How to Choose between a Pvt Ltd Company and LLP? and Incorporating a new business?
A lot of entrepreneurs who are Incorporating a new business are interested in knowing how an LLP and a Private Limited Company compare. Both forms of companies provide many of the same features needed to manage a small to large-sized business, but they also diverge significantly in other areas. In this piece, we compare and contrast Private Limited Companies and LLPs from the perspective of an entrepreneur launching a new company.
Incorporating a new business Process
The process of registering an LLP and a Private Limited Company is fairly similar, with some variations in the forms and documents submitted for incorporation, to ensure compliance with both of them. There is only a marginal difference in the registration cost of both Pvt Ltd Company, with the cost of Pvt Ltd Company being on a little higher side.
Limited Liability Partnerships
The intermediate form between a partnership and a private limited company is a limited liability partnership, or LLP.
A Limited Liability Partnership (LLP) is a popular form of business structure in India that combines features of both a traditional partnership and a private limited company. LLPs provide limited liability to their partners, which means that individual partners are not personally liable for the debts and liabilities of the LLP. The liability of each partner is limited to the extent of their agreed contribution in the LLP.LLPs’ benefits and drawbacks
Limited liability and an LLP’s distinct legal personality from its partners are the main advantages of an LLP over a traditional partnership. It can thus enter into agreements, possess property, provide security, and file or defend legal actions under its own name. Each partner benefits from the fact that, unlike in an unlimited partnership, their liability is not joint and several with the other partners. The increased operational and managerial flexibility of partnerships over limited companies is another advantage of an LLP.
Features
Many of the features offered by Private Limited Companies and LLPs are similar. Both the Private Limited Company and the LLP
- are distinct legal entities with independent assets and liabilities from the promoters
- allow for the transfer of ownership, but Private Limited Companies provide greater flexibility in this regard.
- have an eternal existence.
Organization Structure
Private Limited Company are limited by shares, in other words, Transfer of Ownership is decided upon the base of transfer of share amongst its members. While in case of LLP, ownership is decided upon the basis of profit-sharing ratio agreed upon by the designated partners.
Company form of organization is primarily recommended for the following:
- Medium and Large Businesses
- Companies looking for IPO
- Whereby there are multiple stakeholders
- Contemplating FDI, Employee Stock Options, Venture Capital Funding or other funding
LLP is suitable for the following nature of activities
- Professionals like Architect, CA, Advocates etc.
- Enterprises which are primarily involved in service Industry which are not capital intensive
Governance
Companies Act are governed by Companies Act, 2013 whereby they have to comply with the all the provisions with respect to annual filings, maintenance of books of accounts, audits, loan and borrowing etc. Apart from the legal requirements, one need to abide by the Memorandum of Association and Articles of Association of the company. While in case of LLP, it is governed by LLP Act, 2008 and the LLP Agreement between the parties.
Both the entities enjoy perpetual succession and can hold the properties on its own name.
Both LLPs and private limited companies must comply with tax laws similarly. On the other hand, LLP has a number of advantages when it comes to Ministry of Corporate Affairs compliance. If an LLP’s annual turnover is less than Rs. 40 lakhs and its capital contribution is less than Rs. 25 lakhs, it is not required to have its accounts audited. However, an LLP would need to submit Forms 8 and 11. Meetings amongst LLP partners are driven by LLP agreement and purely voluntary.
On the other hand, a private limited business would have to submit yearly audited financial statements to the Ministry of Corporate Affairs. Annual ROC compliances in terms of AOC-4 and MGT-7 are mandatory in case of company. Companies are required to hold minimum 4 Board Meeting every year and also minimum 1 General (Shareholders) Meeting, most commonly known as AGM. Non compliances result into stricter penalties for Companies.
Taxation
Profit of LLP are taxable at 30% plus surcharge. However, sharing of profit among the member is not liable to tax under current tax structure. Private Companies with turnover upto Rs. 250 Crores are liable to pay tax at 25% plus surcharge and other Companies are liable for 30 % Tax rate.
However, Dividend paid to Shareholders even from PAT (Profit After Tax) is taxable in the hands of shareholders and promoter as per the current tax rates.
Below shows a comparison of Taxation of Company vis a vis LLP considering taxation on Dividends and Salary withdrawn by directors/ partners across both the structures
Thereby Considering dividend taxation, companies form of organisation end up apaying higher taxes
Addition/Change in Ownership
In case of LLP any change in ownership has to be affected only and only by alteration of Agreement which should be signed by all the Partners of LLP. Stamp duty will be applicable as per State of execution. As a result, transfer of Ownership in LLP is a bit difficult and cumbersome task.
Ownership in Private Limited Company can be transfer simply by executing a Security Transfer Form (known as SH-4) and on payment of Stamp duty. It is relatively easy to transfer ownership in case of companies with transfer of shares
Final Thoughts
LLPs are ideally suited for Professionals, Small Business Owners and business which is not capital incentive or a business idea where promoter is not looking for investment.
Private Companies are ideally suited for capital intensive business or for Promoters who are willing to raise funds through investors or Public Issue etc.
Throughout India and the rest of the world, private limited companies are well-known and have been around for longer than limited liability partnerships. As a result, Private Limited Companies have well-established policies and procedures. LLPs, on the other hand, are a relatively new concept in India. As a result, some laws, guidelines, and practices are still changing. Since LLPs are a relatively new concept, they are also not as well-known in India as private limited companies.
Compared to an LLP, a private limited company gives its promoters a more favourable reputation. Additionally, banks and foreign direct investment provide better funding options for private limited companies.