Private limited vs llp

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Querist : Anonymous

Querist : Anonymous (Querist)

17 November 2015 I want to start new business in food processing. Approx. turn over is 3-4 Cr. Please advise me can I start private limited or llp. Please note I want to take term loan about 1.5 cr. And case credit 50 laks. Also give information about stamp duty expense. And other legal expense. For both.

Querist : Anonymous

Querist : Anonymous (Querist)

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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10 August 2024 Choosing between a Private Limited Company and a Limited Liability Partnership (LLP) for starting a new food processing business involves evaluating several factors, including funding needs, liability, management structure, and regulatory requirements. Here’s a detailed comparison and cost overview to help you decide:

### Private Limited Company vs. Limited Liability Partnership (LLP)

**1. Structure and Liability:**

- **Private Limited Company:**
- **Legal Entity**: A separate legal entity from its owners.
- **Liability**: Limited to the amount unpaid on shares. Shareholders' personal assets are protected.
- **Compliance**: More stringent compliance requirements, including regular filings, board meetings, and adherence to the Companies Act, 2013.
- **Funding**: Easier to raise equity funding. Banks and investors generally prefer the Private Limited structure for raising large amounts of capital, such as term loans and case credits.

- **LLP:**
- **Legal Entity**: Also a separate legal entity but with less regulatory burden compared to a Private Limited Company.
- **Liability**: Limited liability for partners; personal assets are protected from business liabilities.
- **Compliance**: Simpler compliance requirements than a Private Limited Company. Requires fewer statutory meetings and less frequent filings.
- **Funding**: Raising funds can be more challenging. Banks may have stricter lending criteria for LLPs compared to Private Limited Companies.

**2. Management and Operations:**

- **Private Limited Company:**
- **Management**: Managed by a board of directors. Shareholders elect directors to manage the company.
- **Governance**: Requires annual general meetings and board resolutions.

- **LLP:**
- **Management**: Managed by partners. The partnership agreement governs the management structure.
- **Governance**: Less formal governance structure. No requirement for annual meetings.

**3. Taxation:**

- **Private Limited Company:**
- **Corporate Tax Rate**: Subject to corporate tax rates, which may be higher than LLP tax rates.
- **Dividends**: Dividend distribution tax applies.

- **LLP:**
- **Income Tax**: LLPs are taxed at a lower rate compared to companies, and there is no dividend distribution tax.

**4. Raising Capital:**

- **Private Limited Company:**
- **Ease of Raising Capital**: Easier to raise equity and debt funding. Banks and investors prefer Private Limited Companies for large loans and investments.
- **Term Loans and Case Credit**: Likely more straightforward to secure term loans and case credits from banks.

- **LLP:**
- **Ease of Raising Capital**: More challenging to raise capital. Banks might be hesitant to provide large loans or credit.
- **Term Loans and Case Credit**: May face more stringent conditions for securing loans and credit.

### Stamp Duty and Legal Expenses

**Private Limited Company:**

1. **Stamp Duty**:
- **Incorporation**: The stamp duty on the memorandum and articles of association varies by state. Typically, it ranges from ₹1,000 to ₹5,000.
- **Share Capital**: Additional duty may be applicable on the authorized share capital.

2. **Legal Expenses**:
- **Incorporation**: Legal fees for drafting and filing documents may range from ₹15,000 to ₹50,000.
- **Annual Compliance**: Costs for statutory compliance (e.g., annual returns, board meetings) can range from ₹20,000 to ₹50,000 annually, depending on the size and complexity of the company.

**LLP:**

1. **Stamp Duty**:
- **Incorporation**: Generally lower than for Private Limited Companies. The duty on the LLP agreement is usually between ₹1,000 and ₹5,000, depending on the state.

2. **Legal Expenses**:
- **Incorporation**: Legal fees for setting up an LLP are typically lower, ranging from ₹10,000 to ₹30,000.
- **Annual Compliance**: Fewer compliance costs compared to a Private Limited Company, usually around ₹10,000 to ₹20,000 annually.

### Recommendations:

- **For Large Funding Requirements**: If you plan to take a substantial term loan (₹1.5 Cr) and case credit (₹50 Lakhs), a Private Limited Company is generally preferred due to its more favorable structure for raising large amounts of capital and its higher acceptance by banks.
- **For Simpler Compliance**: If you prefer a simpler structure with fewer regulatory burdens and lower initial costs, an LLP might be suitable. However, be aware of potential challenges in securing significant loans.

### Conclusion:

For your food processing business with a projected turnover of ₹3-4 Cr and significant funding needs, a **Private Limited Company** is likely the better choice. It provides a more robust structure for raising capital and managing large loans, despite higher compliance costs. If you prioritize lower compliance and legal costs and can manage with potentially more stringent funding requirements, an **LLP** could be considered.

Consulting with a corporate lawyer or company secretary can provide tailored advice based on your specific needs and help with the incorporation process.

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