LLP vs Private Limited Company- Comparison between 2 important forms of organisation

LLP vs Private Limited Company- Comparison  between 2 important forms of organisation

Introduction

Private Limited Company and Limited Liability Partnership are two different business structures governed by two different acts namely Companies Act 2013 and Limited Liability Partnership Act 2008 respectively. Both entities offer many similar features required to run a small to large sized business, while there are many differences also in some aspects.

What do you mean by a Limited Liability Partnership (LLP)

A limited liability partnership is a partnership in which some or all partners have limited liabilities. It therefore can exhibit elements of partnerships and corporations. LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. No partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct. Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners.

What are the advantages of forming an LLP?

1. LLP is a separate legal entity registered under the LLP Act, 2008. It can buy, rent, lease, own property, employ staff, enter into contracts, and be held accountable if necessary to do so. The partners of a LLP are not personally liable for the liabilities of the LLP.
2. Limited liability protects the member’s personal assets from the liabilities of the business.
3. The operation of the partnership and distribution of profits is determined by written agreement between the members. The partners are free to draft the agreement as they please, with regard to their rights and duties.
4. An LLP requires a minimum of 2 partners while there is no limit on the maximum number of partners. This is in contrast to a private limited company wherein there is a restriction of not having more than 200 members.
5. There is no minimum capital requirement in LLP.
6. For income tax purpose, LLP is treated on par with partnership firms. Thus, LLP is liable for payment of income tax and share of its partners in LLP is not liable to tax. Deduction under Section 40(b) of Interest to partners, any payment of salary, bonus, commission or remuneration is allowed.
7. No Dividend Distribution Taxis payable in the case of LLP and profits of an LLP can be easily withdrawn by the partners.
8. An LLP is much easier and cheaper to run than a private limited company as there are way lesser compliances.The cost of registering LLP is low as compared to the cost of incorporating a private limited or a public limited company.
9. It is also easier to wind-up an LLP, as compared to a private limited company.
10. One can operate the LLP with different levels of membership – designate members & non designate members
11. It is not mandatory to conduct annual statutory meetings.

Disadvantages of an LLP

1. Public disclosure is the main disadvantage of an LLP. Financial accounts have to be submitted to Companies House for the public record. The accounts may declare income of the members which they may not wish to be made public.
2. Profit cannot be retained in the same way as a company limited by shares. This means all earned profit is effectively distributed with no flexibility to hold over profit to a future tax year.
3. An LLP must have at least two members. If one member chooses to leave the partnership the LLP may have to be dissolved.
4. LLP’s generally are unable to raise venture capital (VC) funding. VCs would be unwilling to invest in an LLP structure. This is because all ‘shareholders’ in an LLP must be partners, which have certain responsibilities toward the entity. No VC wants any of these responsibilities, and would, therefore, only invest in a private limited company.
5. An LLP’s compliances are minimal, but if the same are not complied with, the LLP could end up paying more in fines than one would with a private limited company. There is no cap on the penalty and it could run into lakhs if an LLP has not filed its annual return for a few years.
6. LLPs are taxed at a higher income tax rate of 30%, irrespective of the turnover.
7. An NRI/Foreign national who wants to incorporate an LLP in India shall have at least one partner who is an Indian citizen. Two foreign partners cannot form an LLP without having one resident Indian partner along with them.
8. If a partner wants to transfer his/her ownership rights then he/she has to obtain the consent of all the partners.

What do you mean by a Private Limited Company?

A private limited company is a company which is privately held for small businesses. The liability of the members of a Private Limited Company is limited to the amount of shares respectively held by them.Shares of Private Limited Company cannot be publically traded.

Advantages of a Private Limited Company

1. A private company is a separate legal entity established under the Act. A company form of organization has wide legal capacity and can own property and also incur debts.
2. The members (Shareholders/Directors) of a company have no personal liability to the creditors of a company for such debts.
3. A private limited company has ‘perpetual succession’. A company, being a separate legal person, is unaffected by the death or other departure of any member but continues to be in existence irrespective of the changes in membership.
4. Unlike proprietorships and partnerships, in a limited liability company, the liability of the members in respect of the company’s debts is limited. The liability of the members of a company is limited only to the extent of the face value of shares taken up by them.
5. A company being a distinct legal entity, can acquire, own, enjoy and alienate property in its own name. The shareholders are not the owners of the company’s property. The company itself is the true owner
6. In the company form of organization it is possible for a company to make a valid and effective contract with any of its members. It is also possible for a person to be in control of a company and at the same time be in its employment. Thus, a person can at the same time be a shareholder, creditor, director and also an employee of the company.
7. A company enjoys better sources for the borrowing of funds. It can issue debentures, secured as well as unsecured and can also accept deposits from the public, etc. Even banking and financial institutions prefer to render large financial assistance to a company rather than partnership firms or proprietary concerns.

Disadvantages of Private Limited Company

1. Registering a private limited company involves processes and costs which are not applicable to an unregistered entity like proprietorship.
2. A private limited company requires a range of compliance post incorporation. All companies are required to hold board meetings, general meetings, get the accounts audited, maintain a statutory register and file an annual return, maintain compliance with tax and labour laws, etc.
3. A major disadvantage of a private limited company is that it requires a minimum of two persons to act as Directors and shareholders. So, any sole entrepreneur who wishes to start and operate a business by him/herself cannot start a private limited company.
4. In a Private Limited Company the number members cannot exceed 200.
5. A private limited company restricts the transfer ability of shares by its articles and its shares cannot be quoted at a stock exchange.
6. Another disadvantage of private limited company is that it cannot issue prospectus to public.

LLP vs Private Limited Company

Many Entrepreneurs starting a new business are curious and confused about the difference between a Private Limited Company and a LLP. Both entities offer many similar features required to run a small to large sized business, while they also differ in certain aspects.

Distinction	LLP	Private Limited Co
Company Name	Should end with LLP.	Should end with Pvt. Ltd.
Registration Cost	Significantly cheaper	Comparatively more expensive
Governing Act	separate legal entity registered under the LLP Act, 2008	separate legal entity registered under the Companies Act, 2013
Audit	LLP does not have to have its accounts audited if the annual turnover of the LLP is less than Rs. 40 lakhs and the capital contribution is less than Rs. 25 lakhs	A private limited company on the other hand would have to file audited financial statements with the MCA each year
DDT	DDT is not applicable on LLP	Required to pay a DDT at the time of distribution of profits to its shareholders
Foreign ownership	Foreigners are allowed to invest only with prior approval of RBI and Foreign Investment Promotion Board (FIPB) approval	Foreigners are allowed to invest under the Automatic Approval route in most sectors
Members required	Minimum 2, Maximum – No limit	Minimum 2, Maximum 200
Board meeting	Not necessary	Within 120 days of the previous board meeting. Minimum 4 board meetings to be held each year
Compliance	Low	High

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