How To Decide Between LLP And Private Limited (Pvt. Ltd.) Company?

How To Decide Between LLP And Private Limited (Pvt. Ltd.) Company

For most young entrepreneurs, picking the type of registration for their startup is one of the chief tasks. A step that could easily confuse many, is however a step that could have serious implications if executed badly. In India, many types of businesses are recognized by the Govt.

These days, however, the most popular choices seem to be Limited Liability Partnership (LLP) and Private Limited Company (PLC). If you are an entrepreneur and trying to decide whether you’ll register your company as an LLP or a Pvt. Ltd. Co, this article should help clear your confusion.

First things first, let us take a look at the definitions of LLP and Pvt. Ltd. company-

Private Limited Company: Typically the registration type used for medium to large scale businesses, a Pvt. Ltd. company is a type of business that limits the financial liability of the owner to the extent of his/her shares alone. The minimum no. of shareholders is 2 and the maximum no. of shareholders allowed is 50. The minimum paid up capital required is 1,00,000 and no shareholder is allowed to invite the general public to take on his/her share.

Limited Liability Partnership: A partnership is a type of company where two or more people jointly own and share the profits reaped by the company. An LLP is a type of partnership in which some or all partners have limited liabilities. Which means that any one partner cannot be held responsible for the wrongdoings or the negligence of another partner. The minimum no. of partners is 2 and there is no upper limit of the no. of partners allowed. It is considered as a separate legal entity where the partners and the LLP as such is considered different.

While both have their own benefits, with LLP offering all the benefits of a Pvt. Ltd. co. at lesser hassles, here are some of the key differences between the two.

How To Decide Between LLP And Private Limited (Pvt. Ltd.) Company

Chief Differences between Registering An LLP And A Pvt. Ltd. Company
The incorporation of an LLP is considerably easier than that of a Pvt. Ltd. co. To register a Pvt. Ltd company, a name must be decided for the company followed by applying for the digital signatures of the shareholders and Directors Identification Numbers (DIN). The next step is drafting the Memorandum and then the Articles of Association (AOA), both very vital documents for the sustenance of the company. Once these steps are done, shareholders can proceed with the e-filing of AOA, MOA and eForms 32,1 and 18 under the Companies Act, 1956. The entire procedure is dictated by the Companies Act, 2013. Any deviation from it might hinder the registration process. Obtaining the Certificate of Incorporation of LLC marks the end of this process.

To register an LLP, the first step would be any two partners applying for Digital Signature followed by application for Designated Partner Identification Number (DPIN). If a name has been picked for the company, proceed with applying for Name Availability and obtaining proposed name assigned. Drafting the LLP Agreement comes next and once all the shareholders reach consensus on the agreement, file Forms 2,3 and 4 with the Registrar of Companies. The process concludes when the Certificate of Registration of LLP is obtained.

Taxation Structures of LLP and Pvt. Ltd. Company
Irrespective of the nature of the company, the one factor that remains same is that every company is liable to pay taxes for the profits they reap.

Here’s a brief description about the tax structure of an LLP:

  • Income tax – 30%
  • Dividend tax – 16%
  • >Minimum Alternate Tax – 18%

Taxation in Pvt. Ltd. Co. is as follows:

  • Income tax – 30%
  • Alternate Minimum Tax – 18.5%

Other Significant Differences
For more clarity, here’s an analysis of the differences between specific features of both LLP and Private Limited Company.

  • Registration: Compulsory for both with the Registrar of Companies. Certificate of incorporation would be the proof of registration.
  • Capital: A minimum paid up capital of INR 1,00,000 is compulsory for the incorporation of a private limited company. A limited liability partnership has no such requirement.
  • Name: For a Pvt. Ltd. company, the name should end with the words “Private Limited” and that of a limited liability partnership in “LLP”.
  • Shareholder/ partner liability: In an LLP, a partner’s liability is limited to the extend of his/her contribution to the company. In a Pvt. Ltd. company, a shareholder’s financial liability is limited to the extent of the unpaid capital.
  • Annual returns & Audits: Annual returns and accounts of both pvt. Ltd. company and LLP are to be filed with the Registrar of Companies. Annual audits are compulsory for a pvt. Ltd. company but not for an LLP, unless the annual turnover crosses INR 40,00,000.

How To Decide Between LLP And Pvt. Ltd. Company?
The nature of registration of a company largely depends upon the scale and industry in which the company is supposed to function. For small scale to medium businesses, an LLP may seem more appropriate while for medium to large scale business, a private limited company would be more suitable. That said, each has its own benefits and one does not have an advantage over the other. Other chief factors include Level of Compliances and the company’s future funding requirements.

This is decision that must not be taken lightly. However, once you have decided what the nature of your company is going to be, you can make use of startup packages to get going.

About Author: LegalDesk