LLP vs Private Limited Company: A Comparative Analysis for Business Owners

Published Sun, 12 May 2024 | Updated Sun, 12 May 2024

Choosing the right business structure is crucial for entrepreneurs, as it impacts various aspects of operations, liability, taxation, and governance. Limited Liability Partnership (LLP) and Private Limited Company are two popular choices among business owners. Both these business structure has their own unique perks and drawbacks, so it's crucial to grasp their variations before making a choice. People often lean towards a Private Limited Company if they aim to gather funds and grow quickly. It brings benefits like limited liability, simple share transfers, and its own legal identity. On the other hand, an LLP merges partnership and corporation traits, gaining popularity for its easy compliance, tax benefits, and adaptable management style. Let's delve into a comparative analysis to help entrepreneurs make informed decisions.

What is Limited Liability Partnerships (LLP)?

A Limited Liability Partnership (LLP) is a distinct business structure that combines the benefits of a company with limited liability and the organizational flexibility of a partnership. It allows its members, known as partners, to structure their internal operations based on mutually agreed-upon terms.

Features of Limited Liability Partnerships:

1. Corporate Body: An LLP is formed and governed by the Limited Liability Partnership Act, 2008. It is considered a separate legal entity distinct from its partners.
2. Separate Legal Entity: As per Section 3(1) of the LLP Act, an LLP has its own legal identity, separate from its partners. This means it can enter into contracts, own assets, and sue or be sued in its own name.
3. Perpetual Succession: Under Section 3(2) of the LLP Act, an LLP enjoys perpetual succession, meaning it continues to exist despite changes in its partners. The death, retirement, or insolvency of a partner does not affect the LLP's continuity.
4. Partnership Constitution: Changes in the partnership's composition, such as the addition or removal of partners, do not impact the LLP's existence, rights, or liabilities.
5. Minimum Partners: An LLP requires a minimum of two partners to be formed, with no upper limit on the maximum number of partners.
6. Eligible Partners: Partners in an LLP can be individuals or corporate entities, offering flexibility in choosing partners from various backgrounds or organizations.

Overall, an LLP provides entrepreneurs, professionals, and service providers with a commercially efficient and flexible business structure that offers limited liability protection while allowing customization of internal operations based on mutual agreements among partners.

What is Private Limited Company?

A Private Limited Company is a type of business entity that offers limited liability protection to its shareholders while allowing for private ownership and management.

Section 2(68) of the Companies Act 2013 defines a private company as a company that meets certain criteria:

1. Minimum Paid-Up Share Capital: The company must have a minimum paid-up share capital of rupees one lakh or any higher amount prescribed by law.
2. Restrictions on Share Transfer: The articles of association of the company must contain provisions that restrict the right of shareholders to transfer their shares. This means that shareholders cannot freely sell or transfer their shares to others without the consent of the company or other shareholders.
3. Limit on Number of Members: Except in the case of One Person Company (OPC), the company must limit the number of its members to two hundred. This means that there cannot be more than two hundred individuals or entities holding shares in the company at any given time.

These criteria ensure that private companies maintain a certain level of control, privacy, and stability in their ownership structure and operations. They also provide clarity and legal framework regarding share ownership and transfer within the company.

Features of Private Limited Company:

1. Limited Liability: Shareholders' liability is limited to the amount they have invested in the company. Their personal assets are protected in case of business debts or liabilities.
2. Separate Legal Entity: A Private Limited Company is considered a separate legal entity distinct from its shareholders. It can own assets, enter into contracts, sue or be sued in its own name.
3. Shareholders: A Private Limited Company can have a minimum of two shareholders and a maximum of 200 shareholders. Shareholders can be individuals, corporate entities, or other legal entities.
4. Directors: The company is managed by directors appointed by the shareholders. There must be a minimum of two directors and a maximum of 15 directors. Directors are responsible for the day-to-day operations and decision-making of the company.
5. Minimum Capital Requirement: There is no minimum capital requirement prescribed under the Companies Act, 2013, for a Private Limited Company. The capital structure of the company is determined by its shareholders.
6. Ownership and Management: In a Private Limited Company, there is a clear distinction between ownership (shareholders) and management (directors). Shareholders elect the board of directors, who are responsible for managing the company's affairs.
7. Transferability of Shares: Shares of a Private Limited Company can be easily transferred, allowing for changes in ownership. However, in private limited companies, existing shareholders often have the right of first refusal before shares can be transferred to external parties.
8. Compliance Requirements: Private Limited Companies have certain compliance requirements, including annual filings with regulatory authorities, conducting statutory audits, and holding annual general meetings of shareholders.

Factors to consider when choosing between LLP and Private Limited Company

1. Eligibility Criteria: Private Limited Companies require a minimum of 2 shareholders and can have a maximum of 200. They also need at least 2 directors, with a maximum of 15. There's no prescribed minimum or maximum capital under the Companies Act, 2023. LLPs, on the other hand, need a minimum of 2 partners, with no limit on the maximum. Designated partners range from 2 to 15, and while there's no specified minimum capital, some capital is required.
2. Formation: Setting up a Private Limited Company involves a simple online process through the MCA website, starting with obtaining digital signatures for all promoters, naming the company, and filing for incorporation. For LLPs, the process mirrors that of company incorporation, followed by drafting and filing an LLP agreement within 30 days of incorporation.
3. Compliance Burden: Private Limited Companies generally have higher compliance burdens, including mandatory audits, ROC annual returns, ITR filings, and maintaining records and registers. LLPs have relatively lower compliance requirements, with statutory audits triggered only when turnover exceeds 40 lakhs or capital reaches 25 lakhs, along with similar ROC filings, ITRs, and record-keeping.
4. Liability: In both structures, liability is limited. Shareholders in a Private Limited Company are liable only up to their investment, while partners in an LLP are typically liable only up to their capital contribution.
5. Taxation: Private Limited Companies are subject to corporate income tax, including taxes on distributed dividends. LLPs are taxed at the LLP level, but there's no tax on profit distribution among partners.
6. Fundraising: Private Limited Companies find it easier to raise funds from investors, including venture capitalists and angel investors, through various methods like rights issues, private placements, preference shares, and debentures. LLPs may face challenges in fundraising due to restrictions on ownership and transferability.
7. Ownership & Management: Private Limited Companies have a clear distinction between owners (shareholders) and managers (directors), allowing for professional management. In LLPs, partners manage the business directly, though they can assign specific responsibilities.
8. Transferability of Interest: Shares in Private Limited Companies can be easily transferred, with existing shareholders given the first right of refusal. Transferring partnership rights in LLPs requires consent from other partners and involves more complex procedures.
9. Perpetual Succession: Both structures can enjoy perpetual succession, meaning they continue to exist even if ownership changes, though LLPs may face complexities with partner entry and exit.
10. Foreign Ownership: Foreign nationals and entities can be shareholders in Private Limited Companies, subject to compliance with FEMA regulations. FDI in LLPs is permitted only in sectors open for 100% foreign investment.
11. Statutory Audit: Statutory audits are mandatory for Private Limited Companies, regardless of turnover or capital, while LLPs are exempt if turnover is less than INR 40 lakhs or capital contribution is less than INR 25 lakhs.
12. Annual Filings: Private Limited Companies must file annual financial statements and returns with the RoC, while LLPs file annual statements of accounts and solvency with the MCA.
13. Dissolution: Winding up a defunct Private Limited Company involves filing a simplified application, while winding up an active one is more complex. LLPs can close inactive ones with Form 24 and active ones require NCLT applications.

Case studies and real-life examples comparing LLP and Private Limited Company

Here are some case studies and real-life examples comparing Limited Liability Partnerships (LLPs) and Private Limited Companies:

Tech Startup Ventures:

LLP: A group of software developers decided to start a tech consultancy firm. They opted for an LLP structure due to its flexibility in management and tax advantages. As partners, they share profits and losses based on their contribution and have limited liability protection. This structure allows them to retain control over decision-making and allocate responsibilities based on expertise.

Private Limited Company: Another group of tech entrepreneurs established a similar venture but chose to register it as a Private Limited Company. While they also benefit from limited liability protection, they find the Private Limited Company structure more conducive to raising funds from external investors. They issued shares to angel investors and venture capitalists, enabling them to raise capital for expansion and innovation. However, they have stricter compliance requirements compared to an LLP.

Retail Businesses:

LLP: A family-owned retail business transitioned to an LLP to streamline operations and succession planning. By converting to an LLP, they retained family ownership and control while mitigating personal liability risks. The LLP structure allows them to involve multiple family members as partners, ensuring continuity and collaboration in decision-making.

Private Limited Company: Conversely, a retail chain seeking rapid expansion and external investment chose to register as a Private Limited Company. They issued shares to private investors and went public to raise capital through an Initial Public Offering (IPO). While this provided access to significant funds for expansion, it also subjected them to stringent regulatory requirements and shareholder scrutiny.

These case studies highlight how the choice between an LLP and a Private Limited Company depends on factors such as business objectives, ownership structure, management preferences, and growth strategies. Each structure offers distinct advantages and limitations, requiring careful consideration based on the specific needs and goals of the business.

Conclusion

Both LLP and Private Limited Company offer unique advantages and cater to different business needs. While LLP provides flexibility, reduced compliance burden, and partnership-oriented management, Private Limited Company offers limited liability protection, easier access to capital, and enhanced credibility. Entrepreneurs should carefully assess their business objectives, long-term goals, and regulatory considerations before selecting the most suitable structure for their venture.

In summary, LLP vs Private Limited Company decision hinges on factors such as liability protection, taxation, compliance requirements, ownership flexibility, and long-term growth aspirations. Consulting Companies Next’s learned legal and financial advisors can help entrepreneurs in making a well-informed decision aligned with their business objectives.

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