When a layman intends to start a business, it is often unclear to him which business form is best for the new business entity. The two most common business form an entrepreneur selects is Private Limited Company and Limited Liability Partnership. These are 2 different concepts governed by Indian corporate law.
A Limited Liability Partnership is a corporate body that is constituted under the Limited Liability Partnership Act, 2008. The LLP enjoys perpetual succession and functions as a separate legal entity from its partners. The existence, rights, and responsibilities of the LLP partnership will not be impacted by the change in the partners. The Private Limited Company is prohibited from transferring shares under the Companies Act, 2013. The Private Limited Company is a separate legal entity as LLP and also provides limited liabilities protection to the members. But most entrepreneurs get confused about which one is better and easy to operate. So let us see how registering LLP is better idea than registering a Private Limited Company.
What is a Limited Liability Partnership?
A Limited Liability Partnership is a business that requires at least two partners and there is no upper limit for number of partners in the firm. It is an alternative corporate business form.
What is a Private Limited Company?
In India, a Private Limited Company falls in between of a partnership and a widely owned public company. A Private Limited Company provides its shareholders with limited liability and legal protection. It can be established with at least two people.
How registering an LLP is better than a Private Limited Company?
It is easy to say the registration of both Private Limited Company and a Limited Liability Partnership is simple. Thus, it is not the issue or question of ease of registering but the question here is the direction and future of business. Sometimes it is beneficial to incorporate as a Private Limited Company. But we will provide you with a comprehensive argument on why LLP is better than a Private Limited Company:
- LLPs combine both the characteristic of the flexibility of partnership firms with the limited liability protection to members of the Private Limited Company.
- In comparison to the cost of forming a Limited Liability Partnership is substantially less than the cost of forming a Private Limited Company.
- In comparison to Private Limited Companies, the requirements of statutory compliance are less for LLPs. If an LLP has not reached the threshold limit of INR 40 lakhs as the aggregate turnover or revenue contribution of INR 25 lakhs for the particular financial year, then there is no need of auditing the financial statement and accounts. However, a Private Limited Company must audit the financial statements and accounts of the company.
- A company can only increase the number of owners in a Private Limited Company to a maximum of 200 shareholders due to its condition of restricted ownership. However, LLPs are not subject to any restrictions regarding the maximum number of members in the firm.
- The need of holding meetings is substantially more in a Private Limited Company with the requirement of holding 4 Board Meetings. But if we talk about LLP, the firm must hold 1 annual Board Meeting for all the partners.
- The incorporation cost of an LLP is very less as compared to the incorporation cost of a Private Limited Company.
- In the case of LLP, there are many tax advantages. Such as wealth tax, surcharge, and dividend distribution tax (DDT) are among the taxes that are not imposed on Limited Liability Partnership whereas all these taxes are imposed in Private Limited Companies.
- There are some Private Limited Companies that fail to comply with the mandatory compliance such as filing an annual return, filing financial statements and insolvency etc. with MCA can lead to hefty penalties up to INR 1 lakhs. But if the LLP fails to comply with the compliances then the penalty is very low as compared to the Private Limited Company.
Similarities between Limited Liability Partnership and Private Limited Company
There are some similarities between an LLP and Private Limited Company:
- Both LLP and Private Limited Companies require a minimum of 2 directors or shareholders to start the incorporation process.
- Both LLP and Private Limited Company provide the limited liability protection to the members or shareholders. It means that the members or shareholders are only liable for the nominal value of shares they own in the business.
- LLP and Private Limited Company are the body corporate and a separate legal entities from its members or shareholders.
There are more benefits of LLP over a Private Limited Company. In light of these benefits, it is a wise step for entrepreneurs or early-phase start-up to choose LLP business form. Registering as an LLP will help you in many ways like less statutory compliance, low cost of incorporation, can have end number of shareholders etc.
Tags llp corporate law