Private Limited Company vs LLP

India offers various business structures for entrepreneurs to establish their ventures, and among the most popular are Private Limited Companies and Limited Liability Partnerships (LLPs). A Private Limited Company (Pvt Ltd) is a well-established form that has been part of the Indian corporate landscape for many years.

On the other hand, the concept of a Limited Liability Partnership was introduced more recently in 2008, giving businesses a hybrid model that combines the advantages of both a partnership and a company. While both LLPs and Pvt Ltd companies share some common traits, they also differ in several key aspects. This article explores the distinctions and similarities between an LLP and a Private Limited Company.

Characteristics of a Private Limited Company
To register a private limited company, at least two individuals are required as members. This type of entity is privately owned and can accommodate up to 200 shareholders. There’s no fixed minimum capital needed for its formation, and only two directors are necessary to incorporate it. Shareholders enjoy limited liability, meaning they are responsible only up to the value of their shareholding in the event of company losses or closure. This structure is ideal for ventures with high turnover expectations and those seeking external funding.

Characteristics of an LLP
A Limited Liability Partnership (LLP) is formed through a mutual agreement between a minimum of two partners. Like a private limited company, there is no mandatory capital threshold to start an LLP. Each partner’s liability is limited to their individual contributions. Moreover, partners are accountable only for their own actions and not for the decisions or conduct of co-partners. The management of an LLP is handled directly by its partners. This format is particularly suitable for startups, traders, and small to mid-sized enterprises with limited funding needs.

LLP vs Private Limited Company: Pros and Cons

Benefits of Choosing an LLP:

• Easier and more straightforward to set up and operate
  
  

• Lower registration costs compared to private companies
  
  

• Separate legal identity, distinct from the partners
  
  

• Continuity of business even after a partner’s death
  
  

• Can be established with nominal capital
  
  

• Partners have limited personal liability
  
  

Drawbacks of an LLP:

• Hefty penalties for non-compliance
  
  

• Dissolution is required if only one partner remains
  
  

• Raising capital through equity, VC, or angel investment is challenging as LLPs cannot issue shares
  
  

Benefits of Choosing a Private Limited Company:

• No minimum paid-up capital requirement for incorporation
  
  

• Members are liable only to the extent of their shareholding
  
  

• Recognized as a separate legal entity
  
  

• Perpetual existence irrespective of membership changes
  
  

• Easier access to external funding
  
  

Drawbacks of a Private Limited Company:

• Shareholder count cannot exceed 200
  
  

• Share transfers among members are restricted
  
  

• Cannot publicly issue a prospectus for share subscriptions

Pvt Ltd vs LLP: Understanding the Key Differences

Deciding between a Private Limited Company and a Limited Liability Partnership (LLP) is crucial for any entrepreneur. To make an informed choice, it’s essential to understand how these two structures differ. Here’s a detailed comparison highlighting the differences between an LLP and a Pvt Ltd company.

Registration: LLP vs Private Limited Company

While both LLPs and Private Limited Companies follow a digital registration process through the Ministry of Corporate Affairs (MCA), their legal frameworks differ. LLPs are governed by the Limited Liability Partnership Act, 2008, whereas Private Limited Companies fall under the Companies Act, 2013. Both structures require filing registration forms with the Registrar of Companies (ROC) via the MCA portal.

To form an LLP, designated partners must obtain a Designated Partner Identification Number (DPIN). For Pvt Ltd companies, directors must acquire a Director Identification Number (DIN). The LLP registration requires submission of the FILLIP form, while a Private Limited Company is registered using the SPICe+ form. Also, the name of an LLP ends with “LLP”, whereas a Private Limited Company concludes with “Pvt. Ltd”.

The LLP is governed by an internal agreement signed between partners—called the LLP Agreement—which is submitted to the MCA but not available publicly. On the other hand, a Pvt Ltd company is governed by its Memorandum of Association (MOA) and Articles of Association (AOA), both of which are accessible to the public through the MCA on payment of a nominal fee.

Additionally, the government charges for incorporating an LLP are generally lower compared to that of a Pvt Ltd company. LLPs also require fewer documents to be notarised and less use of non-judicial stamp paper, making the process more economical and simpler.

LLP vs Pvt Ltd: Ownership and Structure

Ownership and Management

In a Limited Liability Partnership (LLP), there is no separation between ownership and management. The partners are both the owners and the ones actively running the business. Every partner is directly involved in the day-to-day operations and decision-making of the LLP.

Conversely, in a Private Limited Company (Pvt Ltd), ownership and control are divided. Shareholders own the company, while its operations are overseen by a board of directors. The shareholders are not required to be involved in the management unless they are also appointed as directors. Although shares are not publicly traded, they can be transferred privately in accordance with the Articles of Association.

LLP vs Pvt Ltd Membership and Directors

An LLP must have at least two designated partners to function, and there’s no upper cap on the number of partners allowed. LLPs do not appoint directors.

On the other hand, a Pvt Ltd company requires a minimum of two members (shareholders) and can have up to 200. It must have at least two directors, with a maximum limit of 15, unless increased through a special resolution.

LLP vs Pvt Ltd Compliance

Compliance requirements differ significantly between LLPs and Pvt Ltd companies. LLPs are not obligated to conduct board meetings or annual general meetings (AGMs), as the partners manage operations directly.

In contrast, a Pvt Ltd company must hold at least four board meetings annually and conduct an AGM within six months after the financial year ends.

Statutory audits are mandatory for all Pvt Ltd companies, regardless of turnover. For LLPs, audits are only required if their turnover exceeds ₹40 lakhs or if the capital contribution goes beyond ₹25 lakhs.

Annual compliance filings also differ:

• LLPs must file Form 8 (Statement of Account & Solvency) and Form 11 (Annual Return).
  
  

• Pvt Ltd companies must submit Form AOC-4 (Financial Statements) and Form MGT-7 (Annual Return).
  
  

LLP vs Pvt Ltd Funding 

When it comes to funding, LLPs are at a disadvantage for attracting venture capital or angel investors, as investors would need to become partners. While LLPs can secure loans from banks and financial institutions, they are not ideal for equity-based funding.

In contrast, Pvt Ltd companies can easily raise funds from angel investors and venture capital firms by offering them equity, making this structure better suited for startups aiming for rapid growth and external investment.

LLP vs Pvt Ltd: Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is permitted in both LLPs and Private Limited Companies, but the routes and conditions vary. In the case of an LLP, FDI is allowed only under specific circumstances and requires prior approval from the Reserve Bank of India (RBI) and the Foreign Investment Promotion Board (FIPB). The process is more regulated and applies mainly to sectors where 100% FDI is permitted under the automatic route and no performance-linked conditions exist.

In contrast, a Pvt Ltd company enjoys more flexibility. FDI is permitted through the automatic route in most industries, eliminating the need for prior approval. In restricted sectors, however, approval from the concerned authorities is mandatory.

LLP vs Pvt Ltd: Taxation Structure

Taxation policies differ significantly between LLPs and Pvt Ltd companies. LLPs are taxed at a flat rate of 30% on their total income. If the LLP’s income crosses ₹1 crore, an additional surcharge of 12% is levied.

Private Limited Companies have a tiered tax structure. Companies with annual turnover below ₹400 crores are taxed at 25%. If the turnover exceeds ₹400 crores, the applicable tax rate is 30%. Furthermore, companies can opt for reduced tax rates under special provisions: 22% for existing domestic companies and 15% for newly incorporated manufacturing companies, subject to conditions.

Final Thoughts: Choosing Between LLP and Pvt Ltd

Although LLPs and Pvt Ltd companies share some common characteristics, they cater to different business needs. A Pvt Ltd company is ideal for entrepreneurs who plan to scale their operations, raise funding, or seek substantial growth. It offers greater access to equity funding and is widely accepted by investors.

On the other hand, an LLP is well-suited for small business owners or professionals looking to start a venture with limited liability and operational flexibility. It combines the advantages of a traditional partnership with the legal benefits of a corporate structure, such as perpetual succession and a separate legal identity.