Comparison of Private Limited and LLP
It’s critical to comprehend the primary distinctions, benefits, and drawbacks of incorporating an Indian Limited Liability Partnership (LLP) vs a Private Limited Company (PLC). Although they both provide limited liability protection, the corporations’ structures, taxation, compliance needs, and levels of flexibility are very different.
Detailed Comparison of Private Limited Company and Limited Liability Partnership
1. Legal Structure
Private Limited Company (PLC):
- A PLC provides its stockholders with limited responsibility as a distinct legal entity.
- The Companies Act 2013 governs it.
- The corporation has a more intricate organizational structure with directors, shareholders, and a board of directors.
- Ownership is divided into transferable shares to preserve the private status but is subject to limitations.
Limited Liability Partnership (LLP):
- An LLP offers its partners limited liability by fusing the advantages of a company and a partnership firm
- The Limited Liability Partnership Act of 2008 governs it.
- An LLP has more management flexibility because its partners run the company instead of directors or shareholders.
2. Liability Protection
Private Limited Company (PLC):
- The amount that investors have invested in the company’s shares is the maximum amount that they are liable for.
- Shareholders’ personal assets are shielded from the obligations and liabilities of the firm.
Limited Liability Partnership (LLP):
- The liability of partners is capped at what they have contributed to the LLP.
- Partners’ personal assets are shielded from the LLP’s debts, except for fraud and malpractice situations.
3. Compliance and Regulatory Requirements
Private Limited Company (PLC):
- Calls for stricter adherence, which includes yearly general meetings, yearly returns, and the upkeep of statutory registers.
- The appointment of a company secretary is required if the paid-up capital surpasses ₹10 crores.
- It is necessary to produce audited financial accounts with the Registrar of Companies (RoC).
Limited Liability Partnership (LLP):
- Fewer obligations for compliance than with a PLC.
- There is no need to designate a company secretary.
- Filing annual reports and a statement of accounts is mandatory; audits are necessary only when turnover or capital contribution is above ₹40 lakhs or ₹25 lakhs, respectively.
4. Taxation:
Private Limited Company (PLC):
- Subject to the often higher business tax rates ( 22-30%)
- Qualified for several Income Tax Act exemptions and deductions.
Limited Liability Partnership (LLP):
- LLPs are a tax-efficient option for smaller firms because they are not liable to the Minimum Alternate Tax (MAT).
- Deductions for interest and partner compensation are easier to claim.
5. Transferability and Ownership
Private Limited Company (PLC):
- The division of ownership into shares facilitates capital raising and investor attraction.
- Although they can be transferred, shares often need the consent of shareholders to remain private.
- Under FDI regulations, foreign investment is more straightforward.
Limited Liability Partnership (LLP):
- The partnership agreement, which specifies capital contribution and profit-sharing ratios, establishes ownership.
- It can be difficult to change the LLP agreement to transfer ownership.
- Less appealing to investors because there are no shares.
6. Capital and Funding
Private Limited Company (PLC):
- Able to raise money by issuing securities and shares.
- Qualified for loans by banking institutions, venture capital, and private equity financing.
- PLCs are frequently favored by banks and investors because of their well-organized governance and compliance.
Limited Liability Partnership (LLP):
- Unable to issue shares; partner contributions and loans typically account for the majority of finance.
- Less desirable to private equity and venture financiers.
- Ideal for small to medium-sized companies that value flexibility in their operations.
7. Management and Decision-Making
Private Limited Company (PLC):
- calls for a more formal procedure for making decisions, including board meetings and resolutions.
- The directors and majority shareholders have a say in decisions.
Limited Liability Partnership (LLP):
- Allows for management flexibility because partners are allowed to specify roles and duties.
- Partners have direct influence over operations, making decision-making simpler.
8. Dissolution & Closure
Private Limited Company (PLC):
- Dissolution is a drawn-out procedure that needs permission from regulatory bodies and adherence to the Companies Act.
- Designating a liquidator and paying out any outstanding debts are part of winding up.
Limited Liability Partnership (LLP):
- Simpler to dissolve and a less complicated procedure than a PLC.
- To dissolve the LLP and divide the assets in accordance with the agreement, partners may choose to do so together.
Your company’s objectives, size, and future plans will determine whether to form a Limited Liability Partnership or a Private Limited Company. Here’s a brief synopsis to aid with your decision:
A private limited company is best for companies looking to raise money, draw in investors, and keep an organized governance structure. It is appropriate for both larger companies and startups who want to grow and expand.
For small to medium-sized enterprises that value operational flexibility and want to reduce compliance costs, limited liability partnerships are a good fit. For businesses that provide consulting, legal, or accounting services, it’s a great option.
The greatest choice for businesses looking to attract investors, raise a substantial amount of capital, and maintain a well-organized governance structure is a private limited company (PLC). Ideal for startups and larger companies looking to grow and expand.
A limited liability partnership (LLP) is a good choice for small and medium-sized enterprises (SMEs) that prioritize operational flexibility and affordable compliance. Ideal for companies that offer professional services, such as legal firms, consulting firms, or accountancy organizations
In the end, the decision you choose should be in line with your company’s goals, the structure of your firm, and the degree of complexity you can handle. Speaking with a financial or legal professional can offer more information suited to your particular circumstances.
