In India, entrepreneurs have many choices for setting up their businesses. Two common options are Private Limited Companies and Limited Liability Partnerships (LLPs). Private Limited Companies, often called Pvt Ltd companies, have been around for a long time in India.
On the other hand, Limited Liability Partnerships (LLPs) are relatively newer, starting in India in 2008. Even though they share similarities, LLPs and Pvt Ltd Companies have different traits, leading to a closer look at LLP vs. Pvt Ltd Company dynamics.
Features of a Private Limited Company
A Pvt Ltd company needs at least two people to begin. It’s a private business and can have up to 200 members. You don’t need a lot of money to start, and only two directors are required.
People who own shares in a Pvt Ltd company are protected from big losses. They’re only responsible for the shares they own. This setup is good for big businesses that want outside money.
Characteristics of Limited Liability Partnership (LLP)
An LLP starts with at least two partners making an agreement. Unlike other types of businesses, you don’t need to have a certain amount of money to start an LLP.
The partners in an LLP are only responsible for the money they put into the business. This means their personal stuff is protected. Each partner is only responsible for their own actions and not what others do.
Partners work together to run the business, making decisions as a team. LLPs are a good choice for startups, traders, and small to medium-sized businesses that don’t need a lot of money from outside sources.
Comparing the Pros and Cons of LLPs and Pvt Ltd Companies:
Advantages of LLPs:
- Easy to Start and Manage: LLPs have fewer rules, making them simpler to set up and run.
- Lower Registration Costs: Registering an LLP costs less compared to a company.
- Separate Legal Identity: LLPs are seen as separate from their partners, giving them a more official status.
- Continuous Existence: LLPs keep going even if a partner passes away, ensuring they last a long time.
- Low Capital Needed: You don’t need a lot of money to start an LLP.
- Limited Liability: Partners’ personal stuff is protected from business debts in an LLP.
Downsides of LLPs:
- Big Penalties for Not Following Rules: LLPs can get fined a lot for not following the rules.
- Dissolves if Partners Decrease: If there are fewer than two partners, the LLP ends.
- Hard to Get Funding: It’s tough for LLPs to get money from Venture Capitalists (VCs), investors, or angel investors because of limits on ownership.
Benefits of Pvt Ltd Companies:
- No Need for Lots of Money: Pvt Ltd companies don’t have to keep a minimum amount of money in the bank.
- Limited Liability: Members’ personal stuff is protected from business debts.
- Seen as a Different Thing: Pvt Ltd companies are looked at as separate from their members.
- Keeps Going: Pvt Ltd companies keep going even if there are changes in who owns them.
- Easier to Get Money: Pvt Ltd companies can get money from different places more easily.
Drawbacks of Pvt Ltd Companies:
- Can’t Have Too Many Members: Pvt Ltd companies can’t have more than 200 members.
- Limited Share Transfers: Members can’t easily sell their shares to others, making it hard to turn shares into cash.
- Can’t Invite Public to Buy Shares: Pvt Ltd companies can’t ask the public to buy their shares through a prospectus.
Pvt Ltd vs. LLP
Understanding the differences between Pvt Ltd companies and LLPs helps entrepreneurs choose the right structure for their business. Here’s a simple comparison between the two.
Comparing Pvt Ltd and LLP: Understanding Business Types
In the world of business structures in India, entrepreneurs have to make decisions that can really affect their businesses. Two common choices are Private Limited Companies (Pvt Ltd) and Limited Liability Partnerships (LLPs). Pvt Ltd companies have been around for a long time in India, while LLPs are a newer option that came about in 2008, offering a different approach.
Qualities of Pvt Ltd Company:
Pvt Ltd companies start with two people and can have up to 200 members. They don’t need a specific amount of money to start, and only two directors are required. Members are protected from big losses, making them good for businesses with lots of sales that need outside money.
LLP Characteristics:
LLPs start when two partners agree, and they don’t need to put in a specific amount of money. Each partner is only responsible for what they put into the LLP, so their personal things are safe. Partners run the business together, which is good for small businesses that don’t need a lot of money from outside.
Pros and Cons:
Registering as an LLP has benefits like easy start-up, lower costs, and partners not risking everything. But, LLPs can get fined and have trouble getting money from investors. Pvt Ltd companies let you be flexible with money, raise funds easily, and protect members’ stuff. Still, they have limits on how many members and shares can be transferred.
Differences in Registration Process:
The registration processes for LLPs and Pvt Ltd companies are alike in some ways but differ in important ways. LLPs get registered under the Limited Liability Partnership Act, 2008, while Pvt Ltd companies follow the rules of the Companies Act, 2013. Designated partners of LLPs need Designated Partner Identification Numbers (DPINs), but directors of Pvt Ltd companies must get Director Identification Numbers (DINs). LLPs use the FILLIP form for registration, while Pvt Ltd companies use the SPICe+ form. LLP names must include ‘LLP’, while Pvt Ltd company names should end with ‘Pvt. Ltd’.
Also, LLP agreements are the main documents for LLPs, registered with the Ministry of Corporate Affairs (MCA) but not public. On the other hand, Pvt Ltd companies follow the Memorandum of Association (MOA) and Articles of Association (AOA), which are public documents. The government fees for LLP incorporation are lower compared to Pvt Ltd companies, and registering an LLP requires fewer notarized documents.
Understanding the differences between Pvt Ltd and LLP structures helps business owners make smart choices that match their goals and dreams.
Ownership Structure in LLP vs. Pvt Ltd
In a Limited Liability Partnership (LLP), partners both own and run the business. Each partner is in charge of managing things and also owns a part of the LLP. But in a Private Limited Company (Pvt Ltd), ownership and running the company are separate. The board of directors runs the company, while shareholders, who own it, don’t make everyday decisions.
Shareholders in a Pvt Ltd company can’t make day-to-day decisions. This separation between ownership and management is because of the rules in the Articles of Association (AOA). Even though Pvt Ltd shares can’t be traded publicly according to the AOA rules, it’s still pretty easy to transfer them.
How Partners and Leaders Work
In a Limited Liability Partnership (LLP), there must be at least two designated partners, but there’s no limit to how many partners can join. Unlike private limited companies, LLPs don’t need directors to manage affairs.
On the other hand, private limited companies need at least two members and can have up to 200. They must also appoint at least two directors, but they can’t exceed 15. This difference in how members and directors are handled highlights the contrast between these two types of businesses.
LLP vs Pvt Ltd: Meeting and Audit Requirements
In a Limited Liability Partnership (LLP), there’s no need for formal board meetings or an Annual General Meeting (AGM) because owners directly handle operations. However, in Private Limited (Pvt Ltd) companies, managed by directors, at least four board meetings are mandatory each year, along with holding an AGM within six months after the end of the financial year.
Statutory audits are optional for LLPs, but they become necessary if the annual turnover exceeds Rs. 40 lakhs or the capital contribution goes over Rs. 25 lakhs. Pvt Ltd companies, on the other hand, regardless of turnover, must undergo statutory audits.
For compliance, LLPs need to submit their statement of account and solvency using Form 8 LLP, and their annual returns with Form 11 LLP to the ROC. Pvt Ltd companies, however, file their financial statements using Form AOC 4 and their annual returns with Form MGT 7.
LLP vs Pvt Ltd: Differences in Funding, FDI, and Taxation
Funding: LLPs face restrictions in securing funding from Venture Capitalists (VCs) or angel investors because these investors must become partners. In contrast, Pvt Ltd companies have more flexibility, allowing them to attract VCs or angel investors as shareholders.
FDI: Foreign Direct Investment (FDI) in an LLP requires approval from both the Reserve Bank of India (RBI) and the Foreign Investment Promotion Board (FIPB). Pvt Ltd companies typically permit FDI under the automatic route across various sectors, making the investment process simpler.
Taxation: LLPs are subject to a fixed tax rate of 30% on total income, with a surcharge of 12% when income exceeds Rs. 1 crore. Pvt Ltd companies with annual revenue below Rs. 400 crores face a tax rate of 25%, which increases to 30% if revenue exceeds Rs. 400 crores. Pvt Ltd companies also have the option to choose between new tax rates of 22% (for existing companies) and 15% (for new companies).
In summary, while LLPs and Pvt Ltd companies have similarities, they differ in various aspects. Entrepreneurs seeking external funding and aiming for substantial turnover may prefer Pvt Ltd companies. Conversely, when multiple individuals aim to establish and operate a partnership-based business with capital contributions, the LLP structure may be more suitable. Unlike a partnership firm, LLP offers benefits such as limited liability, perpetual succession, and a separate legal entity.
