Introduction
In India's evolving business environment, the selection of the proper business organizational form is a fundamental decision for every entrepreneur. Out of several available business forms, the One Person Company (OPC) and the Limited Liability Partnership (LLP) are two commonly used models. Both are simple to do business with, but they significantly differ in issues like legal recognition, liability, compliance, and taxation. The article attempts to offer a comparative study of an OPC and an LLP, with legislative facts under Indian legislation, i.e., the Limited Liability Partnership Act, 2008, and the Income Tax Act, 1961.
Legal Status and Nature
One person owns and operates an OPC. It has no separate legal existence apart from the owner. The business and the proprietor are treated as one under the law. All the rights and liabilities, along with obligations incurred in the business, trace directly back to the individual proprietor. This is usually the best model for small businesses where control and ownership are intended to remain with one person.
An LLP, however, is a distinct legal entity created under the Limited Liability Partnership Act, 2008. Under Section 3(1) of the Act, a limited liability partnership formed and registered under this Act shall be a body corporate and distinct legal entity separate from its partners. The recognition under the statute thus allows an LLP to sue or be sued, hold property, and enter into a contract in its name. The corporate status of an LLP ensures continuity and business independence from partners as individuals.
Liability of Parties
The most notable difference lies in the nature of liability borne by the participants. In an OPC, the proprietor's liability is unlimited in nature. There is no distinction between business and personal property. The personal property of the proprietor may be used by the business creditors to secure their claims. No legal protection is given by this form against financial risks, which is a major drawback in case of business failure or litigation.
Conversely, an LLP offers the advantage of limited liability to the partners. As per Section 27 of the LLP Act, the partner shall not become personally liable for the liability of the LLP by reason of his being a partner. As per Section 28, the liability of the partner shall be limited to the extent of his contribution made to the LLP. Section 30 makes it clear that in case of fraud, then the partner would be personally liable, and the benefit of limited liability would not be extended.
Formation and Registration
An OPC does not have mandatory central registration. It can begin business after obtaining required local registrations and licenses, such as the Shops and Establishment registration or GST registration, depending upon the size and nature of the business. It has no document of incorporation or central organization issuing a certificate of existence. The business's existence is established by tax registrations, licenses, and ancillary sanctions.
For an LLP, there is mandatory registration under the jurisdiction of the Ministry of Corporate Affairs. Sections 11 to 13 of the LLP Act provide for incorporation through filing the documents of incorporation and executing an LLP agreement with the Registrar of Companies. An LLP becomes a legal entity only on the delivery of the Certificate of Incorporation. The LLP Agreement, as required under Section 23, controls the reciprocal rights and liabilities of partners and is a foundation document controlling internal management.
Governance and Management
The owner of an OPC has full control of operations and decision-making. The setup is highly centralized without the need for procedural formality or agreement in decision-making. The model is appropriate for companies that must make immediate one-way decisions and have minimal bureaucracy.
On the other hand, an LLP is contractually regulated by the LLP Agreement. Section 7(2) provides a minimum of two designated partners with compliance obligations. Internal management and profit-sharing ratios are governed by contract and mutual agreement with flexibility but with documentation and compliance with statute. Section 27 imposes fiduciary obligations on partners to act in good faith and in the best interest of an LLP.
Continuity and Succession
An OPC is not a perpetuity. The business ceases to exist upon the proprietor's death or legal incapacity unless otherwise transferred. There is no succession provision except by contractual transfer of assets and ownership.
An LLP, however, has the benefit of having perpetual succession under Section 4 of the LLP Act. The retirement, insolvency, or death of a partner does not lead to an LLP's dissolution. An LLP will continue to exist and can be reconstituted by admitting new partners or changing the LLP Agreement. This aspect involves business continuity, which is crucial for growth or raising investments.
Taxation
Where an OPC firm is involved, business income is treated as the personal income of the proprietor and taxed under the individual slab rates of the Income Tax Act, 1961. Where the business is exempted under Section 44AD presumptive taxation scheme, the proprietor is permitted to declare income on a presumption basis without keeping detailed books of accounts.
An LLP is treated as a partnership firm for tax purposes under the Income Tax Act. It is levied at a flat rate of 30% with surcharge and cess as it may be. Under Section 10(2A) of the Income Tax Act, the interest on profit received by the partners of an LLP is exempt in their hands and double taxation is avoided. LLPs are not exempted from presumptive taxation under Section 44AD and are required to maintain the books of account under Section 34 of the LLP Act and connected regulations.
Compliance Requirements
OPCs have little compliance needs. The owner will be required to file returns of income in his individual capacity and comply with applicable indirect tax legislation such as GST. No annual filing and audit by law, with the exception in case the turnover crosses specified thresholds.
LLPs mandatorily must comply with the LLP Act. They must file an Annual Return (Form 11) and a Statement of Account and Solvency (Form 8) every year under Section 34. The Institute of Chartered Accountants of India (ICAI) has also issued guidance notes on financial statements for the LLPs. LLPs with turnover over a certain limit must also get their accounts audited. Noncompliance is punishable under Section 74 of the LLP Act.
Conclusion
The decision between an OPC and an LLP has various determinants such as the nature of business, size of operations, risk bearing capacity, compliance capability, and long-term vision. Whereas an OPC provides ease and complete managerial control, it also subjects the owner to excessive personal risk. An LLP, with statutory status, limited liability, and perpetual succession, offers a more structured and secure framework for businesses aiming for growth, investment, and credibility.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
