Traditional businessmen functioning as sole proprietors prefer one-person companies (OPCs), while OPCs enable a sole proprietor to commercialize his business, it isn’t an ideal entity for startups.
OPCs are not advised for startups because:
- Venture capitalists (VCs) avoid OPCs as the shares can be held by one person only and equity investment by VCs isn’t feasible.
- Also, once turnover of an OPC exceeds Rs 2 crores or share capital exceeds Rs 50 lakhs the OPC is required to convert into a private company mandatory.
Limited liability partnership (LLP) has been added in the definition of the term `startup’. LLPs are a hybrid model of a company and a partnership which provides limited liability to the partners and offers a corporate structure. LLP model is new concept, various businesses have adopted it, with professional services companies largely adopting the LLP structure.
However, for startups, especially those looking at VC funding, an LLP structure in not ideal in the long run because
- an LLC is not able to issue stock options to its employees with the same tax advantages as a private company
- to become a shareholder in LLP, one must become a partner and with it comes responsibilities towards the entity and VC do not like this, and therefore, they prefer to invest in a private limited company.
Data – MCA report suggest the same
According to the latest annual report released by the Ministry of Corporate Affairs (MCA) the number of new private companies have increased up by 36% in 2015-16.It is expected that the current year will see a further increase in the number of registrations of private companies as a result of ‘Startup India’ program.
Pvt Limited company registration – why it is suitable?
We advise a startup to incorporate a Private Limited company if it seeks VC‘s funding or angel investment in the future. Private Limited company registration is simple and easy with LegalRaasta online Private Limited company registration. We have helped over 450 clients to incorporate a Private Limited company.
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