Every business is governed by a set of regulations that are laid down by a corresponding government body. These rules usually form the basis of the business structure and determine its direction and growth.
When a new entrepreneur wants to launch a business, there is often a contemplation on which business type or form can best suit their company.
There are various classifications based on the core characteristics, ownership, liabilities, etc – the two most well-known among them are a private limited company and a limited liability partnership.
This article talks about LLP vs pvt ltd company to help you understand the key difference between LLP and private limited and the benefits of each.
| What is a Pvt Ltd Company? A private limited company is a business entity held by a group of shareholders, where the transferability of the shares is regulated to prevent them from being traded publicly. |
The Companies Act, 2013 allows a Pvt Ltd company to be incorporated with a minimum of 2 and a maximum of 200 members.
An important feature of a private limited company is its limited liability. This means that in case of losses faced by the company, the shareholders are not liable to sell their personal assets to repay debts.
| What is a Limited Liability Partnership (LLP)? A limited liability partnership is a firm that is run by multiple partners who hold limited liability towards the company. The company is owned by individuals who also directly manage the business. |
Each partner is accountable for their own acts and cannot be held responsible in case of misconduct by another individual. Similarly, if the business is at loss, the partners are not liable to sell their personal assets to repay debts.
Difference between LLP and Pvt Ltd
1. Registration process
The registration for a Private Limited Company is according to the Companies Act, 2013 and with the Registrar of Companies. A Director Identification Number (DIN) is needed to register a Pvt Ltd company.
LLP registration happens as per the Limited Liability Partnership Act, 2008, registered with the Registrar of LLP. A Designated Partner Identification Number (DPIN) is needed to register a Limited Liability Partnership.
The cost of registration is lesser for an LLP when compared to a Private Limited Company primarily because an LLP has been introduced by the Government with a focus on small businesses. Similarly, the documents for LLP are also lesser and fewer formalities are required to register it.
2. Ownership
A Private Limited Company is usually more flexible in its ownership and can be held by a maximum of 200 shareholders. These shareholders may not be a part of the management that runs the company on a day-to-day basis. They do not have administrative powers.
In the case of an LLP, the partners can hold ownership as well as run the company. There are no additional shareholders, directors or any distribution of shares.
Foreign Direct Investment (FDI) is allowed in a Pvt Ltd company under the automatic route without the need for approval from a Government body. FDI is also permitted for LLP provided certain specified conditions are met.
A Pvt ltd company is a recommended route for businesses wanting to raise funds through equity and venture capital along with offering stock options to their employees.
3. Tax structure
Tax compliances are similar for both a private limited company and an LLP. However, apart from tax on the annual income which is applicable for both, a Pvt ltd company has to additionally pay a dividend distribution tax when profits are distributed to its shareholders.
The minimum alternate tax is also applicable for both.
An LLP is taxable at 30% and a Pvt ltd company pays 25% tax in addition to surcharge and cess (varying across different slabs).
4. Registration process
A Pvt Ltd Company as well as an LLP need to be registered with the Ministry of Corporate Affairs and are issued a Certificate of Incorporation. The process of incorporating both types of companies takes 10 to 15 days on an average.
Here’s a look at the basic steps for registering a private limited company
- Acquire a Digital Signature Certificate (DSC) for directors
- Acquire Director Identification Number (DIN) for the directors
- File the EMoa and EAOA to register the private limited company
- Obtain approval of name from MCA
- File for incorporation
LLP registration steps are as follows:
- Acquire a Digital Signature Certificate (DSC) for the partners
- Acquire a Designated Partner Identification Number (DPIN) for the partners
- Obtain approval of name from MCA
- File for incorporation.
5. Features
Both LLP and Private Limited Company are considered legal entities and can hold assets and liabilities. They are both also transferable but it is easier in the case of a private limited company where the shares can be easily moved to another shareholder.
A pvt ltd company is supposed to hold the board and general meetings within the specified timelines which are not applicable for an LLP.
It is mandatory for a Private Limited Company to write a Memorandum of Association and Article of Association, that mentions the objectives, business activities, company information and shareholding details. The LLP agreement suffices in the case of a Limited Liability Partnership.
Difference between Pvt ltd and LLP
| Private Limited Company | Limited Liability Company | |
| Law | Companies Act, 2013 | Limited Liability Partnership Act, 2008 |
| Registration body | Ministry of Corporate Affairs | Ministry of Corporate Affairs |
| Registration prerequisite | Directors Identification Number (DIN) | Designated Partner Identification Number (DPIN) |
| Registration period | 10-15 days | 10-15 days |
| Members | Minimum 2 and maximum 200 shareholders | Minimum 2 partners, no upper limit to the number of partners |
| Liability | Limited liability | Limited liability |
| Legal status | Independent legal entity | Independent legal entity |
| Ownership | By holding shares only | Can be transferred directly |
| Conversion | Can be converted to an LLP | Can be converted to a company |
| Finance | Can raise funds from VC | Cannot easily raise funds from VC |
| FDI | Through automatic route | Through automatic route but subject to conditions |
| Name Approval | Must include ‘Private Limited Company’ | Must include ‘LLP’ |
| Charter Document | Memorandum of Association (MoA) and Article of Association (AoA) | LLP Agreement |
| Tax | Required to pay income tax and dividend distribution tax | Required to pay only income tax |
| Audit requirement | Mandatory | Mandatory if turnover exceeds forty lakh rupees, or contribution exceeds twenty-five lakh rupees |
| Annual filing | File within 6 months of the closure of a financial year | File Form 11 by 31st May and Form 8 by 30th Oct |
LLP vs private limited: Conclusion
A private limited company and an LLP have many similarities but can be ideal for businesses depending on their long-term objectives.
For instance, if you plan to run a small business with a partner and with limited capital, an LLP is the right fit. On the other hand, if a business is looking at aggressive growth and substantial funds, it should opt for a Private Limited Company.
The concept of a private limited company has been around in India for a while and is considered a reliable business model. LLP is relatively new but is easy to set up and with limited resources. Both have their benefits and should be weighed based on the business needs.
