When entrepreneurs start their new business, there is a general confusion as to which business would be best for them. Which will benefit them more in a safe way. Which type will provide the best environment for their business to flourish and what factors do they need to consider? Such questions are not only common but also extremely important. You need to know the difference between all the types and its factors. You must have the knowledge of what all these companies provide. The advantage and disadvantage. Talking about LLP vs Private Limited Company, both offer limited liabilities to their partners and members. Both are also considered as separate legal entities.
LLP Registration vs Private Limited Company Registration
Private Limited Company is one of the most common types of business forms in India. Limited Liability Partnership is something new in India as compared to Private Limited Companies. There are also some differences and similarities between the two. Some of them are as follows:
While you need at least two members, two shareholders and two directors for the incorporation of the private limited company and a maximum of fifteen directors and two hundred members are allowed. Limited Liability Partnership (LLP) demands at least two partners and two designated partners. However, there is no maximum limit. The cost of formation of Limited Liability Partnership is comparatively less as compared to Private Limited Company.
The difference in naming:
Both forms have to be given different names. For a private limited company, you need to use Private Limited at the end of the company name. As far as Limited Liability Partnership is concerned, you must use Limited Liability Partnership or LLP at the end of the company name. While an LLP has partners, a private limited company has members.
The difference in the registration process:
Private Limited Company Registration is executed as per the Companies Act, 2013 and is registered with the Registrar of Companies. However, LLP registration is done as per the Limited Liability Partnership Act, 2008 and is registered with the Registrar of LLP. A Director Identification Number (DIN) is required for the registration of a Private Limited Company. However, a Designated Partner Identification Number (DPIN) is required in case of a Limited Liability Partnership. The other rules followed by both the companies are also as per their respective Acts.
Private limited company registration process and LLP registration process are very similar with few differences in the documents and forms being filed for incorporation.
The steps to be followed for incorporation of a private limited company are as follows:
- Obtaining (DSC) Digital Signature Certificate for the proposed Directors
- Obtaining (DIN) Director Identification Number for the proposed Directors
- Obtaining name approval from MCA, and
- Filing for incorporation.
LLP registration also has a similar process which are as follows:
- Access Digital Signature Certificate for the proposed Partners
- Accessing Director Identification Number (DIN) / Designated Partner Identification Number (DPIN) for the proposed Partners
- Obtaining name approval from MCA, and
- Filing for incorporation.
Both LLP and Private Limited Company registration are registered with the Ministry of Corporate Affairs (MCA) and are issued a Certificate of Incorporation. The processing time for incorporation of a Private Limited Company and LLP is also comparable with both the entities taking an average of around 20 days for incorporation.
The government fee for incorporation of an LLP is much as compared to the government fee for the incorporation of a private limited company. LLPs are introduced to meet the needs of small businesses and hence LLPs enjoy low government fees for incorporation. Also, the number of documents to be printed on non-judicial stamp paper and notarized is less for LLP registration as compared to Private Limited Company registration.
Both LLP Registration and Private Limited Company Registration offer many of the same features. Both LLP and Private Limited Company are separate legal entities and have assets and liabilities which are different from those of the promoters. Both LLP and Private Limited Company are transferable, however a Private Limited Company offers more flexibility when it comes to transferring or sharing ownership. The life of both LLP and Private Limited Company is perennial, unless closed by the promoters or any competent authority.
Private Limited Company offers more flexibility to the promoters when it comes to ownership and sharing of ownership. The ownership of a private limited company is determined by its shareholding and a private limited company can have a maximum of 200 shareholders. Furthermore, since the shareholders do not directly participate in the management of the company, there is a clear distinction between the owners and the management of the shares in a private limited company. Hence, Private Limited Company is advantageous when it comes to ownership and management facilities.
In LLP, there is no clear differences between owners and management. In LLP, LLP Partners is the owner of the LLP and also has the powers to manage the LLP. Therefore, a partner in an LLP will be both an owner and a manager, whereas in a private limited company, the shareholders (owners) do not have to have management powers.
A Private Limited Company is recommended for any businesses that is considering FDI or Employee Stock Options and Equity Funding or Venture Capital Funding.
The difference in tax structure:
Private limited companies are liable to pay tax on the income of the company. Then there’s also the dividend distribution tax and the alternative minimum tax. However, the tax structure of a limited liability partnership is very simple. Only two taxes are applicable. One income tax and the other alternate minimum tax.
Different Charter Documents:
While Private Limited Company has to write Memorandum of Association (MOA) and Articles of Association (AOA), the same does not follow for LLP. A limited liability partnership has to submit an LLP agreement even though both the documents are used for the same thing. These include the functioning and objectives of the company along with other essential details.
As per the Companies Act, it is mandatory for private limited companies to hold board and general meetings at the prescribed time. However, there is no such obligation for a limited liability partnership.
In a Private Limited Company partnership, a shareholder can easily transfer his shares to another shareholder. However, in a limited Liability Company Partnership, such transfers are governed by the LLP agreement.
Voting rights are decided based on the number of shares a shareholder can hold in a private limited company. However, in a limited liability partnership the voting rights are decided as mentioned in the LLP agreement.
Compliance and other factors:
A limited liability partnership does not have to audit its account if its annual turnover is less than forty lakh rupees. However, the private limited company will have to audit its account annually and file the same with the MCA (Ministry of Corporate Affairs). Also, both the forms provide for limited liabilities, although the liability of the members is limited to the shares of the private limited company. Liability in LLP is not limited to shares only but is limited to the amount invested in the firm in any form.
Private limited companies have been in existence for more than LLP and have gained wide recognition in India and the world. Hence, there are well established processes and procedures for Private Limited Companies. LLPs on the other hand is a recently launched entity in India. Therefore, some rules, regulations and procedures continue to be developed. LLP is also not recognized as a private limited company in India, as it is a relatively new concept.
Private limited company provides better image or reputation to its promoters as compared to LLP. Private limited company has better access to financing from banks and foreign direct investment.
In the case of Private Limited Company registration, no provisions are provided to the members. In a Limited Liability Partnership, however, protection is provided to the partners or to the members who provide useful information.
The basic rules and regulations of a Private Limited Company are mentioned in the Memorandum of Association (MOA) and Article of Association (AOA). However, in a Limited liability Company Partnership, the same is mentioned in the LLP agreement. The dissolution in LLP vs Private Limited Company is less procedural as compared to Private Limited Company.
After discussing the major differences between Private Limited and LLP, we can say that LLP is more flexible in terms of compliance as compared to Private Limited Company. However, Private Limited Company is more reliable and hence is more preferred. This means that they are more famous in a country like India and hence are preferred more. Limited liability partnerships may see growth in the future. Keeping all these points in mind one should choose the business form wisely which helps the business to grow more efficiently and effectively.
We, at Compliance Calendar, can provide you any kind of legal aid you may require. If you have any query, you are welcome to email us at [email protected] or connect at 9988424211.