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When it comes to registering a business in India, two popular options available are Limited Liability Partnership (LLP) and a Private Limited Company. Both these business structure offers liability protection to their owners but are different in many ways in terms of their overall governing body and compliance requirement. While LLPs are allowed for simpler tax structure and compliances, these are stringent for private limited companies. This blog will provide key benefits and limitations of both LLP and private business structure in India basis which a person can decide which strucute is beneficial for him to start his dream business.
An LLP is a form of Partnership where liability of each partner is limited by nature that means personal assets of partners cannot be attached for LLP liability. LLPs are particularly popular among professional services firms, startups, and small businesses due to their reducd income tax rate and comparatively simpler compliance requirements.
Partners will no be held personally liable for the LLP business liablility beyond their total capital contribution.
LLPs have fewer regulations around board meetings and management structure.
Compliance and reporting requirements are less stringent for LLPs.
A Private Limited Company is a corporate structure where the liability of the shareholders are limited to their shareholding in the business. Companies are governed by legislation requirement under Companies Act, 2013, and is ideal for businesses that aspire to grow, attract investors, explore funding or eventually list on a stock exchange.
Shareholder's liability is limited to the extent of their shareholding in the business.
A Private Limited Company is an independent entity separate from its shareholders.
More formalized structure and potential to attract institutional funding.
Partner's liability is limited to the capital they contribute in LLP therefore personal assets of partners are not at risk in case of business default.
Shareholders' liability is limited to the extent of shareholding in the business therefore personal assets cannot be attached for business losses.
At least two partners is mandatory in forming LLP and there is no upper limit on the number of partners.
Minimum of two shareholder is required in forming a Company and it can goes upto maximum of 200 shareholders.
Compliance for LLPs are comparatively easier with fewer documentation, ROC forms, report and meeting requirements.
Private limited companies have to comply with more regulations like regular board meetings, maintaining minutes, and filing annual financials and other compliance reports with the Registrar of Companies (ROC) and are more stringent compared to LLPs.
LLPs are managed by designated partners.
Companies are managed by a Board of Directors who are professionals in the industry by following structured procedures and meetings to make key business decisions.
LLPs are taxed at a flat rate of 30%. They are not subject to the Dividend Distribution Tax (DDT), which makes them cost-effective as per Income tax Act, 1961.
Private Limited Company are taxed at different rates normally between 25-30% based on their turnover. Dividends are also subject to taxes, making tax outflows higher.
Audit is mandatory only if the LLP's turnover exceeds ₹40 lakh or if the capital contribution exceeds ₹25 lakh.
A private limited company is required get accounts audited as per Companies Act 2013, irrespective of turnover or profit, leading to additional cost.
LLPs is considered less formal structured as compared to Company and have limited funding options. They cannot raise funds through equity shares. Banks may also be less willing to offer loans to LLPs as compared to companies.
A private limited company can issue shares to raise equity capital by diluting their shareholding, which makes it easier to attract investors and secure funding.
Foreign Direct Investment (FDI) in LLPs is permitted but requires prior approval from the Reserve Bank of India (RBI).
Private limited companies have more relaxed FDI regulations and can receive investments via the automatic route in many sectors leads to easier funding to grow business.
Ownership transfer in an LLP is restrictive, addition or exit of partner is possible through amendment of the LLP agreement.
Shares in a private limited company can be more easily transferred via transfer of share certificate and few ROC compliance requirement.
Both LLP and Company structure provides limited liability to their owners, but they differ significantly in terms of compliance, taxation, management, and growth potential. Choosing between an LLP and a Private Limited Company is a strategic decision which may impact long term business plans. Therefore details evaluation is required from every aspect of your business goal, scalability, compliance requirement and cost involved. if the preference is flexibility, low-compliance requirement, low cost of compliance and low tax rate an LLP will be ideal. However, if preference is to attract investors , attract venture funding then more formal structure would be relevant which is a Private Limited Company.
We recommend to get in touch with a professional who can explain every aspect of these legal structure which can help you to make an informed decision based on your specific business and future plans.