Private Limited Company versus Limited Liability Partnership

Are you confused with the type of company to choose for registration? Business running is one of the best ways to achieve financial independence and create your path on your terms. But a lot of effort is spent on establishing a company. You need to draw up a business plan to initiate. The plan usually includes naming the company, arranging funds, and planning operations. As a budding entrepreneur, you also need to decide whether you should register your business as a Limited Liability Partnership or a Private Limited Company. In this article, we will have a look at the difference between Private Limited Company vs Limited Liability Partnership.

Overview of Private Limited Company vs LLP

A Limited Liability Partnership (LLP) is a business entity that comes with the benefits of a Private Limited Company and a partnership firm. Regardless of the number of partners in an LLP, all partners have limited liability to the company. The liability of members is limited to the contribution they have made. One partner is not liable for the obligations of the other partners. LLPs are governed by the guidelines set out in the Limited Partnership Act 2008.

In a Private Limited (Pvt Ltd) company, the shares are held by private investors and the public cannot trade these shares on the stock exchange. In Pvt Ltd, the shareholders may be different from the owners of the company. Therefore, under the Companies Act 2013, profits and liabilities are usually shared between the owners of the companies.

Features of Private Limited

At least two partners must establish a Private Limited Company. A Pvt Ltd is a Private Limited Company that can have a maximum of 200 members. There is no minimum capital requirement and only two directors are required to set up a company. Partners have limited liability at the time of loss or closure of the company. They are limited by the range of shares they hold. It is suitable for businesses that have a significant turnover and need external financing.

Features of LLP

At least two partners form a Limited Liability Partnership (LLP) based on the agreement. No minimum capital is required for an LLP. The liability of members/partners is limited to the extent of their contributions to the LLP. Each partner is responsible for his actions and is not responsible for the actions of other partners. The partners run the business. LLP is suitable for startups, traders, and small to medium enterprises that do not require large external funding.

Difference between LLP and Private Limited Company

Let us look at the difference between a Private Limited Company & LLP.

• Registration process: The registration of a Private Limited Company is under the Companies Act 2013 and with the Commercial Register. A Director Identification Number (DIN) is required to register a Pvt Ltd. LLP registration is under the Limited Partnership Act 2008, registered with the LLP Registrar. A Designated Partner Identification Number (DPIN) is required to register a limited partnership. The cost of registration is lower for an LLP compared to a Private Limited Company mainly because the LLP was introduced by the government with a focus on small businesses. Similarly, there are fewer documents for an LLP and fewer formalities are required to register it.

• Tax structure: Tax compliance is similar for both a limited company and an LLP. However, in addition to the annual income tax applicable to both, a Pvt Ltd company has to additionally pay dividend tax when profits are distributed to its shareholders. A minimum alternative tax also applies to both. Pvt Ltd is liable for 25% tax while LLP is taxed at 30% in addition to surcharge and cess (varies in different slabs).

• Ownership: A private limited company is flexible in its ownership. A maximum of 200 shareholders can be held. These shareholders must not be part of the management that runs the company on a day-to-day basis. They do not have administrative powers. In the case of an LLP, the partners can both own and manage the company. There are no other shareholders, directors, or distribution of shares.
  Foreign Direct Investment (FDI) is automatically allowed in Pvt Ltd manner without the need for approval from a government authority. FDI is also permitted for LLPs provided certain specified conditions are met. A Pvt Ltd is a recommended route for businesses looking to raise funds through equity and venture capital along with offering stock options to their employees.

• Registration process: A Pvt Ltd, like an LLP, must be registered with the Ministry of Corporate Affairs and issued a certificate of incorporation. The process of setting up both types of companies takes an average of 10 to 15 days. Here is an overview of the basic steps for registering a Private Limited Company
• Get a Digital Signature Certificate (DSC) for Directors
• Get a Director Identification Number (DIN) for the director
• Register a private limited company and file E-Moa and EAOA
• Get name approval from MCA
• File to incorporate.

The procedure for registering an LLP is as follows:

• Get a Digital Signature Certificate (DSC) for partners.
• Get a Designated Partner Identification Number (DPIN) for partners.
• Get name approval from MCA
• File to incorporate.
• Properties: Both an LLP and a Private Limited Company are considered legal entities and can hold assets and liabilities. Both are also transferable, but it is easier in the case of a Private Limited Company where the shares can easily be transferred to another shareholder. A Pvt Ltd is supposed to hold the board and general meetings at specified times that do not apply to LLP.
  A Private Limited Company is required to draw up a memorandum of association and articles of association that set out the objectives, business activities, company information, and share ownership details. In the case of a limited partnership, an LLP agreement will suffice.

Comparison Chart on Private Limited Company vs LLP

The difference between a Private Limited Company vs Limited Liability Partnership can be shown below-

LLP vs Private Limited– Who wins?

There are some similarities between LLP and Pvt Limited. Both have limited liabilities; they do not require a minimum share capital and both must be registered with the Ministry of Corporate Affairs (MCA). Therefore, it would be best if you determine the better option based on the business structure that best suits your financial operations and management.

Pvt Ltd companies have to go through an audit process regardless of turnover and need private investors. Therefore, businesses with high turnover that need to raise money from equity financing can opt for a Private Limited Company.

LLPs offer flexible business operations and lower compliance rates, making them ideal for small businesses or start-ups requiring lower capital costs.

Final words

When a layman wants to start a business, it is usually doubtful to choose the most suitable form of business for the new business entity. There are many forms of business that an entrepreneur can choose, but the most commonly chosen forms of business are Private Limited Companies and LLPs. Hope this article on the difference between a Private Limited Company vs Limited Liability Partnership will help you clear your confusion.