As new financial year 2024-25 is coming, there may be many entrepreneurs thinking about this topic. Knowing the answer to LLP vs Pvt Ltd company – which is better, will help an entrepreneur. This article may give clarity on the decision-making 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.
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 many similar features, but there are many differences also.
Features of LLP
A minimum of two partners establish a Limited Liability Partnership (LLP) through an agreement. There is no minimum capital requirement to establish an LLP. The liability of the members/partners is limited to the extent of their contributions to the LLP. Each partner is responsible for their own acts, and they are not responsible for the acts of other partners. The partners manage the business. LLP is suitable for startups, traders, and small to medium-sized businesses that do not require much external funding.
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
Advantages of an LLP business:
- 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.
Disadvantages as an LLP business:
- 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.
Advantages as a Pvt Ltd company business:
- 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.
Disadvantages as a Pvt Ltd company business:
- 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, only a Public Limited company can do so.
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 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 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 manages 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 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).
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.
Conclusion
An LLP and Pvt Ltd company have a lot of similarities, yet they are different in various aspects. When an entrepreneur needs external funding, aims for a good turnover, and has the vision to create a big business empire with endless boundaries, 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 capital, the LLP structure is the best against a partnership firm since the LLP provides several benefits to the partners, such as limited liability, perpetual succession, etc.
Disclaimer
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