limited liability partnerships, or LLPs, have increased in number. Experts contend that given the advantages they offer, they should be more well-liked than they are. LLPs give business owners all the benefits of a private limited company without the drawbacks of partnership businesses. It also provides limited liability protection and tax benefits and may accommodate any number of partners. They are a legitimate and trustworthy alternative because people may register such business organizations with the Ministry of Corporate Affairs.
Additionally, they are less expensive and easier to run since they need less compliance requirements than private limited companies.
Meaning of Private Limited Company
For greater growth aspirants, the most common and successful vehicle for beginning a business in India is a Private Limited Company (Pvt. Ltd. Co.). It is formed under the Companies Act, 2013 and has several advantages, including restricted liability and a separate legal entity, which means personal property is protected. This sort of company is often used by start-ups and expanding businesses.
According to Section 2(68) of the Companies Act, 2013, a “private company” is defined as “a business whose articles restricts the power to transfer its shares, if any, and limits the number of its members to fifty.” Furthermore, because the shares are restricted, this sort of company cannot offer them to the broader public.
The fundamental advantage of a private company is that its financials are not made public. Furthermore, they are exclusively accountable to their members/investors.
Meaning of Limited Liability Company
A limited liability partnership (LLP) is a form of alternative corporate business structure that combines the advantages of a company’s limited liability with the flexibility of a partnership. Even if the partners change, the LLP can continue to exist. It has the power to enter into contracts and own property in its own right. The LLP is a separate legal organization with full accountability for its assets, but the partners’ liability is limited to their agreed-upon contribution to the LLP. Furthermore, no partner is liable for the autonomous or unauthorized activity of other partners; therefore individual partners are shielded from shared liability stemming from another partner’s illegal business decisions or malfeasance.
An agreement between the partners or, in the case of an LLP, between the partners and the LLP governs the reciprocal rights and duties of the partners. The LLP, on the other hand, is not immune from liability for its other responsibilities as a separate business. An LLP is referred to as a “hybrid” between a corporation and a partnership since it combines aspects of both a “corporate structure” and a “partnership firm structure.”
The basic goal is that one partner should not be held accountable for the actions or carelessness of the other partners. It combines the benefits of a Partnership and a Company, such as a separate legal body, limited liability, and so on. Furthermore, it requires less legal processes and is simple to register.
People sometimes become perplexed while deciding whether to form a private limited company or an LLP. LLPs are for persons who wish to run a safe and risk-free company, do not want to obtain any capital from the market in the future, and want to retain a less compliance organization.
Similarities between Private Limited Companies and Limited Liability Partnership
- Separate legal entity: They each have their own legal entity. That is, in the perspective of the law, a Private Limited Company or LLP is recognized as a separate individual.
- Tax advantages (taxation): Tax advantages are granted to both types of business formations. The tax breaks would amount to 30% of the earnings.
- Limited Liability: In the event of a Private Limited Company or an LLP, the partners’ obligations are limited.
- Registration Procedure: Pvt Ltd and LLP registration, both types of enterprises must be registered with the Ministry of Corporate Affairs.
Difference between Private Limited Company and Limited Liability Partnership
- Registration Process : Registration Process of Private Limited Company and Limited Liability Company are as follows:
- Registration of Private Limited Company: The Private Limited Company and LLP registration processes are largely similar, with few changes in the documents and forms filed for incorporation.
The processes for forming a Private Limited Company are as follows:- Obtaining a Digital Signature Certificate (DSC) for each of the prospective Directors
- Obtaining the recommended Directors’ Director Identification Numbers (DIN)
- Obtaining MCA name permission and
- Incorporation filing
- Registration of Limited Liability Partnership: LLP registration follows a similar procedure:
- Obtaining a Digital Signature Certificate (DSC) for each of the prospective Partners,
- Obtaining the prospective Partners’ Director Identification Number (DIN) / Designated Partner Identification Number (DPIN),
- Obtaining MCA name permission and
- Incorporation filing
The Ministry of Corporate Affairs issues a Certificate of Incorporation to both Private Limited Companies and LLPs. The processing period for forming a private limited company and an LLP is also comparable, with both organizations needing roughly 20 days on average.
- Registration Fee: When compared to the Government charge for forming a Private Limited Company, the price for forming an LLP is much lower. LLPs were created to satisfy the requirements of small companies, thus they have a cheaper government charge for establishment. Furthermore, the amount of papers that must be printed on Non-Judicial Stamp Paper and Notarized for LLP registration is smaller than that of a Private Limited Company registration.
- Features: Many of the benefits of an LLP and a Private Limited Company are the same. Both an LLP and a Private Limited Company are separate legal entities with assets and liabilities distinct from the promoters. Both an LLP and a Private Limited Company are transferable, albeit a Private Limited Company provides more flexibility in terms of transferring or sharing ownership. Both the LLP and the Private Limited Company enjoy perpetual existence, until terminated by the promoters or a competent authority.
- Ownership: When it comes to ownership and ownership sharing, a private limited company provides more freedom for the promoters. A private limited company’s ownership is decided by its shareholding, and a private limited corporation can have up to 200 shareholders. Furthermore, because shareholders do not actively engage in corporate management, there is a clear divide in a private limited company between share owners and management. As a result, a private limited company is favorable in terms of ownership and management.
There is no apparent separation between the owners and management in an LLP. In an LLP, the LLP Partners own the LLP and have management authority over it. As a result, a Partner in an LLP will be both an owner and a manager, whereas shareholders (owners) in a Private Limited Company are not required to have management rights.
A private limited company is advised for any company pursuing FDI, employee stock options, equity investment, or venture capital funding.
- Compliance: Tax compliance is the same for a private limited company and an LLP. However, when it comes to Ministry of Corporate Affairs compliance, LLP has major benefits. A LLP is exempt from having its accounts audited if its annual turnover is less than Rs.40 lakhs and its capital contribution is less than Rs.25 lakhs. A LLP, on the other hand, must submit LLP Forms 8 and 11.
A private limited company, on the other hand, would be required to file yearly returns with the Ministry of Corporate Affairs each year.
- Penalties and fines: The penalty for non-compliance or late filing of documents with the Ministry of Corporate Affairs is usually greater for an LLP since a flat cost of Rs.100 per day is assessed if the non-compliance continues with no cap on the responsibility. As a result, LLPs may face increased penalties or fines from the MCA for noncompliance. As a result, it is critical for LLP promoters to be aware of the deadlines and file the necessary documents with the registrar on time.
- Other Factors: Private limited companies have been around longer than LLPs and are well-known in India and across the world. As a result, Private Limited Companies have well-established systems and procedures. LLPs, on the other hand, are a relatively new entity in India. As a result, some of the laws, regulations, and processes are still evolving. Because LLPs are a relatively new idea, they are not as well recognized in India as a private limited company.
A private limited company provides its promoters with a greater image or status than an LLP. Private limited companies also have easier access to bank finance and foreign direct investment.
Why LLP is better than Private Limited Company?
It is clear that the registration processes for both Private Limited Companies and LLPs are straightforward. Thus, it is not a matter of ease of incorporation; rather, it is a matter of determining the company’s direction and destiny. We’ve also observed that incorporating a private limited company can be advantageous at times. However, we present a complete case for why LLPs should be favored over Private Limited Companies.
- LLPs combine the operational benefits of a company with the flexibility of a partnership firm.
- In comparison to a Private Limited Company, the charge for incorporating an LLP business is quite low.
- An LLP’s compliance obligations are much lower than those of a private limited corporation. If an LLP has not reached the 40 lakh turnover or 25 lakh revenue contribution thresholds, the frequency of obligatory audits is 0.
- A private limited company’s ownership is restricted, and it can only have a maximum of 200 shareholders. LLPs, on the other hand, have no such restriction.
- Meeting requirements for PLCs are significantly greater, with the obligation of convening four board meetings and one annual public meeting of the company.
- There is no legal necessity for an LLP to have meetings.
- The cost of forming and operating a PLC (Rs. 15000 incorporation + Rs. 15000 compliances + Rs. 15000 audit) is three times that of an LLP (Rs. 11,000 incorporation + Rs.4, 000 compliances). As a result, LLP is a cost-effective option.
FAQs
How is ownership structured in Pvt Ltd and LLP?
In a Pvt Ltd, ownership is represented by shares, and shareholders hold ownership stakes in proportion to their shareholding. In an LLP, ownership is structured through partnership interests, and partners typically share profits and losses based on their agreed terms in the LLP agreement.
What are the compliance requirements for Pvt Ltd and LLP?
Pvt Ltd companies are subject to more stringent compliance requirements, including statutory audits, annual filings with regulatory authorities, maintenance of statutory registers, and board meetings. LLPs have relatively simpler compliance requirements, such as filing annual returns and maintaining books of accounts.
Can Pvt Ltd and LLP convert into each other?
Yes, both Pvt Ltd companies and LLPs have the option to convert into each other subject to compliance with regulatory requirements and approval from the relevant authorities. The conversion process involves specific procedures outlined in the Companies Act for Pvt Ltd companies and the Limited Liability Partnership Act for LLPs.
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