Setting up a business: LLP, partnership, OPC and startups

In short

This topic covers the legal forms an Indian business can take at birth — sole proprietorship, Hindu Undivided Family, registered or unregistered partnership firm under the Indian Partnership Act, 1932, limited liability partnership under the LLP Act, 2008, and the One Person Company (OPC) and other company forms under the Companies Act, 2013 — and the special regime for DPIIT-recognised startups. The choice decides liability, taxation, compliance cost, ability to raise outside capital and exit route, so it is the first advice a company secretary or consultant gives a promoter. It is examined directly in the ICSI Executive paper *Setting up of Business, Industrial and Labour Laws* and in Company Law & Practice, and appears in CA/CMA, LLB and commerce syllabi. Employers test it in secretarial, legal, CS-firm and startup-finance roles, where the practical work is entity selection, incorporation, partner/LLP agreements, conversions and Startup India recognition.

Explained

Choosing a form of business organisation

• Sole proprietorship: no separate law, no registration with MCA; proprietor and business are one person, so liability is unlimited and income is taxed in the proprietor's hands at slab rates. Registrations are only functional — Udyam (MSME), GST, Shop and Establishment, trade licence.
• HUF: created by Hindu law, not contract; karta manages, coparceners share. Used for family-held businesses; it cannot be "incorporated".
• Partnership firm: contract-based, governed by the Indian Partnership Act, 1932; unlimited liability, mutual agency.
• LLP: body corporate with perpetual succession and limited liability, but internal flexibility of a partnership (LLP Act, 2008).
• Company: private, public, OPC, Section 8 (not-for-profit), Nidhi, producer company — separate legal person, strongest form for equity funding, heaviest compliance.
• Deciding factors: number of promoters, need for limited liability, external funding plans (VCs invest almost only in private limited companies), tax outgo, annual compliance budget, and credibility with banks and customers.

Partnership firm — Indian Partnership Act, 1932

• Definition (s.4): the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The "true test" is mutual agency, not merely profit-sharing.
• Essentials: agreement between two or more competent persons, lawful business, profit-sharing, mutual agency. A partnership deed (written, stamped under the State Stamp Act, usually notarised) is not compulsory but is universal in practice.
• Maximum partners: 50, prescribed under the Companies Act, 2013 (s.464 and the Companies (Miscellaneous) Rules, 2014).
• Types: partnership at will (no fixed duration, dissolvable by notice) and particular partnership (for a venture or period). Partners: active, sleeping, nominal, partner in profits only, sub-partner; minor may be admitted only to the benefits of partnership (s.30) and must elect within six months of attaining majority.
• Liability: every partner is liable jointly and severally for all acts of the firm (s.25); unlimited, extending to personal assets. Implied authority of a partner binds the firm (s.19) except for restricted acts such as submitting a dispute to arbitration, opening a bank account in his own name, compromising a claim, transferring immovable property.
• Registration is optional — done with the Registrar of Firms of the State, in Form 1 with the prescribed fee; the firm gets no separate legal personality by registration.
• Effects of non-registration (s.69): an unregistered firm or its partners cannot sue the firm, co-partners or third parties to enforce a contractual right; third parties can still sue the firm. The firm may claim set-off only up to ₹100. Does not bar suits for dissolution, accounts of a dissolved firm or realisation of its property.
• Reconstitution and dissolution: admission, retirement, expulsion, insolvency or death change the firm; public notice is needed to end liability of an outgoing partner. Dissolution may be by agreement, compulsory (all partners insolvent/illegal business), on contingency, by notice in a partnership at will, or by court (s.44). Settlement of accounts follows s.48 — losses first out of profits, then capital, then by partners in profit-sharing ratio.

Limited Liability Partnership — LLP Act, 2008

• Nature: a body corporate separate from its partners, with perpetual succession; partners' liability is limited to their agreed contribution. The LLP's property is its own; partners act as agents of the LLP, not of one another, so there is no joint liability for another partner's independent acts — but a partner remains personally liable for his own wrongful act or fraud.
• Partners: minimum two partners and minimum two designated partners, of whom at least one must be a resident in India; individuals or bodies corporate may be partners, but a designated partner must be an individual holding a DPIN/DIN. No maximum number of partners.
• Incorporation route: reserve the name (RUN-LLP or within the incorporation form), then file FiLLiP with the Registrar of Companies along with subscribers' and designated partners' details, consent, address proof and the professional's declaration; the ROC issues the certificate of incorporation with an LLPIN and allots PAN/TAN. Up to two names may be proposed; a reserved LLP name is valid for three months.
• LLP agreement: governs mutual rights and duties; filed in Form 3 within 30 days of incorporation, stamped under the State Stamp Act. If there is no agreement, or it is silent, the default provisions of Schedule I apply (equal profit sharing, every partner may take part in management, no remuneration to a partner, unanimous consent to admit a partner, decisions by majority).
• Annual compliance (independent of profit): Form 11 annual return within 60 days of the close of the financial year (i.e. by 30 May) and Form 8 Statement of Account and Solvency within 30 days from the end of six months of the financial year (i.e. by 30 October). Both are mandatory even for a dormant LLP, and late filing attracts an additional fee of ₹100 per day per form.
• Audit: statutory audit by a chartered accountant only if turnover exceeds ₹40 lakh or contribution exceeds ₹25 lakh in a financial year.
• Small LLP (inserted by the LLP (Amendment) Act, 2021, effective 2022): contribution up to ₹25 lakh and turnover up to ₹40 lakh (limits may be raised by notification up to ₹5 crore and ₹50 crore) — lower fees and lower penalties. The 2021 amendment also decriminalised many defaults, converting them into civil penalties, and introduced special courts, adjudication of penalties and the concept of a start-up LLP.
• Limitations: cannot issue shares or raise equity from the public, so venture capital is practically unavailable; FDI is allowed up to 100% under the automatic route only in sectors where 100% FDI is permitted without performance-linked conditions; ESOP-type instruments are not available; many tenders and banks still prefer companies.

One Person Company — Companies Act, 2013

• Definition (s.2(62)): a company which has only one person as a member. It is a private company by law (s.3(1)(c)) and must use "(OPC)" in its name — for example "Vega Tools (OPC) Private Limited".
• Eligibility (Rule 3, Companies (Incorporation) Rules, 2014): only a natural person who is an Indian citizen may form an OPC or be its nominee; since 1 April 2021 both residents and non-resident Indians are eligible, and the residency test is 120 days in the previous financial year. A person can be a member of only one OPC and a nominee in only one; a minor can be neither member nor nominee.
• Nominee: compulsory, named in the memorandum with written consent in Form INC-3; the nominee becomes the member on the subscriber's death or incapacity. Change of nominee is intimated in INC-4.
• Directors: minimum one director (the member may be the sole director), maximum 15.
• Prohibited activities: an OPC cannot carry on non-banking financial investment activity, including investment in securities of any body corporate, and cannot be incorporated as or converted into a Section 8 company.
• Relaxations: no requirement to hold an annual general meeting; where there is only one director, a resolution entered and signed in the minutes book is deemed a board meeting; with two or more directors, at least one board meeting in each half of the year with a gap of 90 days. The cash flow statement may be omitted from the financial statements, and the annual return is signed by the company secretary or, where there is none, by the director. Annual accounts are filed in AOC-4 (OPC).
• Conversion: since 1 April 2021 the earlier mandatory conversion thresholds (paid-up capital ₹50 lakh, turnover ₹2 crore) and the two-year waiting period were removed — an OPC may convert voluntarily into a private or public company at any time by filing INC-6 after altering its memorandum and articles and meeting the minimum member/director requirements. A private company (other than a Section 8 company) may likewise convert into an OPC using INC-6.
• Compared with a sole proprietorship: an OPC gives limited liability, perpetual succession and a separate PAN, but costs more to run (ROC filings, audit of accounts regardless of turnover, DIR-3 KYC) and is taxed at corporate rates with a second layer of tax on dividends.

Startups — the DPIIT regime

• Definition (DPIIT notification, as amended): an entity is a startup if (a) it is a private limited company, a registered partnership firm or an LLP; (b) up to ten years have elapsed from the date of incorporation/registration; (c) turnover has not exceeded ₹100 crore in any financial year since incorporation; and (d) it is working towards innovation, development or improvement of products, processes or services, or has a scalable business model with high potential for employment generation or wealth creation. An entity formed by splitting up or reconstruction of an existing business is excluded.
• Recognition: apply online on the Startup India portal with the certificate of incorporation, a brief write-up on innovation and, where available, patents/awards/funding details; DPIIT issues a recognition certificate with a DIPP number. Recognition lapses on completing ten years or crossing the turnover limit.
• Income-tax benefits: a 100% deduction of profits for three consecutive years out of the first ten, available to a recognised startup incorporated as a company or LLP that obtains an Inter-Ministerial Board (IMB) certificate; the incorporation cut-off for this deduction has been extended to startups incorporated before 1 April 2030. (The provision was section 80-IAC of the Income-tax Act, 1961; after the Income-tax Act, 2025 came into force on 1 April 2026 the section numbering has changed, so quote it as the startup profit-linked deduction.) Relief on carry-forward of losses despite change in shareholding, and deferment of tax on ESOPs for IMB-certified startups, continue in the 2025 Act. The "angel tax" on share premium received from investors above fair market value was abolished for all investors with effect from assessment year 2025-26.
• Company-law and FEMA relaxations for recognised startups: sweat equity shares up to 50% of paid-up capital within ten years of incorporation; ESOPs to promoter-directors and to directors holding more than 10%; money received under a convertible note of ₹25 lakh or more in a single tranche, convertible or repayable within ten years, is not treated as a deposit; faster private-placement cycles; and a startup private company is treated as a small company for several reporting purposes.
• Other benefits: self-certification of compliance for a prescribed period under labour and environment laws through the Shram Suvidha portal (now to be read with the four Labour Codes, in force from 21 November 2025, which replaced the earlier Factories, Minimum Wages, Industrial Disputes and BOCW Acts — the self-certification facility is being realigned to the Codes); 80% rebate on patent fees and 50% on trade-mark fees with facilitator support; exemption from prior turnover and experience criteria and from earnest money deposit in central public procurement/GeM; fast-track insolvency resolution for small corporate persons; and funding through the Fund of Funds for Startups (SIDBI), the Startup India Seed Fund Scheme and the Credit Guarantee Scheme for Startups.
• Capital-raising ladder: founder/bootstrap → convertible note or angel round (Companies Act private placement, PAS-3) → SEBI-registered Category I AIF — Angel Fund / Venture Capital Fund → institutional rounds → listing, including SEBI's Innovators Growth Platform for technology-driven companies.

Conversions, registrations and closure

• Firm → LLP: all partners of the firm must become partners of the LLP; file Form 17 with FiLLiP; the LLP succeeds to all property, assets, liabilities and licences by operation of law.
• Private/unlisted public company → LLP: Form 18 with FiLLiP; permitted only if there is no security interest on assets and all shareholders become partners.
• LLP → company: by registration under section 366 of the Companies Act, 2013 (URC-1 route) after obtaining partners' consent and advertisement.
• Common post-incorporation registrations: PAN and TAN, bank account, GST registration (compulsory above aggregate turnover of ₹40 lakh for goods and ₹20 lakh for services, halved for special category states, and compulsory irrespective of turnover for inter-State supply, e-commerce operators and reverse-charge cases), Udyam/MSME, professional tax, Shop and Establishment, IEC for exports, and registration under the Labour Codes where applicable. GST rate slabs have been 5%, 18% and 40% since 22 September 2025, and the compensation cess ended on 1 February 2026.
• Closure: strike-off of a company under section 248 (Form STK-2); Form 24 for striking off a defunct LLP; dissolution of a firm by deed and intimation to the Registrar of Firms; insolvency and liquidation of companies and LLPs under the IBC, 2016, while its personal-insolvency provisions (Part III) for individuals and firms have been notified so far only for personal guarantors to corporate debtors.

Key points

• Mutual agency - the true test of partnership; profit-sharing alone does not create one.
• Section 69 - an unregistered firm cannot sue on a contract, but can be sued.
• Unlimited liability - partners are jointly and severally liable; LLP partners and company members are not.
• LLP is a body corporate - separate legal person with perpetual succession, unlike a partnership firm.
• Two designated partners - minimum for an LLP, at least one resident in India, each with a DPIN.
• FiLLiP - the LLP incorporation form; Form 3 files the LLP agreement within 30 days.
• Schedule I, LLP Act - default mutual rights where the LLP agreement is silent or absent.
• Form 11 by 30 May, Form 8 by 30 October - LLP annual filings; ₹100 per day additional fee, no cap.
• LLP audit trigger - turnover above ₹40 lakh or contribution above ₹25 lakh.
• Small LLP - contribution up to ₹25 lakh and turnover up to ₹40 lakh; reduced fees and penalties.
• OPC - one member, one compulsory nominee (INC-3), minimum one director, maximum 15.
• One-OPC rule - a natural person can be member of only one OPC and nominee in only one; minors barred.
• OPC bars - no NBFC/investment activity; cannot be or become a Section 8 company.
• OPC conversion - voluntary any time via INC-6; the ₹50 lakh/₹2 crore mandatory limits were removed in 2021.
• Startup definition - private company, registered firm or LLP; ten years; turnover never above ₹100 crore; innovation/scalability; not a split or reconstruction.
• IMB certificate - needed for the three-year 100% profit deduction, not for DPIIT recognition itself.
• Angel tax - abolished from assessment year 2025-26 for all classes of investors.
• Convertible note - minimum ₹25 lakh per tranche, convertible or repayable within ten years; not a deposit.

Formulas and examples

Example 1 — LLP versus private limited company, cash in the promoters' hands. Business profit before partner remuneration = ₹60,00,000; two working promoters; profit fully withdrawn.

• *LLP route:* remuneration limit = 90% × 6,00,000 = ₹5,40,000 (higher than ₹3,00,000) + 60% × 54,00,000 = ₹32,40,000, total ₹37,80,000. Pay ₹24,00,000 (within the limit, so fully deductible). Firm's taxable income = 60,00,000 − 24,00,000 = ₹36,00,000; tax at 31.2% = ₹11,23,200. Profit share left = ₹24,76,800, exempt in the partners' hands. Remuneration ₹24,00,000 taxed in partners' hands at an assumed marginal 31.2% = ₹7,48,800 (TDS at 10% applies on partner remuneration above ₹20,000 and is adjustable). Net in hand ≈ 24,76,800 + 16,51,200 = ₹41,28,000.
• *Company route:* tax at 25.168% on ₹60,00,000 = ₹15,10,080; profit after tax ₹44,89,920 distributed as dividend, taxed in shareholders' hands at an assumed 31.2% = ₹14,00,655. Net in hand ≈ ₹30,89,265.
• *Conclusion:* the LLP leaves about ₹10.4 lakh more because there is no second layer of tax on distribution — the classic reason consultants recommend an LLP for a profitable, non-fundraising business.

Example 2 — OPC versus sole proprietorship at ₹30,00,000 profit (new personal regime slabs).

• Proprietorship: 5% on 4–8 lakh = ₹20,000; 10% on 8–12 lakh = ₹40,000; 15% on 12–16 lakh = ₹60,000; 20% on 16–20 lakh = ₹80,000; 25% on 20–24 lakh = ₹1,00,000; 30% on 24–30 lakh = ₹1,80,000 → tax ₹4,80,000 + 4% cess = ₹4,99,200 (effective 16.64%).
• OPC: 25.168% of ₹30,00,000 = ₹7,55,040 at company level, before any dividend tax.
• The OPC costs about ₹2.56 lakh more in tax at this profit level, plus audit and ROC costs — it is chosen for limited liability and succession, not for tax.

Example 3 — LLP audit and small-LLP test. An LLP has partner contribution ₹20,00,000 and turnover ₹45,00,000. Turnover ₹45 lakh > ₹40 lakh → statutory audit required, and the LLP is not a small LLP (turnover limit breached), even though contribution is within ₹25 lakh.

Example 4 — late LLP filings. Form 11 filed 45 days late and Form 8 filed 60 days late: additional fee = (45 × 100) + (60 × 100) = 4,500 + 6,000 = ₹10,500, over and above normal fees (a small LLP pays a lower multiple of normal fees under the LLP Rules).

Example 5 — startup eligibility. A private company incorporated on 12 June 2019 recorded turnover of ₹120 crore in FY 2025-26 and applies for DPIIT recognition in November 2026. Ten years from incorporation runs to 11 June 2029, so the age test is met, but turnover has exceeded ₹100 crore in a financial year since incorporation — it is not eligible, and an existing recognition would stand withdrawn.

Where it is used

• CS and CA practice / LLP and company secretarial firms: entity-selection advisory, drafting partnership deeds and LLP agreements, FiLLiP and SPICe+ filings, Form 11/Form 8 compliance calendars, conversions and strike-offs.
• Startup legal and compliance teams: DPIIT recognition, IMB applications, convertible notes and SAFE-style instruments, ESOP pools, cap-table and FEMA/NDI reporting for foreign investors.
• Banking and NBFC credit teams: verifying constitution documents — partnership deed and firm registration certificate, LLP agreement and LLPIN, memorandum and nominee details for an OPC — before sanctioning working capital.
• Professional services and family businesses: CA, law, architecture, consulting and design practices largely use LLPs; traders and kirana businesses use proprietorships and firms.
• Incubators and government schemes: IIT/IIM and state incubators, Startup India Seed Fund Scheme and state startup policies (Kerala, Karnataka, Gujarat, Telangana T-Hub) require a recognised entity form.
• Public procurement: GeM and central tenders where recognised startups get turnover, experience and EMD relaxations.

Interview questions

• Q: What is the true test of a partnership? A: Mutual agency — whether each partner can bind the others while carrying on the business for all; profit-sharing is only evidence, not proof.
• Q: What happens if a partnership firm is not registered? A: Under section 69 the firm and its partners cannot sue to enforce contractual rights, though third parties can sue the firm; suits for dissolution or accounts of a dissolved firm are not barred.
• Q: How does an LLP differ from a partnership firm? A: An LLP is a body corporate with perpetual succession and limited liability, and a partner is an agent of the LLP alone, whereas a firm has no separate existence and partners are jointly and severally liable without limit.
• Q: Who must be a designated partner and what are his obligations? A: An individual with a DPIN; an LLP needs at least two, with at least one resident in India, and they are responsible for all filings and compliances and liable to penalties for default.
• Q: When does an LLP need a statutory audit? A: Only if turnover exceeds ₹40 lakh or contribution exceeds ₹25 lakh in a financial year.
• Q: What are the LLP annual filing dates? A: Form 11 within 60 days of the close of the financial year (30 May) and Form 8 within 30 days from the end of six months of the financial year (30 October); ₹100 per day applies on delay.
• Q: Why is a nominee mandatory for an OPC? A: Because there is only one member, a nominee named in the memorandum with consent in INC-3 ensures perpetual succession by becoming the member on the member's death or incapacity.
• Q: Can an OPC carry on investment activity or become a Section 8 company? A: No — Rule 3 prohibits non-banking financial investment activity, including investment in securities of a body corporate, and bars incorporation as or conversion into a Section 8 company.
• Q: Are the mandatory conversion limits for an OPC still in force? A: No — the paid-up capital ₹50 lakh and turnover ₹2 crore thresholds and the two-year waiting period were removed with effect from 1 April 2021; conversion is now voluntary through INC-6.
• Q: Why do venture capital investors insist on a private limited company rather than an LLP? A: Only a company can issue equity shares, preference shares, CCPS and ESOPs with a clean cap table and standard exit/anti-dilution rights; an LLP has only capital contribution and profit-sharing.
• Q: Does DPIIT recognition by itself give a tax holiday? A: No — the three-year 100% profit deduction requires a separate Inter-Ministerial Board certificate; recognition alone gives IPR, procurement, self-certification and scheme benefits.
• Q: What is a convertible note and why is it useful for startups? A: An instrument of at least ₹25 lakh in a single tranche, repayable or convertible into equity within ten years, which a recognised startup can issue without it being treated as a deposit — useful for early rounds where valuation is uncertain.

Common mistakes

• Saying registration of a partnership firm is compulsory, or that registration gives the firm separate legal personality — it is optional and does not.
• Writing that an unregistered firm cannot be sued; the bar in section 69 operates only against the firm and its partners suing.
• Confusing an LLP's "designated partners" with "partners", or thinking an LLP can have only a limited number of partners.
• Quoting the old OPC mandatory conversion thresholds, the 182-day residency test or the two-year lock-in — all changed in 2021.
• Treating a partner's profit share and remuneration alike for tax; the share is exempt, the remuneration is taxable and subject to the section 40(b)-type ceiling.
• Assuming a dormant LLP need not file; Form 11 and Form 8 are due even with nil business, and the ₹100 per day fee has no upper cap.
• Equating DPIIT recognition with a tax exemption, or forgetting the "not formed by splitting up or reconstruction" and ₹100 crore turnover conditions.

Related topics

Incorporation of companies on the MCA21 portal: SPICe+ and e-forms · Companies Act basics · Annual compliance calendar for companies: ROC filings, AOC-4 and MGT-7 · Directors and key managerial personnel · Insolvency and liquidation under the IBC, 2016 · Micro, small and medium enterprises and Udyam registration.