While starting up a company one has to decide which business organization they want to incorporate and carry on. The choice of business organization is very important to give shape to your business motive. Here, if one has to choose between the Private limited company registration and LLP one can see the advantages and the difference so as to choose what’s best for them.

Private company are those companies where the all shares of the company are held privately. They can operate their business themselves or hire directors to manage the company on their behalf. It is a business entity which is privately held by some share holders. It limits the owner liability to the extent of their shareholding and limits the no. of shareholders to 50 only. It also restricts shareholders to trade shares publicly.

Advantages:

  • The liability of the shareholders is limited to the extent of their shareholding their personal assets are not taken to repay the debts of the company.  Although this has one exception where there is fraud committed in relation to the company it will negate the owner’s liability protection.
  • There is restricted trade of shares, It is an advantage to the shareholders who do not want to sell the shares to the outsiders. So the risk of hostile takeover is low.
  • It has perpetual succession and has an independent identity which is different from its owners or shareholders. It means that the company will still and continue to exist even if the members die or ceases to be a member. The change in shareholders will not bring any effect on the identity of the company. It will be the same with same privileges, immunities, estates and possessions. It will continue to exist till wound up is there according to the Companies Act 2013 or any relevant act.
  • It is a Separate legal entity.  It has its own assets and liability is a legal entity which can be sued or sue or can hold and dispose of property of the company. It is capable of owing the funds and other properties. It is a legal person under whose name the company’s property is vested and is not of the shareholders.
  • There are few shareholders the decisions taken are quick and prompt. They are governed by the Companies Act 2013 and have to follow the procedures and disclosure norms under the act.
  • Income tax act 1961 provides a lower tax burden and rates for the companies compared to other type of business.
  • A company being a legal entity has the power to sue in its name and can be sued by others.

LLP

LLP Registration is limited liability partnership. It is new form of business where both partnership and corporation exists. Here the partnership is with limited liability. It is registered under LLP Act, 2008 and with Ministry of corporate affairs.

Advantages of LLP:

  • LLP can be formed by any amount of capital. There is no need for minimum capital for LLB. It is so set up hassle free and not burdensome on the owners.
  • It requires a minimum of 2 partners and there is no limit on the maximum number of partners of the LLP.
  • The cost of registering LLP is low as compared to a company.
  • All limited companies have to get their accounts audited but in case of LLP hther is no such requirement. Although it is required to audit when the contributions of LLP exceeds Rs. 25 lakh or annual turnover exceeds Rs. 40 lakh.
  • The LLP has to file only two i.e. annual return and statement of accounts and solvency.
  • LLP is treated in par with the partnership firm. The provision of dividend distribution tax is not payable on LLP. Also under Section 40(b) deductions are allowed on the interest given to partners, any payment of salary bonus commission or remuneration.

Problems with LLP:

  • LLP can be bind by the act of one partner without the other partner i.e. one partner can make all other liable or bind them.
  • They cannot raise money from public.

Difference between the LLP and Private Limited Co.

Factors of comparison Private limited company Limited liability partnership
Partners/Share holders The minimum number of shareholder required for a company is 2 and there can be upto 50 shareholders, in case of a private limited company. For formation of an LLP , minimum of 2 Partners are required. There is no limit to the maximum number of Partners. A body corporate can be a member of an LLP.
Requirements for compliance Annual return filling  board meetings and general meetings Annual return filling and Statement of Account & Solvency.
Audit compulsory Only if contribution more than Rs. 25 lakhs or turnover exceeds Rs. 40 Lakhs
Conversion Can be converted to LLP Cannot be converted into a company
Procedure Obtain DSC (Digital Signature Certificate) Obtain DIN (Directors Identification Number) Name Approval Filing for Incorporation Obtain DSC (Digital Signature Certificate) Obtain DPIN (Designated Partner Identification Number) Name Approval Filing for Incorporation File LLP Agreement
Time for registration 15-20 days 10-15 days
Dividend distribution tax Apply Not apply
Private Limited Company is preferred by Venture Capitalists over Limited Liability Partnerships

In India, VCs are not yet comfortable with LLPs, and insist that the startups they will consider should be in the form of Private limited Company. VCs are risk averse and generally have proven to be slow adopters despite significant benefits of the LLP form in case of many business models as far as India is concerned. This is surprising given that several VC funds were quick in forming LLPs instead of private trusts in order to administer and manage their funds. If you are planning to raise venture capital in the near future, private limited company is the way to go.

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