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Decision to Have Company or LLP - Comparison between Private Limited Company and Limited Liability Partnership (Pvt V/s LLP)

Updated: Feb 8



When deciding between LLP and Pvt Ltd structures for startups, various considerations come into play, including liability protection, management structure, regulatory adherence, taxation, and alignment with long-term business objectives.

What is LLP?

An LLP is recognised as an alternative business entity that offers the advantages of limited liability similar to a corporation while granting its members the flexibility to structure their internal operations akin to a partnership through a mutually agreed-upon arrangement. This structure empowers entrepreneurs, professionals, and service-oriented enterprises to establish commercially efficient entities tailored to their needs and preferences.


The nature of an LLP (Limited Liability Partnership) entails:

  • Limited liability for partners.

  • Flexibility in management and operations.

  • Separate legal entity status.

  • Perpetual succession.

  • Pass-through taxation.

  • Minimal regulatory compliance.

  • Governance by an LLP agreement.

  • Ease of formation and lower formalities compared to corporations.

What is Pvt Ltd.?

A private company is the predominant legal framework for businesses and startups, offering a favourable structure for those aiming to develop scalable ventures. As per section 2(68) of the Companies Act 2013, a private company is defined as a company with a minimum paid-up share capital of one lakh rupees or a higher amount specified by law. Additionally, under section 2(68), a private company, as delineated in its articles of association, imposes constraints on shareholders' rights to transfer shares and typically caps its membership at two hundred, barring the exception of One Person Company.


the nature of a Private Limited Company (Pvt Ltd) includes:

  • Limited liability for shareholders.

  • Separate legal entity status.

  • Ownership is structured around shares.

  • Regulatory compliance obligations.

  • Management by a board of directors.

  • Taxation as a separate legal entity.

  • Formal corporate governance mechanisms.

  • Perpetual succession until dissolution.

Comparing LLPs (Limited Liability Partnerships) and Pvt Ltd (Private Limited Companies) for startups involves weighing various factors. Here's a comparison:


Particulars 

LLP

Pvt Ltd 

Liability Protection

Provides limited liability protection to partners. Personal assets are safeguarded against business liabilities.

Provides limited liability protection to partners. Personal assets are safeguarded against business liabilities.

Venture Capital

LLP is not suitable entity to do fund raising or to Venture Capital Investments

VC’s prefer and mostly compulsion the investment only in private or public limited company and avoid investing in LLP

Ownership and Management:

Partners manage the business, and ownership is based on partnership agreements.

Shareholders own the company, and management is overseen by directors appointed by shareholders.

Regulatory Compliance:

Generally has fewer compliance requirements and formalities compared to Pvt Ltd companies.

Subject to stricter regulatory compliance, including annual filings, board meetings, and audit requirements.

Flexibility:

Offers flexibility in management and decision-making processes. Partners can structure the LLP according to their agreement.

Follows a more structured management approach with a board of directors and shareholder meetings.

Perpetual Succession:

Enjoys perpetual succession, meaning changes in partners do not affect the existence of the LLP.

Also has perpetual succession unless dissolved voluntarily or by regulatory authorities

Ease of Formation:

Formation involves fewer formalities and is generally simpler and less expensive compared to Pvt Ltd companies.

Requires more formalities for formation, including the issuance of shares, appointment of directors, and registration with regulatory authorities.

Credibility and Perception:

Comparatively low perceived credibility among investors, clients, and stakeholders 

higher perceived credibility among investors, clients, and stakeholders 

Taxation

LLPs are subject to a fixed tax rate of 30% on their total income.

Pvt Ltd companies earning less than Rs. 400 crores annually are taxed at a rate of 25%.

Once the annual revenue surpasses Rs. 400 crores, the tax rate for Pvt Ltd companies increases to 30%.

Pvt Ltd companies have the option to choose between the new tax rates of 22% (for existing companies) and 15% (for new companies).


Mostly, if the business is self-managed, MSME Business  or family managed than LLP can be a suitable option but bigger businesses involving various stakeholders , investments , etc. will need incorporation of Private Limited Company. Again lower corporate tax rate is also pivotal to choose Companies over LLP.


To read about LLP Compliance in details you can click here



Prasanna Laxmi R., Assistant Content Manager

An MBA student specializing in Finance, driven by a keen interest in exploring the complexities of finance to navigate the business landscape.


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