Author name: Rapid Consulting

One of the most important factors while starting a new business is choosing the most suitable legal structure. In India, Limited Liability Partnerships (LLP) and Private Limited Company (Pvt Ltd) are the most favoured options. This guide provides a thorough comparison of these two business models and delves into their characteristics, benefits, drawbacks and their appropriateness towards different businesses. What is Limited Liability Partnership (LLP)? The Limited Liability Partnership (LLP) is a unique form of business that incorporates characteristics of both partnerships and corporations. For instance, it has the best characteristics of a partnership as well as limited liability of a corporation. In India, The Limited Liability Partnerships are formed and regulated under the Limited Liability Partnership Act, 2008. This form is often used by professionals like lawyers, accountants, and consultants in practice. An LLP shields the partners from exposure of their personal property in satisfying the business debts and liabilities. In a general partnership, any one partner has to bear the brunt of the other partner’s breach in such circumstances, but in an LLP, it is not the case. Features of Limited Liability Partnerships Corporate Body LLP is a corporate individual. It is distinct of its partners and is thus treated as a corporate affiliation. It is capable of performing legal functions. It can enter into contracts, holds properties, bring and be Brought into Court, and so on. Separate Legal Entity The partners of LLP are protected from any risk arising from the partnership since the LLP itself is a recognized legal entity which is independent from its members. Therefore, the partnership can obtain loans, purchase and sell property, and so on in its own name. This guarantees that the business partners do not bear any personal risk for business-related activities. Perpetual Succession An LLP does not lose continuity as an entity merely due to the change of partners. If one of the partners goes out, retires or dies, there are no interruptions in the working of the LLP. Partnership Constitution The operation of an LLP shall be in accordance with the Limited Liability Partnership Agreement that is made and signed by the partners. The agreement states, inter alia, the functions of each partner, how the partners shall divide profits, etc. Minimum Partners An LLP can have as low as 2 designated partners with at least one being an resident of India. There is no maximum restriction over the number of partners in an LLP. Eligible Partners Individuals or corporate bodies can be the partners in an LLP. This flexibility makes it suitable for a variety of business collaboration. What is a Private Limited Company? A Private Limited Company (Pvt Ltd) is a company structure as per the Companies Act, 2013 in India. This is perhaps most suitable for entrepreneurs and small and medium enterprises. A private limited company shareholders are limited liability which provides personal security. The structure of private limited companies is quite straightforward for such a type of company has shareholders who own the company while it is directors that carry out the daily activities of the company. These companies have limited liability status, thus can be safely separated from their owners. Features of Private Limited Company Limited Liability The only obligation of the shareholders is to pay for the shares that they own and they have not paid for. In the event the company goes down, assets of shareholders and directors are left unharmed. Separate Legal Entity A Private limited company which is similar to an LLP is considered to be an independent institution from its shareholders and directors. It can acquire assets, make agreements and perform business transactions on its own. Shareholders Such a company can have between two and two hundred shareholders, and thus it has the possibility of getting more than one shareholder in order to raise funds. Directors The limit on directors in a private company is upto fifteen and the minimum is two. The directors oversee day to day management of the business. Minimum Capital Requirement Even though the Companies Act, 2013 abolished the minimum capital threshold, it is still necessary to have enough authorized capital for the private limited company to be able to carry out its operations properly. Ownership and Management The shareholding is what determines ownership while the board of directors is charged with the management. The strategic distribution of tasks increases the likelihood of role ambiguity. Transferability of Shares The shares of a private limited company can be transferred, but the process is limited in order to maintain its so-called private status. However, the transfer is usually subject to the consent of other shareholders. Compliance Requirements Some of the compliance norms to which the private entities are obligated to observe include: filing of annual returns, financial accounting statements and board meetings which make them very much regulated than the LLPs. LLP vs Pvt Ltd Advantages and Disadvantages The advantages of an LLP are as follows Ease of formation: Simple procedure for registration as well as lesser compliance requirements. Cost effective: Lower compliance and operational costs in comparison to private limited companies. Flexible management: There are no board meetings and no resolutions that have to be passed. Tax benefits: There is no tax on the distribution of dividends and profits are also taxed at a flat rate. The disadvantage of an LLP are as follows: Limited options for fundraising: They are not able to solicit equity investment from the general public or from venture capitalists. Lack of credibility: They are seen as lacking professionalism when compared to private limited companies. Profit-sharing issues: This may lead to misunderstandings amongst the partners. The advantages of a Pvt Ltd company are as follows: Better credibility: They have enhanced reputation amongst investors and financial institutions. Easy fundraising: They are able to source for equity and sell shares to investors. Limited liability: The assets of the shareholders are secure. The disadvantage of a Pvt Ltd company are as follows:  In compliance costs: It entails routine filing of returns, carrying out audits

GST (Goods and Services Tax) has changed the way Indirect Taxes are Vat trolled in India, as it has retained its character of being a value added tax. One of such features is termed as Reverse Charge Mechanism (RCM). As the name suggests, a GST registered recipient rather than the supplier incurs the liability to pay tax on the provision of services. This guide will explore the details of the RCM under GST, as well as its scope and consequences for businesses. Latest Update About Reverse Charge Mechanism  The latest news about the Reverse charge mechanism can be found up here.  July 23, 2024: The GST Council has increased the list of items and services covered by RCM to include certain types of rental services and facilitation services offered by non-residents. Businesses are recommended to monitor contracts to avoid non-conformity. June 22, 2024: Changes were made to the GST Compensation Cess on e-commerce services that attract RCM making it compulsory for e-commerce operators to observe the high number of turnover for small suppliers’. June 26, 2024: A new notification has redefined the time of supply for services retired under RCM thereby assisting ease tax compliance for registered taxpayers. What is Reverse Charge Mechanism?  The Reverse Charge Mechanism (RCM) is a tax regulation process with the essence of causing the recipient rather than the supplier to pay tax as a consequence of a taxable supply. Unlike the forward charge mechanism where the supplier is responsible for tax payment, the recipient of the taxable supply is liable to make tax payment directly to the government in RCM.  What is Reverse Charge Mechanism in GST? RCM in GST refers to any process in RCM that is applicable to certain designated good or services notified by the government in the country’s GST policy. It is appropriate for dealing with unregistered suppliers and imports and some specified services. This clause provides provision for appropriate tax collection and assists in the controlling mechanism of tax evasion of the unorganized sectors in the economy. When is Reverse Charge under GST Applicable?  Reverse charge under GST is applicable in the following scenarios:  Unregistered Suppliers: When a registered recipient procures goods or services from an unregistered supplier.  Specified Categories: On goods and services listed in the government’s notification, such as legal services and rent-a-cab services.  Import of Goods/Services: Tax liability falls on the importer.  E-commerce Services: Applicable when services are provided through an e-commerce operator.  RCM Who is Liable to pay the GST?  RCM places the liability of tax payments on the recipient of goods and services and not the supplier. When, for example, a business expands its scope to provide legal services through advocates, it’s the responsibility of that business as the purchaser to pay the GST.   Different Types of Reverse Charges Under GST   Forward Charge   The supplier collects GST from the recipient and manages to remit it to the government in this traditional model.  Backward Charge (Reverse Charge)   In this case, the payer of service or goods bypasses the supplier and settles the government directly with GST.  RCM Provisions Under GSTR Forms – GSTR-1 and GSTR-2   GSTR-1: Invoices subjected to RCM must be revealed by the suppliers.  GSTR-2: Where purchase has been made and self-assessed liability to RCM GST has been incurred must be submitted by contacts. Time of Supply of Goods and Services under RCM Time of Supply of Goods under RCM Receipt of the goods Payment made Invoice issued 30 days ago Time of Supply for Services under RCM Receipt of payment Invoice issues 60 days ago The earlier of these dates will determine the time of supply of both goods and services. What Are the Registration Requirements Under RCM? Threshold for minimum requirement RCM is applicable even to a supplier who is unregistered but has gone beyond the threshold limit given. Supplier vs Recipient The recipient is required to be registered under GST in order to be compliant to the RCM provisions irrespective of the status of the supplier. Composition Dealers Composition dealers do not want RCM as they will not be able to claim the input tax credits. GST Compensation Cess Services covered under the scopes of GST Compensation Cess are covered under RCM. E-commerce Services RCM applies in respect of supplies directed by unregistered vendors by e-commerce operators. Who Needs To Pay GST Under RCM RCM works on: Paid by registered companies who buy from unpaid suppliers. Those Paying Taxes Within Goods or Services’ Importations. Individuals who are provided with certain specified services e.g. legal services, security services, sponsorships etc. Positive Impacts of RCM Improved Compliance and fair competition RCM guarantees fairness by making tax collection from the unorganised sector a formality. Cost Saving through Tax Credits Acknowledgement of input tax paid under RCM Methods can also help the recipients to lower their overall tax burden. Challenges of RCM Increase in Compliance Cost Under RCM, businesses are required to handle more paperwork and filing requirements leading to increased overhead costs. Complicated Document Management RCM invoice and payment substantiation require logs making bookkeeping much more difficult. Why We Need to Consult Professionals   To understand the complexities of the reverse charge mechanism under GST, one has to comprehend the law and its changes from time to time. RCM applicability, tax liability, and documentation requirements are examples of areas in which an expert practitioner can advise. Getting these professionals assists them in submitting appropriate GST returns, obtaining the necessary input tax credits, and avoiding penalties for non-compliance. It is critical to note that these RCM provisions under GST keep changing which could be quite overwhelming for businesses and hence, it is prudent to seek professional assistance like: Rapid Consulting for seamless business conduct and legal compliance. Conclusion The implementation of the Reverse Charge Mechanism under the GST provisions plays an integral role in achieving tax compliance and accountability. Any business firm needs to be alive to the latest RCM provisions to avoid infringing the RCM requirements. 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