Give me six hours to chop down a tree, and I will spend the first four sharpening the axe.
– Abraham Lincoln
If you are an aspiring business owner, you realise the importance of a business plan. A clear, well-defined business plan creates a sustainable and profitable business. To make such an effective business plan, you must rely on your business instinct as well as on your knowledge of business fundamentals.
One such business fundamental that can prepare and equip many aspiring business owners is the concept of a private limited company versus a limited liability partnership (LLP). You can register your business in India using either of these business structures. Are you wondering which will be more beneficial for your business? Read further to find out.
Private limited company
A private limited company is a business in which private investors hold shares that cannot be traded publicly.
To register your business as a private limited company, you must have at least one more member. The maximum number of shareholders in your company can be 200. A private limited company registration is suitable if your business has a high turnover and requires external funding.
Limited liability partnership
A limited liability partnership provides the benefits of a company and a partnership. To set up an LLP, you must have one more partner (with at least one of you being an Indian resident). Additionally, there is no upper limit on the number of partners.
The Limited Liability Partnership Act, established in 2008, governs all LLPs in India. If you are a startup or a small—to medium-sized business owner, an LLP registration is more suitable for your business.
Pvt Ltd and LLP: Differences
1. Company name
The first distinction in LLP vs Pvt Ltd is the business name. If you register your company as an LLP, you need to incorporate LLP in the company name. Conversely, in case of a private limited registration, your company name should end with ‘Pvt. Ltd’.
2. Registration process
The second private limited company vs LLP difference pertains to the registration process.
A private limited company is governed by the Companies Act of 2003 and is registered under the Ministry of Corporate Affairs (MCA). Conversely, an LLP is registered with the MCA under the Limited Liability Partnership Act 2008. The registration of both is filed with the Registrar of Companies on the MCA portal.
Further, to register your company as a private limited company, you must obtain the Director Identification Number (DIN) along with your partners. For an LLP, you must obtain the Designated Partner Identification Number (DPIN) for you and your partners.
3. Governing documents
The governing document for an LLP is the LLP partnership agreement. This partnership agreement between you and your partners in an LLP is not publicly available.
However, when you register your company as a private limited company, the two governing documents, the Memorandum of Association (MOA) and the Article of Association (AOA) are publicly available after a fee payment to the MCA.
4. Ownership
Ownership is different in Pvt Limited vs LLP. If you register your business as an LLP, you and your partners will be the company’s owners and managers.
On the other hand, if you register your business as a private limited company, the management will be different from the owners. The company will be managed by a board of directors and owned by the shareholders. Shareholders will not participate directly in the company’s day-to-day operations.
5. Membership and directors
The difference based on membership and director requirements is next on the list of differences between limited liability partnership and private limited company.
In an LLP, you must have a minimum of two partners without an upper limit. Directors are not required in an LLP.
A private limited company has a minimum number of members or shareholders of two and a maximum of 200. Additionally, it requires at least two and at most 15 directors for company management.
6. Compliance
The next difference between a limited liability partnership and a private limited company is based on compliance requirements.
If you register your company as an LLP, you are not required to conduct board meetings. In contrast, you must conduct at least four board meetings per year and an annual general meeting every six months in a private limited company.
Further, your business is not liable for a mandatory audit in an LLP until the turnover exceeds INR 40 Lakhs. A statutory audit is compulsory for a private limited company regardless of turnover.
7. Funding
Funding constraints are next on the list of Pvt Ltd vs LLP.
You cannot get funds from venture capitalists and angel investors for an LLP. This is because any entity that invests in your LLP must be a partner. However, you can raise funds through financial institutions.
Registration as a private limited company allows you to raise funds from VCs and angel investors who become shareholders after investing.
8. Taxation
The next difference between Pvt Ltd and LLP is based on taxation.
An LLP is required to pay a 30% fixed tax on its income. When the income exceeds INR 12 Crore, an additional 12% tax is levied on an LLP.
A private limited company must pay a 25% tax on income less than INR 400 Crores. Above this, the tax rate increases to 30%.
Concluding thoughts
This brings us to the end of our discussion on private limited company vs LLP. By now, you would have gotten a pretty good idea of which suits your business better. Once decided, you must tackle the overwhelming question of funding for your business. If you’re considering a business loan, look no further than Tata Capital’s MSME loan.
Tata Capital provides MSME loans with zero collateral and attractive interest rates. Apply for Tata Capital’s online business loan now and take advantage of its flexible repayment feature to establish your business without worry.
22 November 2024
5 mins read
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