You have a solid idea or product in hand .Your friends and your team strongly believes that the product or your idea will work out. This is probably the time you look out for registering a firm for marketing, hiring, branding and funding of your venture. And in most cases the first option coming to your mind will be starting a private limited company.
The new simplified process and affordable registration cost makes private limited a good option to start with. It will give you the reputation of directorship and flexibility of share holding. But there is a point of concern; the recurring cost of successfully running a private limited. In Company form of business you have to take care of maintenance of minutes and registers, Meeting should be conducted on regular intervals and of course Auditing is a Mandatory requirement. You may need to spend money for routine filings with Registrar of Companies as well. At this point you start looking at other feasible options for sure
You have the option of Limited Liability Partnership (LLP) to take a shortcut from some of the limitations of a private limited. LLP is a new but fast growing concept in India which has almost all the features of private limited with some exceptions. It has the features of limited liability (the liability of promoters is limited to the extent of their contribution in LLP), Independent existence, continuous succession (the changes in ownership will not affect the existence of LLP), Exception with minimum capital requirement and liberty to associate with any number of partners. The most attractive feature with LLP is waiver of Yearly Auditing for LLPs with less than 40 Lakhs Turnover. But this Waiver is not available for LLPs with capital above 25 Lakhs.
There are a few limitations as well; the flexibility of share holding and share transfer which we have with companies is not there in LLP. Also there are certain limitations for Foreign Direct Investment in LLP. It is also eminent that most of the Venture Capital/Seed funding agencies prefer Private Limited to LLP and If you are trying for obtaining some contracts from government or semi government agencies or trying for vendor registration with other corporates, you should ensure before proceeding that their vendor registration norms accepts LLPs.
The concept of dividend is also not there in LLPs and hence profit after tax (Firm Tax is applicable @ 30.90% of net profits of the LLP) will be credited to partners' account which will not be taxable in the hands of partners.
It is recommended to go with LLP, if you are keen on reducing the running cost of your startup in initial phase. You have the option to convert LLP into Private Limited or Public Limited Company on a later stage, if your startup is performing good (Though it will cost you slightly higher at that point).