man is to earn profit and create wealth. Usually tax incidence will became the major deciding factor. As far as indirect tax like GST is concerned, it is applicable on the product or services and is evenly applicable to all the business vehicles. Hence the major Tax components in decision making will be the Income Tax.

Taxation Law (Amendment) Ordinance, 2019 promulgated on 20/09/2019 brought 2 more tax slabs for Companies as follows:

• New Co. set up for manufacturing business to pay tax @15%., with Effective tax rate at 17.16%
• Existing Co. to pay tax @22%, with effective rate of tax at 25.168%.

The following table will provide you clear idea about the effect of various tax slabs on a profit of Rs.100/- earned by an entity under various structures:

Applicable till 31^st March 2020

Other factors to consider while taking a decision whether to form a company or an LLP or otherwise to do business under a partnership are the advantage of Limited Liability, Compliances with respect to the companies and LLP’s. As far as LLP’s are concerned the movement of funds in between the partners and LLP and amongst the LLP’s and outsiders are not regulated and hence let us say fund movement is easy.

Other major decision point is Remuneration to the Directors in a Company and remuneration to Partners in an LLP or firm.  As far as a Private Limited Company is concerned, Companies Act doesn’t placed any restriction in respect of managerial remuneration to Directors and in LLP’s, LLP Act, 2008 also not restricting the payment of remuneration to the partners.

From 1^st April 2020 onward the situation will change into:

Now DDT stands removed

*Tax on Dividend paid by shareholder will be 31.20%, 42.74% in case of Individuals and 25.17% in case of Domestic Companies and 10% in case of foreign treaty Companies.

Mandatory Appointment of Company Secretary:

By present amendment in rule, the limit of Rs.5 Crore of paid-up capital for mandatory appointment of Company Secretary is now stands increased to Rs.10 Crore. That means every company having a paid-up capital of Rs.10 Crores or more as on closure of the previous financial year should appoint a whole time company Secretary in its role. Ministry of Corporate affairs vide notification number G.S.R. 13(E) substituted Rule 8A of Companies (Appointment and Remuneration of Managerial personnel) Rules, 2014 to this effect.

The said notification also mandated that every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more should  undergo  Secretarial Audit by a Practicing Company Secretary. Rule 9 of the Companies (Appointment and Remuneration of Managerial personnel) Rules, 2014 is amended to this effect.

Filing of Demat position of the Companies with ROC:

Ministry of Corporate Affairs introduced Rule 9A to the Companies (Prospectus and Allotment of Securities) Rules 2014, with effect from 2nd October 2018, for mandating dematerialization of all the securities of unlisted public companies, and provided that no securities of an unlisted public companies can be issued or transferred unless the securities are therein dematerialized form. Further the said rule provides that the audit report under regulation 76 of the SEBI (Depositories and Participants) Regulations, 2018 shall be filed with the Registrar of Companies on a half yearly basis.
All the unlisted public Companies Shall submit the above said audit report on half yearly basis to the Registrar of Companies in Form PAS-6 with applicable fees. By Circular dated 28/11/2019, the Ministry had extended the date of filing of Form PAS-6 for the half year ended 30th September 2019 without additional fees, till 60 days from the date of deployment of the form in MCA website.