What would work best for you? LLP or Private Limited Company

Every kind of organisation is paired with advantages and disadvantages, which build the ground to select a suitable and compatible organisation structure for business specific requirements.

On one side, start-ups end up by choosing to register a private limited company (Pvt. Ltd.) as their constitution whereas the concept of LLP is emerging day by day and people are looking for the comparison between both types of organisation structure. Here, we make your task easier by explaining the differences between both structures to support your decision making based on requirements of your business.

Know which organisation structure is beneficial for your business and how this structure will be advantageous for you.

Private Limited Company:

Any Private Limited Company is incorporated and registered under Companies Act, 2013. Registration of private company is more preferable type of organisation where the Businessmen are considering the long term and sustainable growth of the organisation. A Company is formed where people from different backgrounds come together with the idea of Business and invest in the organisation by handling the management of the company to the Board of Directors.

Limited Liability Partnership – LLP:

This is the organisation, where the alike minded people comes together to carry on the business with common goal of earning profit out of the capital invested in the LLP. Here, the owners and stakeholders are called as the Partners in the LLP. LLP is hybrid organisation structure merging the benefits of flexibility of Partnership and distinctness of Company Structure.

Investment needs:

Where the owners are willing to raise funds through external sources like venture capital and private Equity, one should choose “company” as 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.

Public access to Documents:

The operations, management and decision making related to any type of formation i.e. whether a Private Limited Company or a Limited Liability Partnership,  is governed by the articles and clauses of the constitutional/ Incorporation Documents of the organisation.

In case of Private Limited Company, Memorandum of Association (MoA) and Article of Association (AoA) are the governing documents. Both the documents are public in nature. Any third party by making payment of prescribed fees to MCA may get through the main object as well as details regarding the Subscribers to the Memorandum of the Company which provides the essential information to the third party who is interested in tracking the activities of the Private Limited Company. In addition, the public documents involve Financial Statements of the Company which can provide very useful insight to the operations of the Company to the third parties whether being the Investor or any other Contracting Party.

Also, one can look into the specifically defined rules for operational as well as management activities  prescribed in the AoA developed within the  boundaries of the provisions laid down under the  Companies Act, 2013.

However, in case of the 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 which actually adds on to the Privacy to operations of the LLP.

In both organisations, the documents shall not override the provisions or Rules and Regulations prescribed under the Indian Companies Act, 2013 and Limited Liability Partnership Act, 2008 respectively. 

Statutory Requirements & Compliance:

Organisation specific cost does not end with the incorporation, both in case of Company as well as LLP. In case both organisations, there is cost involved to maintain the active status. This involves the cost after compliances including event based and annual or time based compliances.

The compliance and restrictions in case of Private Company is 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 Companies Act, 2013. Limited Liability Partnership enjoys more flexibility of partnership in this case.

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

Any charge created or modified over the Assets of Company requires to be registered with the Registrar unlike in case of LLP.

Taxability:

The status of LLP under Income Tax Act is unclear as no separate taxable provisions are prescribed for LLP. The provisions laid down with respect to Partnership Firm are applicable to the LLP. The provisions with regards to the taxability of Pvt. Ltd. Company are clearly defined and provided under the Income tax Act. To know more about taxability of both organisations, follow our next blog post.

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 dividend on the shares held by the owners. Here, dividend is the return to the capital invested in the company. Furthermore, in return to the efforts devoted in 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 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 the on capital invested in the LLP.

Bottom Line:

On the basis of the points and explanation noted above in the blog, one can easily end up by choosing the correct form of organisation to start the business according to the requirements. However, one may consult the professionals at time where any activity driven requirements are to be considered. Before incorporating or registering any business organisation, one shall also look into the provisions to be complied with while incorporation as well as post Incorporation.