People remain confused between LLP vs Private Limited. While starting a new business, people often wonder whether they should go with a Limited Liability Partnership or a Private Limited Company. To get a clear answer to this question, t is very important for you to first understand the meaning of Limited Liability Company and Private Limited Company. Apart from this, it is also important for you to understand the difference between the two.
An Overview – LLP vs Pvt Ltd Company In India
A Limited Liability Partnership (LLP) combines the characteristics of a partnership firm and a Private Limited Company. In an LLP, all the partners have limited liability towards the company, irrespective of the number of partners. Their liability is limited only to the amount of his contribution to the firm. The Limited Liability Partnership Act of 2008 governs the rules related 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 allowed to trade such shares in the stock market. In a Private Limited Company, the shareholders are considered the owners of the company. According to the Companies Act 2013, the assets of the company and liabilities of the business are distributed among the owners of the company.
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:
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Business Structure
An LLP is registered under the Limited Liability Partnership Act, 2008. It can also be termed a quasi-partnership firm, as LLP is the higher-end version of a partnership firm and the lower-end version of a company. Whereas, a Private Limited Company Registration under the Companies Act, 2013. Moreover, there is capital sharing in the LLP, and on the other hand, in Pvt. Ltd. company is a concept of share capital.
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Taxation
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 Private Limited 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%.
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Compliance
The compliance requirements for Limited Liability Partnership and private limited companies are almost the same. Both businesses are required to submit annual returns to the Registrar of Companies 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 came into existence. However, LLP has a number of advantages when it comes to compliance with the Ministry of Corporate Affairs. A Limited Liability Partnership 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. Form 8 and 11 must be submitted by an LLP.
Whereas, on the other hand, the Ministry of Corporate Affairs would need annual reports and audited financial statements from a private limited company on an annual basis.
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Investment
This point brings a major difference between LLP and Pvt Ltd company. In an LLP Company Registration, the investment is done in the form of capital contribution. LLP has partners, and they contribute capital as per their mutual understanding. Whereas, Pvt. Limited company is the concept of investment through equity shares, and the people who start the company are known as equity shareholders.
For example, A and B are partners and have formed a private company Ltd Company with an investment of Rs. 1 lakh, and the equity investment of both the partners is 50%. Considering the face value of each share as Rs. 10, then A and B will be issued 50,000 shares individually. Similarly, if A and B start LLP with Rs. 1 lakh, there will be no concept of equity shares, rather both the partners will get a capital contribution of Rs. 50,000 each.
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Membership and Directors
Limited Liability Partnership requires a minimum of two authorized partners. The maximum number of partners is unrestricted. In an LLP, there are no directors. A private limited company can have a maximum of 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
| Basis | Private Limited Company | Limited Liability Partnership |
| Applicable Law | 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. |
| Members | Minimum – 2
Maximum – 200 |
Minimum – 2
Maximum – No limit |
| Directors | Minimum – 2
Maximum – 15 |
2 designated partners are required, no maximum limit is applicable. |
| Conduct of Board meeting |
|
No Compulsion |
| Statutory Audit | Mandatory | Required only if the contribution of partners exceeds 25 lakhs or annual turnover exceeds 40 lakhs. |
| Compliance | A Private Limited Company has to follow a lot of compliances every year. | An LLP has to comply with only a few compliances. |
| Liability | Limited | Limited |
| 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. |
| Company Name | Should end with Pvt. Ltd. | Should end with LLP. |
Conclusion
After properly understanding the difference between a Limited Liability Partnership 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 into your company after incorporation, 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 LLP. In the future, if you feel the need to convert your firm from an LLP to a Pvt Ltd Company, then you can do that without any limitations.
