In the corporate law of India, two distinct concepts are recognised: the Limited Liability Partnership (LLP) and Private Limited Company. The Limited Liability Partnership Act 2008 provides the definition of a limited liability partnership as a corporate or incorporate body formed under this act. LLPs possess a separate legal entity from their partners and enjoy perpetual succession.
There are many business structures in India from which an entrepreneur can choose to establish a business or company. Private limited companies and Limited Liability Partnerships (LLPs) are two such business structures. A private limited company (Pvt Ltd company) has existed in India for a long time.
Limited Liability Partnership (LLP) business structure was introduced in India in 2008. Thus, Pvt Ltd companies have existed longer than LLPs and enjoyed widespread recognition. LLP and Pvt Ltd Company have similar features, but there are many differences also.
What is Limited Liability Partnership?
A Limited Liability Partnership (LLP) is a business entity category that combines a partnership’s features and a limited liability company (LLC). In an LLP, members are personally liable for the partnership’s actions, but their Liability is limited to their contributions to the partnership. It means that members cannot be held responsible for debts beyond their contributions to the partnership, and their assets are protected if the partnership goes bankrupt or faces legal Liability. The LLP offers tax advantages and flexibility, making it appealing to many businesses, including law firms, consulting firms, construction companies, and real estate businesses.
Features of LLP – A minimum of two members must establish a private limited company.A Pvt Ltd company is a privately held business which can have a maximum of 200 members. There is no minimum capital requirement, and only two directors are required to establish the company. The members have limited liability at the time of loss or closure of the company. They are limited to the extent of shares held by them. It is suitable for businesses that have a significant turnover and need external funding.
What is a Private Limited Company?
A Private Limited Company is a business establishment that one or more shareholders own. In a Private Limited Company, the shareholders’ Liability or responsibility is limited to their shareholding in the company, and they are not personally liable for the company’s debts or obligations. This business entity is typically formed to conduct business and generate profits. Individual shareholders may own Private Limited Companies or public companies that issue shares to the general public through an initial public offering (IPO). Private Limited Companies often have more flexible ownership structures than other business entities, offering tax advantages and greater flexibility in business decisions.
Features of Pvt Ltd Company- A minimum of two members must establish a private limited company.A Pvt Ltd company is a privately held business which can have a maximum of 200 members. There is no minimum capital requirement, and only two directors are required to establish the company. The members have limited liability at the time of loss or closure of the company. They are limited to the extent of shares held by them. It is suitable for businesses that have a significant turnover and need external funding.
LLP vs Pvt Ltd Advantages and Disadvantages
The advantages of registering a business as an LLP are as follows:
- An LLP is easier to start and manage as it has fewer formalities.
- It has a lesser cost of registration compared to company registration costs.
- It is a corporate body having a separate legal existence from its partners.
- The death of a partner does not affect the existence of the LLP. It has perpetual succession.
- It can be started with a minimal amount of capital.
- The partners have limited liability.
The disadvantages of an LLP are as follows:
- The penalty for non-compliance by an LLP is heavy.
- If the number of partners goes below two, i.e. if there is only one partner, the LLP will be dissolved.
- It is difficult to raise funds/capital from Venture Capitalists (VC), equity funding or angel investors since they can’t be the shareholders of the LLP.
The advantages of registering a business as a Pvt Ltd company are as follows:
- There is no minimum paid-up capital requirement to establish a Pvt Ltd company.
- The company members have limited liability.
- It has a separate legal entity from its members.
- It has perpetual succession.
- It can raise funds easily.
The disadvantages of a Pvt Ltd company are as follows:
- The members of a Pvt Ltd company are limited to 200.
- It restricts the transfer of shares of its members.
- It cannot issue a prospectus inviting the public to subscribe to the company shares.
What are the Processes of forming a Limited Liability Partnership and a Private Limited Company?
The processes for forming an LLP (Limited Liability Partnership) and a Private Limited Company differ depending on the jurisdiction where the entity is formed. However, there are general similarities in the process, including the following steps:
Processes in a Limited Liability Partnership:
- Register the LLP with the relevant regulatory body.
- Draft and execute an LLP agreement outlining the partners’ rights, responsibilities, and ownership structure.
- Hold an initial meeting to elect a managing partner and establish the governance structure.
- Obtain the necessary permits and licenses applicable to the LLP’s operations.
- Comply with ongoing regulatory and reporting requirements.
Processes in a Private Limited Company:
- Register the PLC with the relevant regulatory body.
- Draft and execute a memorandum of association and articles of association that outline the shareholders’ rights, responsibilities, and ownership structure.
- Hold an initial meeting to elect a board of directors and establish the governance structure.
- Obtain the necessary permits and licenses applicable to the PLC’s operations.
- Comply with ongoing regulatory and reporting requirements.
What documents are needed for Limited Liability Partnership and Private Limited Company?
Documents Needed for Limited Liability Partnership:
- Partnership Agreement: This document outlines the terms and conditions of the partnership, including the rights, responsibilities, and ownership structure of the partners.
- Business Licenses and Permits: Depending on the business’s jurisdiction and nature, a business might require specific licenses and permits to operate.
- Tax registrations and filings: The LLP must register for taxes and make the necessary filings, including income tax, sales tax, and payroll taxes.
- Insurance policies: The LLP may also need to obtain insurance policies for the business, such as liability insurance, workers’ compensation insurance, and property insurance.
- Financial statements and audit reports: Depending on the jurisdiction, the LLP may be required to prepare and submit annual financial statements and audit reports.
Documents Needed for Private Limited Company:
- Memorandum of Association: This document outlines the purpose and objectives of the company, as well as the rights, responsibilities, and interests of the shareholders.
- Articles of Association: This document outlines the company’s governance structure, including the directors’ and officers’ duties and responsibilities.
- Business Licenses and Permits: The company may require specific licenses and permits to operate depending on the business’s jurisdiction and nature.
- Tax registrations and filings: The Private Limited Company must register for taxes and make the necessary filings, including income tax, sales tax, and payroll taxes.
- Insurance policies: The Private Limited Company may also need to obtain insurance policies for the business, such as liability insurance, workers’ compensation insurance, and property insurance.
- Financial statements and audit reports: Depending on the jurisdiction, the Private Limited Company may be required to prepare and submit annual financial statements and audit reports.
Difference Between Pvt Ltd and LLP
LLP vs Pvt Ltd Registration Process- The registration process of LLP and Pvt Ltd company is similar with a few differences. The LLP is registered with the Ministry of Corporate Affairs (MCA) as per the Limited Liability Partnership Act, 2008.The Pvt Ltd company is registered with the MCA under the Companies Act, 2013. The LLP and Pvt Ltd company registration application is filed with the Registrar of Companies (ROC) on the MCA portal.
The designated partners of the LLP should obtain the Designated Partner Identification Number (DPIN) to register the LLP. The directors of a company must obtain the Director Identification Number (DIN) to register a Pvt Ltd company. The LLP must file the FILLIP Form to register the LLP, while the Pvt Ltd company must file the SPICe+ form to register the company. The name of an LLP should contain the word ‘LLP’, while the name of a Pvt Ltd company should end with – ‘Pvt. Ltd’.
The governing document of an LLP is the LLP agreement entered between the partners. The LLP agreement is registered with MCA, but it is not a public document. A company’s governing documents are the Memorandum of Association (MOA) and Article of Association (AOA). The MOA and AOA are public documents. Thus, a third party can obtain them by paying prescribed fees to the MCA.
The government fee for LLP incorporation is significantly low compared to the government fee for Pvt Ltd company incorporation. The documents that must be notarised and printed on non-judicial stamp paper are less for an LLP registration when compared to a Pvt Ltd company registration.
LLP vs Pvt Ltd Ownership-There is no clear distinction between the management and owners in an LLP. The partners are the LLP owners and manage the LLP business. A partner in an LLP is a manager and an owner, while in a Pvt Ltd company, the owners, i.e. shareholders, do not have managerial powers.
In a Pvt Ltd company, the management is different from the owners. The board of directors manage the company business. Since the shareholders do not directly participate in the company management, there is a distinction between the owners and management. The shares of a Pvt Ltd company cannot be publicly traded since the AOA restricts it. However, the shares can be easily transferred.
LLP vs Pvt Ltd Membership and Directors- There must be a minimum of two designated partners in an LLP. There is no limit on the maximum number of partners. There are no directors in an LLP. In a Pvt Ltd company, the minimum number of members is two, and the maximum is 200. There must be a minimum of two directors in a Pvt Ltd company, and the maximum is limited to 15.
LLP vs Pvt Ltd Compliance-An LLP does not have to conduct board meetings or an Annual General Meeting (AGM) since the owners manage the business. Since directors manage a Pvt Ltd company, they must conduct a minimum of four board meetings every year. It must also conduct an AGM within six months of the end of the financial year.
The statutory audit is not mandatory for an LLP. An LLP should get its accounts audited when its annual turnover exceeds Rs.40 lakhs and the capital contribution exceeds Rs.25 lakhs. The statutory audit is mandatory for a Pvt Ltd company, irrespective of its turnover.
An LLP must file the statement of account and solvency and annual returns with the ROC in Form 8 LLP and Form 11 LLP, respectively. A Pvt Ltd company must file its annual financial statements and annual return with the ROC in Form AOC 4 and Form MGT 7, respectively.
LLP vs Pvt Ltd Funding –LLPs cannot raise funds from Venture Capitalists (VCs) or angel investors since they will need to be partners in the LLPs to invest. They can raise funds and investments from financial institutions, such as banks. Fast-growing businesses that require funding from VCs will have to register as Pvt Ltd companies since they can make the VCs or angel investors as shareholders of the company.
LLP vs Pvt Ltd FDI – Foreign Direct Investment (FDI) is permitted for LLP when specified conditions are met. Foreigners can invest in an LLP only with prior approval of the Reserve Bank of India (RBI) and the Foreign Investment Promotion Board (FIPB). FDI is allowed in a Pvt Ltd company under the automatic route in most sectors and also the approval route.
LLP vs Pvt Ltd Taxation- An LLP should pay a 30% fixed rate tax on its total income. When its total income exceeds Rs.1 crore, the income tax amount is increased by a surcharge of 12%. When a Pvt Ltd company earns less than Rs.400 crores, it should pay a tax of 25%. When the company’s annual revenue exceeds Rs.400 crores, it must pay a 30% tax. Pvt Ltd companies can also choose between the new rates of 22% (for existing companies) and 15% (for new companies).
An LLP and Pvt Ltd company have a lot of similarities, yet they are different in various aspects. When an entrepreneur needs external funding and aims for a good turnover, a Pvt Ltd company is the right business structure. When two or more persons wish to start and run a business in partnership by contributing the capital amount, the LLP structure is the best as against a partnership firm since LLP provides several benefits to the partners, such as limited liability, perpetual succession and separate legal entity.
FAQs
Q: What is the main advantage of choosing an LLP over a Private Limited Company?
The primary advantage is the limited liability protection offered to the partners, similar to a private limited company. This means that personal assets of the partners are safeguarded against business debts and liabilities.
Q: Is there a minimum capital requirement for forming an LLP?
No, there is no mandatory minimum capital requirement for LLPs. Unlike private limited companies, LLPs can be formed without a specified minimum amount of capital.
Q: How is the management structure of an LLP different from a Private Limited Company?
LLPs offer more flexibility in management as there is no restriction on the number of partners. Decision-making can be more streamlined, and partners can actively participate in the day-to-day operations.
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