Different business structures exist, and you can register your company or business in any one of them. You should know what each business structure has to offer entrepreneurs. We will talk about the differences between OPCs and LLPs in this article.
Many entrepreneurs are unclear about which business structure to use. Nevertheless, the available structures are so distinct that you shouldn’t be confused, specifically if you’re wondering whether to register an LLP (limited liability partnership) or an OPC (One Person Company). We’re going to explore why this is the case, and we’ll help you determine which is best for your business.
Who Is It For?
Entrepreneurs who want complete control of their businesses should consider an OPC. There can be no other shareholders or directors, which also means fewer board meetings and lower compliance. The OPCs cannot be very big since all of them are required by the Ministry of Corporate Affairs (MCA) to become LLPs or private limited companies once their earnings exceed ₹2 crores.
LLPs, on the other hand, are for businesses, small and large, that do not want to raise funds through venture capital or the general public. As a result, law firms, publicity agencies, and web development firms prefer it over other business structures.
Having a legal presence
One person can run an OPC, but they have their own legal identity. It’s probably because OPCs need a candidate partner, who’s powerless before the promoter dies or leaves, but takes over afterward. Due to the company’s independent identity, the directors have limited liability.
On the other hand, LLPs have their own existence, which also limits their liability.
Unlike a private limited company, there are no general advantages here, though industry-specific advantages may exist. Profits are taxed at a flat rate of 30%. DDT and MAT apply to dividend distributions.
The LLP does, however, have some advantages over all other business structures, especially if your revenue exceeds cross ₹1 crore. You do not have to pay wealth taxes. MAT and DDT are, however, applicable, and tax is payable at 30% on profits.
OPCs are required to maintain books of accounts in compliance with the statutory audit requirements and to file income tax returns and annual reports with the RoC.
For LLPs, accounting records must be maintained, but statutory audits are only required if turnover exceeds cross ₹40 lakhs and capital contribution exceeds ₹25 lakhs. LLPs must, however, file annual tax returns and income tax returns with the RoC.
Documents for Incorporation
It is vital that the Memorandum and Articles of Association are in order in order for a company to be incorporated.
In contrast, the documents that constitute a limited liability partnership are the core documents.
Account Maintenance and Audit
An OPC must perform auditing and account maintenance wherever applicable.
However, LLPs must have their accounts audited if the turnover exceeds ₹40 lakhs or if the contribution exceeds ₹25 lakhs.
OPC companies are permitted to deduct management remuneration as a deduction, and no limit is imposed.
In contrast, a licensed company’s management compensation that is in the possession of the company is allowed to be deducted as management remuneration in an LLP.
The Entity Advances Money to the Participants
Under Section 2(22 e) of the Income Tax Act, 1961, the OPC is taxable as a considered dividend when it meets the requirements.
It is not taxable in LLPs. With the exception of private companies that have been converted to LLPs, the first three years following conversion are taxable.
Capital or equity investment by foreign direct investment (FDI).
OPC members must be Indian citizens or Indian residents in order to qualify for incorporation as a one-person corporation, i.e., an OPC member, as the law does not permit FDI.
These sectors or activities are eligible for FDI in LLP. In the case where 100% FDI is allowed on an automatic route with no performance-based conditions for FDI.
Entry into such a route requires prior approval from the Government/FIPB.
Foreign direct investment is not allowed in the following sectors:
Sectors with an automatic route of less than 100% foreign direct investment;
(b) Authorized areas, such as agriculture/planting and print media, as well as sectors where foreign direct investment is prohibited.
Dividend distribution is taxed at the corporate level. Shareholders do not pay tax on dividend distributions.
LLPs do not pay taxes on income sharing. Profits in partners’ hands are exempt from tax.
Startup owners can greatly benefit from the information offered above about the differences. Business structures can be chosen based on the inputs offered above. Several legal laws and compliance requirements apply to the above business structures.