When forming a legal entity, one must decide which business organisation to register and operate. The choice of company organisation plays an important role in shaping your corporate purpose. If one has to pick between a private limited company registration and an LLP registration, they can evaluate the benefits and differences to determine which is ideal for them.
Private Limited Company and Limited Liability Partnership are two distinct business entities governed by separate statutes, the Companies Act of 2013 and the Limited Liability Partnership Act of 2008. Both the entities, Private Limited Company and Limited Liability Partnership, provide many identical features essential to run a small to large-sized firm, while also differing in some ways.
Definition and Overview of Private Limited Company and LLP
Given below is the overview of a Private limited company and an LLP:
Private Limited Company: In India, a Private Limited Company is a type of corporate organisation that offers limited liability to its investors, restricting their liability to the amount of share capital they have contributed. This means that shareholders are not personally liable for the company’s debts beyond their investment. A Private Limited Company is a separate legal entity from its owners and is registered under the Companies Act of 2013.
Limited Liability Partnership (LLP): LLP is a business structure in India that combines the benefits of a partnership with limited liability protection similar to that of a company. Governed by the Limited Liability Partnership Act of 2008, an LLP must be registered and exists as a distinct legal entity from its partners. The liability of each partner is limited to the extent of their capital contribution. Unlike a Private Limited Company, an LLP can have an unlimited number of partners and is not allowed to issue shares.
Features of LLP Vs. Private Limited Company
The difference in features of an LLP and private ltd. Company are given below:
Features of Pvt Ltd Company:
- Requires a minimum of two members for establishment
- Privately held business with a maximum of 200 members
- No minimum capital requirement
- Only two directors needed to set up the company
- Members have limited liability, restricted to their shares’ value
- Suitable for businesses with substantial turnover and seeking external funding
Features of LLP:
- Established by a minimum of two partners through an agreement
- No minimum capital requirement
- Members’ liability limited to their contributions to the LLP
- Each partner is responsible for their own actions, not liable for other partners’ actions
- Partners actively manage the business
- Suitable for startups, traders and small to medium-sized businesses not heavily reliant on external funding.
LLP Vs. Private Limited Company Based on Pros and Cons
Given below is the table of comparison between an LLP and Private limited company on the criteria of pros (advantages) and cons(disadvantages):
| Criteria | Private Limited Company | LLP |
|---|---|---|
| Pros | Limited Liability: Shareholders’ personal liability is limited to the amount invested in the company. | Limited Liability: Partners are not personally liable for the debts and obligations of the LLP. |
| Perpetual Succession: The company has a separate legal identity, allowing it to continue despite changes in directors and shareholders. | Flexible Ownership Structure: Partners can contribute cash, skills or a combination of both to the LLP. | |
| Greater Access to Funding: Private Limited Companies can attract equity or debt funding from angel investors, venture capitalists and banks. | Perpetual Succession: LLP exists independently of its partners, allowing for continuity. | |
| Credibility: Enjoy higher credibility and goodwill with investors, clients and suppliers. | Tax Benefits: Profits are taxed only at the partner level, resulting in potential tax savings. | |
| Tax Benefits: Eligible for various tax breaks and exemptions, including deductions for loan interest, asset depreciation and research and development costs. | Fewer Compliance Requirements: LLPs have fewer compliance obligations compared to Private Limited Companies. | |
| Cons | Compliance Requirements: Must adhere to legal and regulatory obligations, which can be time-consuming and costly, including filing annual reports and holding meetings. | Unlimited Liability of Partners: Partners may be subject to unlimited liability for the actions or negligence of other partners. |
| Restriction on Share Transfers: Shares cannot be freely transferred without consent from other shareholders or the board of directors. | Limited Financing Options: LLPs have limited options for raising money through equity financing due to the inability to issue shares. | |
| More Expensive to Start: Higher initial investment due to legal and registration fees compared to other forms like sole proprietorships or partnerships. | No Transferability of Ownership: Similar to Private Limited Companies, partners cannot transfer ownership without consent from other partners. | |
| Lack of Control: Shareholders have limited influence over management decisions, leading to potential disputes. | Lack of Credibility: LLP may not be as credible as a Private Limited Company, making it more challenging to attract clients and investors. | |
| Public Disclosure: Private Limited Companies are required to disclose certain financial and non-financial information to the public and competitors. | Limited Growth Potential: LLP may not be suitable for companies with significant growth potential due to limited access to large amounts of debt financing. | |
LLP Vs. Private Limited Company Comparison Based on Registration Process
Given below is the table of comparison between an LLP and Private limited company on the criteria of registration process:
| LLP | Pvt Ltd Company | |
|---|---|---|
| Registration | Under Limited Liability Partnership Act, 2008 | Under Companies Act, 2013 |
| Application | Filed with Registrar of Companies (ROC) on MCA portal | Filed with Registrar of Companies (ROC) on MCA portal |
| Identification Numbers | Partners obtain Designated Partner Identification Number (DPIN) | Directors obtain Director Identification Number (DIN) |
| Registration Forms | FILLIP Form | SPICe+ form |
| Naming Requirement | The name should contain the word ‘LLP’ | The name should end with ‘Pvt. Ltd’ |
LLP vs Pvt. Ltd. Co. on basis of Ownership
Given below is the table of comparison between an LLP and Private limited company on the criteria of ownership:
| LLP | Pvt Ltd Company | |
|---|---|---|
| Ownership | Partners are the owners and managers | Owners (shareholders) and management (directors) are separate |
| Managerial Powers | Partners have managerial powers | Shareholders do not have direct managerial powers |
| Share Trading | Shares cannot be publicly traded | Shares can be easily transferred |
LLP vs Private Limited Company on Basis of Membership and Directors
Given below is the table of comparison between an LLP and Private limited company on the criteria of membership and directors:
| LLP | Pvt Ltd Company | |
|---|---|---|
| Minimum Members | Minimum two designated partners | Minimum two members |
| Maximum Members | No limit on maximum partners | Maximum 200 members |
| Directors | No directors in an LLP | Minimum two directors, maximum 15 |
LLP vs Private Limited Company on Basis of Compliances Post Registration / Incorporation
Given below is the table of comparison between an LLP and Private limited company on the criteria of Compliances for the entity post registration:
| LLP | Pvt Ltd Company | |
|---|---|---|
| Board Meetings | No board meetings required | Minimum four board meetings per year |
| Annual General Meeting (AGM) | Not required | Must conduct an AGM within six months of the financial year-end |
| Statutory Audit | Not mandatory | Mandatory, irrespective of turnover |
| Filing with ROC | Statement of Account and Solvency (Form 8 LLP), Annual Returns (Form 11 LLP) | Annual Financial Statements (Form AOC 4), Annual Return (Form MGT 7) |
LLP vs Private Limited Company Based on Funding
Given below is the table of comparison between an LLP and Private limited company on the criteria of Funding:
| LLP | Pvt Ltd Company | |
|---|---|---|
| VC/Angel Funding | Cannot raise funds from VCs or angel investors | Can raise funds from VCs and angel investors |
| FDI | Permitted with RBI and FIPB approval | Allowed under automatic route in most sectors and approval route |
LLP vs Private Limited Company on Basis of Taxation
Given below is the table of comparison between an LLP and Private limited company on the criteria of Taxation:
| LLP | Pvt Ltd Company | |
|---|---|---|
| Total Income Tax Rate | Fixed 30% tax on total income | 25% tax if annual revenue is less than Rs.400 crores; 30% tax if annual revenue exceeds Rs.400 crores |
| Surcharge | 12% surcharge when total income exceeds Rs.1 crore | – |
| New Tax Rates | – | Can choose between 22% (for existing companies) or 15% (for new companies) |
Final Thoughts
When comparing LLP registration and Private Limited Company incorporation, both business entities have their own distinct advantages and disadvantages. A Private Limited Company offers limited liability, perpetual succession, access to funding, credibility and tax benefits. However, it requires compliance with legal obligations and has higher startup costs. On the other hand, an LLP provides limited liability, flexible ownership, perpetual succession, tax advantages and fewer compliance requirements. Yet, it faces limitations on funding options, share transferability, credibility and growth potential.
Entrepreneurs and investors must carefully consider their specific business goals and requirements before deciding on the most suitable structure for their company. The choice between a Private Limited Company and LLP will significantly impact the overall functioning and future prospects of the business.
For more clarity on the differences between LLP registration and Company incorporation, connect with our experts at StartupFino.
