Starting a business is no cakewalk; there are a lot of things entrepreneurs have to consider while investing in a huge amount of hard work, effort and time.
If you are one of those aspiring entrepreneurs looking forward to starting your enterprise, there are chances that you must have thought of one of the most fundamental issues about what kind of business entity: a private company incorporated or a limited liability partnership (LLP) would suit your business needs.
It is crucial to know about both these types of companies in order to assess which option would prove better for the business to flourish.
While both these legal entities: LLP and private limited have their distinct advantages and disadvantages, there are substantial similarities and differences too that we will look forward to in this brief piece of annotation.
LLP vs. Private Limited Company: Where does the difference lie?
Limited liability partnerships were first introduced in 2008 under the LLP Act and have been growing in number ever since.
Though LLP’s are not as popular as private companies yet they provide nearly all the benefits of a private limited corporation without any downsides associated with that of a partnership firm.
LLP offers limited liability, offers simpler tax structure( there is no concept of dividend distribution tax as it is in Private Ltd.) , can facilitate accommodation of unlimited partners while offering credibility of registration from Ministry of Corporate Affairs (MCA).
1. Unlimited Accommodation of Partners
The minimum number of partners required in case of LLP is 2, with no limitation on maximum partners. While in a private company the maximum number of members cannot exceed 200.
- The rate of income tax applicable on an LLP is 30% where it is treated at par with partnership firms.
- In the case of total income exceeding Rs 1 Crore, the amount of income tax gets increased through a surcharge at the rate of 12%.
- Additionally, Education Cess at 2% and SHEC at 1% are also applicable.
- Wealth Tax is not applicable for an LLP
Private Limited Company:
- The rate of income tax for a private company is 25% in case they have a turnover of less than Rs 50 cores and 30% in all other cases.
- Surcharge: When the total income of the company exceeds Rs 1 crore but does not exceed Rs 10 crore, the rate of income tax is increased at the rate of 7%. In cases, where the total income exceeds Rs 10 crore, the surcharge is applicable at the rate of 12%
- Education Cess applicable is 2% and SHEC is chargeable at 1%
- Wealth Tax is applicable at the rate of 1%.
3. Economic benefits:
Additionally LLP is more economical to the private limited company in terms of establishment cost and maintenance and also comes with fewer compliance regulations.
A private limited company has a minimum of 2 and a maximum of 200 members. Private limited companies have a wider range of applicability over LLP’s. While providing all benefits of an LLP, a private company differentiates between directors and shareholders. This makes it gain an edge over LLP in raising funding and attracting new talent by providing ESOP’s.
Employees nowadays look for additional benefits than just a high salary while getting associated with any organisation. Attracting good talent definitely requires businesses to offer benefits such as stock ownership, training, and flexible timings. Out of all the benefits, stock ownership is definitely more valued as it makes employees feel they are a part of the business thereby motivating them to perform better. Thus, private companies have an edge over LLP’s as they can provide employees with ESOP’s and stock ownership which helps in reinforcing hiring for the organisation.
Hence, If you are looking to raise fund for your organization or reinforcing hiring in near term you can register with private limited. But, in case you have plans of running a traditional brick and mortar business, consider going for an LLP over a private limited corporation.
Private Limited Company has offers greater flexibility when it comes to sharing of ownership with shareholders.
The ownership here is decided upon shareholding where the maximum number of shareholders can be 200. Moreover, since shareholders need not participate directly in the management of the company, it brings a clear distinction as well as transparency between share ownership and management.
Talking about LLP, there is no distinction between management and ownership. The partners of LLP hold both the ownership of LLP as well as the ability to manage it.
This is perhaps the reason a private limited company is preferred over LLP for any business considering FDI or ESOP’s or Venture capital funding.
5. Process of Registration
The process of registration for LLP and private companies is quite similar however the differences are there in terms of documents and forms that required for registration.
The steps involved in a private limited company registration are:
- Seeking approval of proposed directors for obtaining Digital Signature Certificate
- Getting Director Identification Number (DIN) from the proposed directors
- Getting name approval from MCA followed by filing for incorporation
The steps involved for LLP registration are:
- Getting a Digital Signature Certificate (DSC) from the proposed partners
- Getting either Director Identification Number (DIN) or Designated Partner Identification Number (DPIN) from the partners
- Obtaining name approval from MCA and filing
It is important to note that both LLP and private limited company are registered under Ministry of Corporate Affairs and are issued a certification of registration from the regulating body.
Moreover, the time frame for incorporation of both these entities is also comparable which is approximately 20 days for incorporation.
6. Registration Cost
LLP’s were introduced with a motive to meet the needs of a small business and hence they enjoy some benefits from the government which cannot be availed by private limited companies.
There is no minimum capital requirement in case of LLP, only incorporation charges are applicable which are Rs 7999/-. On the other hand, the minimum capital requirement for private limited company incorporation is Rs 100,000/. In addition, the incorporation charges are also there which are Rs 12999/-
7. Tax Structure and Compliance
LLP has a simpler tax structure where two taxes are functional – an income tax and an alternate minimum tax. This makes it an attractive option over the private limited company. Both the companies i.e. private limited as well as LLP have to pay an income tax at a rate of 30% of their taxable income along with additional surcharges depending on the total income.
The main point of difference lies in the fact that a private company has to also pay a dividend distribution tax applicable at the rate of 20.36% (15% tax plus surcharge and cess) on any amount declared or distributed by a private company to its shareholders. While in an LLP, there is no dividend distribution tax.
In terms of tax compliance associated with the Ministry of Corporate Affairs, LLP has a significant advantage over private limited.
An LLP is not required to get its account audited if its annual turnover is less than Rs 40 lakhs or the capital contributions are less than Rs 25 lakhs.
8. Transfer of Shares
In a private limited corporation, a shareholder has the right to transfer his share to any other shareholder. However, in an LLP share transfer are strictly governed via regulations of an LLP agreement.
9. Voting Rights
The factor for determining voting rights in a private limited company is the number of shares held by a shareholder. While in an LLP, voting rights are decided as per the agreement.
10. Annual Meetings
A private limited company is subjected to conduct regular annual meetings and board conferences as per the regulations mentioned in the Companies Act. An LLP is not subjected to such compulsions.
11. Foreign Ownership
Foreigners are not permitted to invest in Private Limited companies under the automatic approval route for the majority of sectors.
On the other hand, Foreigners can invest in an LLP provided they are given approval from Reserve Bank of India (RBI) as well as from the Foreign Investment Promotion Board (FIPB).
For a better understanding of similarities and differences between an LLP and a private limited company, we have come up with a tabular distinction:
|Factors||LLP||Private Limited Company|
|Prevailing Law||It is prevailed by Limited Liability Partnership Act, 2008||It is prevailed by the Companies Act, 2013|
|Registration||It is required to register with the MCA ( Ministry of Corporate Affairs)||It is also required to be registered by MCA|
|Number of Members||Minimum-2Maximum- unlimited partners||Minimum-2Maximum-200 members|
|Compliance Requirements||Annual Return Filing||Annual Return Filing Board Meetings & General Meetings|
|Taxation||Profit of LLP is taxed at 30% cess|
Education Cess at 2% and SHEC at 1% are also applicable.
Wealth Tax is not applicable
|Income of private limited is taxed at 25% for turnover less than 50 Cr while at 30% for turnover exceeding 50 Cr|
Education Cess applicable is 2% and SHEC is chargeable at 1%
Wealth Tax is applicable at the rate of 1%.
|Dividend Distribution Tax||20.36%||Nil|
|Conversion||Cannot be converted into a private company||Conversion into LLP is possible|
|Foreign Ownership||Prior approval of RBI is needed by a foreigner to invest or become a member of LLP||Foreigners can invest in a private company under the automated approval route|
|Venture Capital Funding||No||Yes|
|Ideal For||People looking forward to raising capital||Traditional Brick & Mortar Business|
Hence, having looked over multiple factors and considering all aspects we can say that LLP is ‘more flexible’ while the private limited company is more ‘old yet reliable’.
While your end decision to go with LLP or private limited company can depend on many factors such business requirements, future plans and most importantly the kind of liability you want to get involved with, a right choice will definitely bring a great impact in paving a road for your business success.