Limited Liability Partnership v. Private Limited Company

Looking to start an entity? The first thing you should decide is what is the type of entity you want to incorporate. Two most popular types of entities to be incorporated are: Limited Liability Partnerships and a Private Limited Company. The operative word here is ‘limited’. In a Limited Liability Partnership or a LLP, the liability of the partners is limited. In a private limited company too, the liability of the founders is limited. Another important aspect is that founders or partners’ personal liability never comes into the picture in these two kinds of entities. However, the compliances in a private limited company are much more extensive than a LLP. Let us see how you can set up these two entities and how are they different in their essential aspects.

You may also read How to Convert Partnership Firm to LLP? Process and Benefits. 

Registration Process

Private Limited Company

The steps for incorporation of private limited company are-

1. Obtaining Digital Signature Certificate(ODSC) for the Proposed directors of the company
2. Obtaining Director Identification Number(DIN) for the proposed directors
3. Name Approval from Ministry of Corporate Affairs(MCA)
4. Filing Incorporation

Limited Liability Partnerships

1. Obtaining Digital Signature Certificate for the Proposed Partners
2. Obtaining Director Identification Number for the proposed Partners
3. Name Approval from Ministry of Corporate Affairs(MCA)
4. Filing Incorporation

Processing Time- 20 days (Approx.) for both LLP and Pvt. Ltd.

Also, read Advantages of LLP Registration.

Registration Cost

The sole purpose of the creation of LLPs was to foster incorporation of small businesses. The Cost of incorporation of LLPs is very less than the fees for the incorporation of Pvt. Ltd. company. Moreover, the documents to be printed on Non-judicial stamp paper as well as Notarized are less for LLP.

Features

Ownership and Management

Private Limited Company

A Pvt. Ltd. company is very flexible for the promoters when it comes to ownership and ownership sharing. A Pvt. Ltd. company can have at max 200 shareholders and is determined by this shareholding. In a Pvt. Ltd. company the shareholders don’t directly participate in the management. The shareholders need not necessarily be the managers.

Limited Liability Partnerships

In LLP, there is no clear distinction between management and ownership. In LLP, holders of the LLP are also the Holders of the power of management of the LLP.

Transferability of Ownership

Private Limited Company

The ownership of a Pvt. Ltd. company can be transferred by way of a share transfer.

Limited Liability Partnerships

A limited liability partnership being a partnership does not have share capital, however, addition of new partners may be done.

Tax

Tax compliance is more or less similar in both the LLP and Pvt. Ltd. Company. In the Compliance Requirements of MCA LLP has few benefits, an LLP does not need an audit done if its annual turnover falls below 40 Lakhs and capital contribution falls below 25 lakhs. However, a LLP has to file two forms namely LLP form 8 and LLP form 11.

On the other hand, the Pvt. Ltd. company would have to file income tax return as well as audit report to the MCA.

Both Pvt. Ltd. Company and LLPs are taxed at the rate of 30% plus cess and surcharge as applicable.

Fines and Penalties

Non-Compliance penalty or late filing penalty of documents with the Ministry of Corporate Affairs is higher for LLPs as there is a flat fee of Rs 100 on non-compliance which is uncapped. Hence, it could result in a LLP getting a lot of fines from MCA, which could be a problem if promoters are not aware of the deadlines for filing the documents with the registrar.

Other Factors

LLPs are in a very nascent stage in India, it is a newly introduced concept, with people having very less knowledge about it. Being new in their establishment the procedure, rules and regulations of LLP continue to evolve due to which the clarity further diminishes.

On the other hand, Pvt. Ltd. companies enjoy a very widespread recognition in India and around the world. Thus, the processes and procedures established for Pvt. Ltd. companies are very certain.

When it comes to FDI and Funding from banks the Pvt. Ltd. companies enjoy better access as compared to the LLPs.

Foreign Ownership

LLP- Prior approval of Reserve bank of India and Foreign Investment Promotion board is required.

Pvt. Ltd. – Foreigners can invest in companies through the normal automatic approval route in most sectors.

Existence or survivability

LLP- Existence of LLP is not dependent on the partners. It is to be dissolved only voluntarily or by the order of company law board.

Pvt. Ltd. company- Existence of a private Limited company is not dependent upon the Directors or shareholders, can be dissolved only voluntarily or by regulatory authorities.

You may like reading Limited Liability Partnership (LLP). 

Differences between LLP and Private Limited Company