Private Limited Company and LLP – Differences
In India, choosing the appropriate business structure is vital for the success of any startup and there are many business structures in India from which an entrepreneur can choose to set up a Company or a business. Private Limited Company and LLP are 2 such business structures. Both companies are similar in some parts while they differ in many areas & aspects. These 2 types of companies are the common pillars that an entrepreneur might decide to choose to set up its business. Investors & Entrepreneurs may make well-informed choices that fit their requirements & goals for their businesses by being aware of the vital characteristics of each company structure. In this article, we will discuss the difference between Private Limited Company and LLP.
Meaning of a Private Limited Company and LLP
Before we jump into the difference between Private Limited Company and LLP, let’s discuss the meaning of a Private Limited Company and LLP first.
- Private Limited Company: This is a privately held business entity held by Private Stakeholders and in this case, the liability arrangement is that of a limited partnership wherein the shareholder’s liability extends only up to the number of shareholders held by them.
- LLP (Limited Liability Partnership): It’s an alternative business form that gives the benefits of a company’s limited liability & the flexibility of a Partnership. A Limited Liability Partnership is a separate legal entity that is liable to the full extent of its assets but Partners’ liability is limited to their agreed contribution in the LLP.
Pros and Cons of a Private Company and LLP in India
Following are some Pros and Cons of a Private Limited Company and LLP in India:
| Private Limited Company | LLP | ||
|---|---|---|---|
| Pros | Cons | Pros | Cons |
| No minimum paid-up capital requirement | Members are limited to 200 | It requires fewer formalities | Heavy penalty for non-compliance |
| Members have limited liability | Restricts the transfer of shares of its members | It has a separate legal existence from its partners | Difficult to raise funds or capital from Venture Capitalists, equity funds, etc. since they can’t be the LLP Shareholders |
| Perpetual Succession | It can’t issue a prospectus inviting the public to subscribe to the shares of the company | Partners have limited liability | If the number of partners goes below 2, then it will be dissolved |
| Raise funds easily | It has perpetual succession | ||
| Separate legal entity from its members | It has lesser cost of registration as compared to Company Registration |
Difference between Private Limited Company and LLP
Following is the detailed comparison table between Private Limited Company and LLP in India:
| Important Points | Private Limited Company | LLP |
| Company Formation | ||
| Incorporation | Incorporation under Provisions of Companies Act, 2013 | Incorporation under provisions of LLP Act, 2008 |
| Minimum Number of Partners or Directors | 2 Directors are required | 2 Partners are required |
| Maximum number of Shareholders or members | 200 members or shareholders are required | No such limit |
| Capital Requirement | No minimum Authorised & Paid-up Capital required | No minimum capital requirement |
| Registration Cost | Cost depends on Authorised Capital and stamp duty of each state | Registration cost is less as compared to Private Limited Company |
| Company Management | ||
| Management | Management of a Company is vested with Board of Directors (BoD) elected by Company’s Shareholders | LLP is managed by Partners as per LLP agreement |
| Ownership meetings for specific decisions | GM of shareholders to be conducted once in a year compulsorily | No requirement of meetings |
| Meeting for Management Decisions | There should be at least one meeting of BODs in every half of a calendar year & the gap between the 2 meetings is not less than 90 days | No such requirements |
| Designated Directors or Partners | A Company’s Director cannot be a Shareholder | Designated Partner should be a Partner of an LLP |
| Criteria for Startup Business in India | ||
| Startup India Registration | Any Private Limited Company in India can be registered under Startup India Program | LLP in India can be registered under Startup India Program |
| External Investment | It is the best business form for attracting External Investments from Venture Capitalists or Angels or PE | External Investments and FDI is possible but it is very difficult to attract investors to LLP |
| ESOPs for attracting employees | Only a Private Limited Company can issue ESOPs to attract employees | Not possible |
| Taxation | ||
| PAN | Company is required a separate PAN other than Director or Shareholder | LLP is required a separate PAN other than Partner |
| Tax Return Filings | It is necessary for a Company to file tax returns every year, in case of no business, a NIL is required to file. Delay in filing tax returns will attract penalties | It is necessary for an LLP to file tax returns every year, in case of no business, a NIL is required to file. Delay in filing tax returns will attract penalties |
| Taxability of Dividends in hands of Partners or Shareholders | Dividends from a domestic company up to Rs. 10 lakhs is exempted in the Shareholders’ hands. Dividend more than Rs. 10 lakhs shall be taxable at 10% in the case of HUF or Individual or Firm | Profit distributed by a Limited Liability Partnership in India is totally exempted in the Partner’s hands |
| DDT or Dividend Distribution Tax | If the Company profit is distributed as dividend, it will attract DDT at 20.36% on dividend | LLP profits after tax will be credited to Partners’ account & it will not be taxable in the Partner’s hands |
Compliance Difference between Private Company and LLP in India
Following is the compliance difference between Private Limited Company and LLP in India:
- In India, an LLP doesn’t have to conduct Board Meetings or AGM since the owners manage the business. Whereas, Directors manage a Private Limited Company in India, they must conduct at least 4 Board Meetings every year and it must also conduct an Annual General Meeting within 6 months of the end of Financial Year (F.Y.).
- A Limited Liability Partnership in India must file the Statement of Account & Solvency and Annual Returns with the Registrar of Companies in Form-8 and Form-11 respectively. Whereas, a Private Limited Company must file its Annual Financial Statements and Annual Return with the Registrar of Companies in Form AOC-4 and Form MGT-7 respectively.
- For an LLP in India, the Statutory Audit is not compulsory, an LLP should get its accounts audited when its annual turnover is more than Rs. 40 lakhs & the capital contribution is more than Rs. 25 lakhs. Whereas, the Statutory Audit is compulsory for a Private Limited Company, irrespective of its turnover.
Conclusion
A Private Limited Company and an LLP have a lot of similarities but they are different in various aspects. When a Startup or an Entrepreneur needs external funding & aims for a good turnover, then a Private Limited Company is best. When 2 or more individuals wants to start & operate a business in Partnership by contributing the capital amount, then the LLP Structure is the best. So, choose your business structure carefully as per your business needs in India.
