Difference between LLP and Private Limited Company

Introduction

While starting a business, there is a common confusion as to which form of organisation one should choose. There are different business structures that you can choose from to take off your business. Every kind of structure is paired with advantages and disadvantages. There are mainly 5 different business structures in India that you can choose from. These 5 are Sole Proprietorship, Partnership Firm, One Person Company (OPC), Private Limited Company (PLC), and Limited Liability Company (LLP). And Pvt Ltd Company and LLP are definitely the most popular ones among these.

A lot of start-ups end up choosing to register a private limited company (Pvt. Ltd.). But the concept of LLP is also emerging day by day and people are looking for a comparison between both types of company structures. Here, we make your task easier by explaining the difference between LLP and Private Limited Company to support your decision-making based on your business requirements.

We understand that as an entrepreneur, you must consider the incorporation process, benefits, taxes and compliances, and a range of other factors before making your choice. Let us take it one step at a time as we discuss the main Difference between LLP and Private Limited Company. You should be aware of the benefits available, the costs to be incurred, which structure shall provide an environment for the business to flourish, etc.

Here are some points that highlight the difference between LLP and Private Limited Company based on their Incorporation and Compliance Requirements.

Private Limited Company – PLC

Private Limited Company registration is done under The Companies Act, 2013. Private company is a more preferable type of organisation if you are considering the long-term and sustainable growth of your organisation. There should be at least two directors and two shareholders, with directors serving as managers and shareholders as the company’s owners.

Limited Liability Partnership – LLP

The LLP Act of 2008 covers the registration of an LLP. Here, the owners and stakeholders are called Partners. At least two recognised partners are necessary for this type of business structure. Partners in an LLP, just like a Pvt Ltd company have limited liability. LLP is a hybrid organisation structure merging the flexibility of Partnership and limited liability of the Company Structure.

Pvt Ltd vs LLP

	Private Limited Company	Limited Liability Partnership
Min. Capital Requirement	Rs 100,000/- Authorised capital. No minimum requirement of paid-up capital	No minimum requirement specified
Creditability	Higher	Low compared to Private Company
Public Doc	MOA & AOA are available for public search	LLP Agreement is a private document and is not publically available.
Compliance Requirements	Higher	Low
Transparency	Transparency in the operations is higher compared to LLP	In comparison with a Private Company, transparency of operations is lower
Statutory audit	Mandatory since incorporation	Mandatory after exceeding the prescribed limit
Return to owner	Dividend to owners & Remuneration to directors	Share of profit, interest in capital & Remuneration
Number of Member	2 to 200	Min 2 – Unlimited
Tax benefit	Few	More

Investment needs

Where the owners are willing to raise funds through external sources like venture capital and private Equity, one should choose “company” as the formation type because the LLP cannot raise funds through such resources.  In case, where the investment needs can be satisfied with the contribution of Partners and advances from Financial Institutions, i.e. where the funds requirements are very limited, one can surely opt for LLP.

Entrepreneurs that want to raise funds through angel investing, venture capitalists, private placement etc. prefer Pvt Ltd company registration. LLP on the other hand is suitable for smaller businesses due to fewer compliances.

Pvt Ltd Company Vs LLP: Minimum Requirements

A minimum of two shareholders and two directors are necessary for the formation of a private limited company. A shareholder and a director are not necessarily two different individuals. However, one director must be an Indian national and must spend at least 182 days continuously in India. Furthermore, the registered office must be located in India. The office can be registered at either a commercial or a home address. Two partners are necessary for LLP registration in India, one of whom must be an Indian citizen and have resided in India for at least 182 days. LLPs, like PLCs, must have a registered office address in India.

Public access to Documents

The operations, management and decision-making in both the strictures are governed by the respective constitutional/Incorporation documents. In the case of Private Limited Company, the Memorandum of Association (MoA) and Article of Association (AoA) are the governing documents.

MoA and AoA documents are public in nature. Any third party by making payment of prescribed fees to MCA may find the main object and other details. Any third party interested in tracking the activities of a Private Limited Company can get the information. In addition, the public documents involve the Financial Statements of the Company. These documents can provide very useful insight to investors or any other contracting party regarding the operations of the company.

In the case of LLP, the governing document is the LLP Agreement, entered between the Partners of the LLP. Here, the LLP Agreement is registered with MCA, but the same is not a public document. This in a way ensures the Privacy of operations of your LLP.

Statutory Requirements & Compliance

For both Pvt Ltd company and LLP, there is a cost involved to maintain the active status of the company. There are many annual, one-time, time-based, as well as event-based compliances that need to be taken care of. The compliance and restrictions in the case of a Private Company are higher compared to an LLP. Several restrictions such as Related Party Transactions, Accepting Deposits, Loans to Directors, making loans & investments, Corporate Social Responsibility etc. are laid on Private Limited Company under The Companies Act, 2013. Limited Liability Partnership enjoys more flexibility of partnership in this case.

In the case of Pvt. Ltd. Company, one needs to fulfil the regulations which require the appointment of a statutory auditor within 30 days after the incorporation of the Company. Whereas in the case of LLP, Statutory Audit is mandatory when the annual turnover exceeds Rs. 40 lakh or the contribution of Partners exceeds 25 lakh rupees.

Any charge created or modified over the Assets of a Pvt Ltd Company requires to be registered with the Registrar, which is not the case with an LLP.

Taxability

LLP is required to pay tax at a fixed rate of 30% on its total income. When total income exceeds one crore rupees, the amount of income tax is increased by a surcharge of 12 percent. if a Private Limited firm earns less than 400 crores in the previous year, a 25% tax is payable. If the annual revenue exceeds 400 crores, the company must pay a 30% tax. Companies can also now choose between the new rates of 22 percent (for existing companies) and 15 percent (for new companies). However, doing so will exclude you from some deductions and exemptions.

LLP vs Pvt Ltd: Returns to Owners

The prime interest of any owner in any business is yielding a healthy return from the capital and efforts invested in the entity. Registering a Private Limited Company allows the owner to withdraw profit by way of issuing dividends on the shares held by the owners. Here, the dividend is the return on the capital invested in the company. Furthermore, in return to the efforts devoted to operations and management of the company by holding the position of Directors, the remuneration can be withdrawn subject to the limit prescribed under the provisions of the Companies Act, 2013.

In case of LLP, working Partners of LLP may get the return in form of remuneration, which is allowable up to certain limit as prescribed under the Income Tax Act. Further, the share of profit as per the ratio decided in the LLP Agreement can be provided along with the interest levied on the capital invested in the LLP.

Conclusion

Having discussed the major difference between LLP and Pvt Ltd, we can say that LLP is more flexible in terms of compliance as compared to a Private Limited Company. However, a Private Limited Company is more reliable and hence is preferred more. One shall also look into the provisions to be complied with while incorporation as well as post Incorporation and then choose the form of business wisely.

We hope this blog helps you figure out the perfect company structure for your business. However, it is always advisable to consult professionals when it comes to making such important decisions. Our experts at LegalWiz.in have helped thousands of businesses get started with their businesses and you could be the next. Give us a call now to talk to our professionals!