30 Jul 2019, 17:32 — 8 min read
Background: A Private Limited Company is governed by the Companies Act, 2013 and the Companies Incorporation Rules, 2014. This type of business entity limits owner liability to their shareholdings, the number of shareholders to 200, and restricts shareholders from publicly trading shares. In case of a Limited Liability Partnership, the shareholders have limited liability in the company which means in case of a crisis, they don’t need to sell off their assets to pay off debts. Anisha Patnaik, in her previous article explained all about the valuation game and what it means. In this article she compares Private Limited Company and LLP as legal structure for a business.
Many entrepreneurs starting a new business are curious about the comparison between Private Limited Company vs. LLP. Both entities offer many similar features required to run a small to large sized business, while also differing starkly on certain aspects.
In this article, we will decode for you the comparison between Private Limited Company and LLP from the viewpoint of an entrepreneur starting a new business.
Both Private Limited Company and LLP are registered with the Ministry of Corporate Affairs (MCA) and are issued a Certificate of Incorporation.
The Private limited company registration process and the LLP registration process are very similar with some differences in the documents and forms being filed for incorporation. The steps for incorporation of a Private Limited Company are:
LLP registration also has a similar process:
Both Private Limited Company and LLP are registered with the Ministry of Corporate Affairs (MCA) and are issued a Certificate of Incorporation. The processing time for incorporation of a private limited company and LLP are also comparable with both entities taking on average about 20 days to incorporate.
The government fee for incorporation of an LLP is significantly cheaper when compared to the government fee for incorporation of a Private Limited Company. LLPs have been introduced to meet the needs of small businesses and hence LLP enjoy lower government fee for incorporation. Also, the number of documents that have to be printed on Non-Judicial Stamp Paper and Notarized is lesser for LLP registration when compared to that of a Private Limited Company registration.
Both LLP and Private Limited Company offer many of the same features. LLP and Private Limited Company are both separate legal entities and have assets and liabilities that are separate from that of the promoters. LLP and Private Limited Company are both transferable, though a Private Limited Company offers more flexibility when it comes to transferring or sharing of ownership. LLP and Private Limited Company both have perennial life, unless and otherwise closed by the promoters or a competent authority.
Private Limited Company offers more flexibility for the promoters when it comes to ownership and ownership sharing. The ownership of a Private Limited Company is determined by its shareholding and a private limited company can have up to 200 shareholders.Further, since the shareholders do not directly participate in the management of the company, there is a clear distinction in a private limited company between the owners of share and the management. Hence, a private limited company is advantageous when it comes to ownership and management features.
In a LLP, there is not a clear distinction between the owners and management. In a LLP, the LLP Partners hold ownership of the LLP and also hold powers to manage the LLP. Therefore, a Partner in an LLP will be both an owner and a manager, whereas, in a Private Limited Company, the shareholders (owners) do not necessarily have to have management powers.
A private limited company is recommended for any business that is considering FDI or Employee Stock Options or Equity funding or Venture Capital funding.
Tax compliances are similar for both private limited company and LLP. However, when it comes to compliance relating to the Ministry of Corporate Affairs, LLP enjoys significant advantages. An LLP does not have to have its accounts audited if the annual turnover of the LLP is less than INR 40 lakhs and the capital contribution is less than INR 25 lakhs. An LLP would, however, have to file LLP FORM 8 and LLP FORM 11.
A private limited company, on the other hand, would have to file annual return audited financial statements with the Ministry of Corporate Affairs each year.
Also read: How to register a LLP in India?
Fines and Penalties
The penalty for non-compliance or late filing of documents with the Ministry of Corporate Affairs are most of the times higher for an LLP as a flat fee of Rs.100 per day is levied when the non-compliance continues with no cap on the liability. Therefore, LLPs could incur larger penalty or fines from MCA due to non-compliance. Therefore, it is important for the promoters of an LLP to be aware of the due dates and file the required documents with the registrar on time.
Private limited companies have been in existence for longer than LLPs and enjoy widespread recognition in India and the world. Therefore, there are well-established processes and procedures for Private Limited Companies. LLPs, on the other hand, are a recently introduced entity in India. Therefore, some of the rules, regulations, and procedures are continuing to evolve. LLPs are also not as recognized in India as a private limited company since it is a relatively new concept.
Private limited company offers its promoters a better image or standing than that of an LLP. Private limited company also enjoys better access to funding from banks and foreign direct investment.
Foreigners are allowed to invest in an LLP only with prior approval of Reserve Bank of India and Foreign Investment Promotion Board (FIPB) approval, whereas in Private Limited Company Foreigners are allowed to invest in a Private Limited Company under the Automatic Approval route in most sectors.
Existence or Survivability
Existence of a Partnership business is dependent on the Partners. Could be up for dissolution due to death of a partner.
In LLP, existence is not dependent on the Partners. Could be dissolved only voluntarily or by an Order of the Company Law Board, however in a Private Limited Company existence of a Private Limited Company is not dependent on the Directors or Shareholders. Could be dissolved only voluntarily or by Regulatory Authorities.
Registering the right type of company is crucial to the success of your business as it will help you avoid any complications later on. Every entrepreneur needs to closely consider his/her needs before even thinking of registering a company because every business is unique and the type of company you choose can go a long way in ensuring its success!
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