Starting a business enterprise in India calls for many decisions. One such fundamental decision is whether to register your enterprise as a Limited Liability Partnership (LLP) or a Private Limited Company. Basically, it is a question about what structure your business ought to follow so as to reap maximum benefits without shouldering excess legal requirements. While both LLP and Private Limited Companies share many similarities, they also differ on several counts.
By understanding the main differences between an LLP and a Private Limited Company, you will be in a better position to determine which one is more suitable for your enterprise. Let us take a look.
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What is a Private Limited Company?
A Private Limited Company refers to a business structure where the ownership lies with the shareholders. The company functions as an independent legal entity with the rights to buy, own, and sell the property as well as to extend loans for the purpose of business. The legal existence of a Private Limited Company is independent of its members or any changes in the holding of the shareholders.
The liability of the shareholders is limited to the shares they own. Such members can’t be held responsible for any of the debts incurred by the company. Their personal assets can’t be seized by a court of law to repay company debts.
What is a Limited Liability Partnership (LLP)?
A Limited Liability Partnership extends the benefits of the partnership while upholding the limited liability advantages of a company. Similar to a Private Limited Company, an LLP is also an independent legal entity. They too have the right to purchase properties and can incur debts.
An important characteristic of LLP is that one partner can’t be held responsible for the negligence or misconduct of another partner. In other words, partners have limited liability which depends on their agreed contribution as per the LLP agreement.
Differences between a Private Limited Company and an LLP
LLPs and Private Limited Companies differ from each other in a number of aspects, ranging from governing laws to tax structure to legal compliance, and more. Listed below are some of the key differences between both:
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Governing law
Private Limited Companies function as per the Companies Act, 2013. LLPs functions as per the Limited Liability Partnership Act, 2008.
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Formation Requirements
For a Private Limited Company’s incorporation, you need at least two stakeholders and two members. Such a company can have at most 15 directors and 200 members.
In the case of the LLPs, the required number of members and designated partners stand at two in each case. However, there is no limit to the maximum number of members.
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Registration Cost
The cost of registering a Private Limited Company is higher than that required for LLP. This is because LLPs are designed to cater to small businesses. As such, the government has set a lower registration cost for them.
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Tax Structure
Private Limited Companies have to pay tax based on the income of the company. They also need to shoulder other taxes, such as dividend distribution tax as well as an alternate minimum tax.
The taxation process of LLPs involves just two taxes – one is the income tax and the other is the alternate minimum tax.
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Transfer of Share
In a Private Limited Company, you can easily transfer your shares to another shareholder. But in an LLP, such transfers have to follow the guidelines of the LLP agreement.
Also Read: Top 10 Pain Areas of a Small Company
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Annual filing
Private Limited Companies need to audit their accounts every year and file the report with the Ministry of Corporate Affairs (MCA).
LLPs do not have to audit their accounts unless their annual turnover is more than 40 lakh rupees.
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Foreign ownership
Foreigners can invest in Private Limited companies operating under most sectors in India.
But that is not the case for LLPs. Foreigners can invest in an LLP in India only after they obtain permission for the same from the Foreign Investment Promotion Board (FIPB) and the Reserve Bank of India (RBI).
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Survivability or existence
The existence of a Private Limited Company does not depend on the shareholders or the directors. Such a company can be dissolved by Regulatory Authorities or it can also be done voluntarily.
The existence of an LLP is independent of the partners. Such an entity can be dissolved either by the Company Law Board’s order or can be done voluntarily.
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In conclusion:
Despite the differences, these entities share some similarities too. For instance, both LLPs and Private Limited Companies are required to be registered with the Ministry of Corporate Affairs. For this, your company needs an address. Buying or renting a traditional office in the initial stages of your business can be an extra financial burden. Coworking spaces like The Office Pass (TOP) can help you by providing an address for registration and also a well-equipped place to work out of.
Before you come to a decision regarding which business structure is ideal for your enterprise, make sure to consider your long-term goals and how you would like to take the company forward. This will help you to decide whether you ought to register your enterprise as a Private Limited Company or an LLP.
