People are confused between a LLP Vs Pvt Ltd. While starting a new business, people often wonder whether they should go with a Limited Liability Partnership or a Private Limited Company. In order to get a clear answer to this question, it is very important for you to first understand the meaning of a Limited Liability Partnership Company and Private Limited Company. Moreover, you are also required to understand the difference between the two.
An Overview – LLP vs Pvt Ltd Company In India
A Limited Liability Partnership (LLP) combines the features of a partnership firm and a private limited company. All partners in an LLP have limited liability to the company, regardless of the number of partners. Their liability is only restricted till the amount of their contribution to the firm. The Limited Liability Partnership Act of 2008 governs the rules pertaining to incorporation, investment, etc. of LLP in India.
Private investors hold shares in a Private Limited (Pvt Ltd) firm, and the general public is not permitted to trade such shares on a stock market. In a Pvt Ltd. Company, the shareholders are considered owners of the company. According to the Companies Act of 2013, the company’s assets and liabilities of the business are distributed between the company owners.
Comparing LLP vs. Pvt. Ltd: Structure, Taxation, Compliance & Investment
Let’s discuss a few major points of difference between a Limited Liability Partnership and a Private Limited Company:
A LLP is registered under the Limited Liability Partnership Act, 2008. It can also be termed a quasi-partnership firm, as LLP is a higher-end version of a partnership firm and a lower-end version of a company. Whereas, a Private Limited Company Registration is done under the Companies Act, 2013. Moreover, there is capital sharing in the LLP, and on the other hand, in the Pvt. Ltd. company, there is a concept of share capital.
If you ever think about opening an LLP, then you must know that 30% tax is charged on the LLP. In contrast, only 26% tax is charged on the Pvt. Ltd. Company. Here, the latter saves around 4% of tax as compared to LLP. Furthermore, for the newly incorporated manufacturing Pvt. Ltd. Companies, the tax is charged at the rate of 15%.
Compliance requirements are almost similar for LLPs and Private limited companies. Both businesses are required to submit yearly returns to the Registrar of Company along with Income Tax returns. They also need to complete periodic compliance and this is where the main difference between an LLP and a Pvt. Ltd. Company comes into the picture. LLP, however, has a number of advantages when it comes to compliance with the Ministry of Corporate Affairs. An LLP is exempt from having its accounts audited if its annual income is less than Rs. 40 lakhs and its capital investment is less than Rs. 25 lakhs. Forms 8 and 11 must be submitted by an LLP.
Whereas, on the other side, the Ministry of Corporate Affairs would need annual reports and audited financial statements from a private limited company on yearly basis.
This point brings a huge difference between a LLP and Pvt. Ltd. Company. In a LLP Company Registration, the investment is done in the form of capital contribution. There are partners in a LLP, and they contribute the capital as per their mutual understanding. Whereas, in the Pvt. Ltd. Company, there is a concept of investment by the way of Equity shares, and the people starting the company are known as equity shareholders.
For example, A and B are partners and they started a Pvt. Ltd. Company with an investment of Rs. 1 Lakh, and the equity investment of both the partners is 50% each. Assuming the face value of each share to be Rs. 10, then 50,000 shares will be issued to A and B individually. Similarly, if A and B start a LLP with Rs. 1 Lakh investment, then there will be no concept of equity shares, rather, both the partners will get a capital contribution of Rs. 50,000 each.
Membership and Directors
An LLP requires a minimum of two authorized partners. The maximum number of partners is unrestricted. In an LLP, there are no directors. A Pvt Ltd company can have up to 200 members, with a minimum of two. A Pvt Ltd firm must have a minimum of two directors.
Quick Comparison Table: Private Limited Co. vs LLP
|Private Limited Company
|Limited Liability Partnership
|Companies Act 2013
|Limited Liability Partnership Act, 2008
|Minimum share capital
|No minimum share capital is required to start a company.
|There is a concept of capital contribution rather than a share capital. In LLP, no minimum capital contribution is required.
|Minimum – 2
Maximum – 200
|Minimum – 2
Maximum – No limit
|Minimum – 2
Maximum – 15
|2 designated partners are required, no maximum limit is applicable.
|Conduct of Board meeting
|Required only if the contribution of partners exceeds 25 lakhs or annual turnover exceeds 40 lakhs.
|A Private Limited Company has to follow a lot of compliances every year.
|An LLP has to comply with only a few compliances.
|Transferability of shares
|Can be transferred easily. Only the Articles of Association can restrict the transferability of shares.
|Capital can be transferred by executing an agreement before a notary public.
|Should end with Pvt. Ltd.
|Should end with LLP.
After properly understanding the difference between a LLP and a Private Limited Company, it would now become easy for you to execute your idea either in the form of an LLP or a Pvt. Ltd. Company. Now, if you want to bring private investment in your company after incorporation, then it is recommended to start a Private Limited Company. Whereas, if you are clear that you wish to operate your business in a bootstrap model at least for some time after incorporation, then you should definitely go for a LLP. In the future, if you feel the need to convert your firm from LLP to Pvt. Ltd. Company, then you can do that without any limitations.