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Private Limited Company vs LLP: An In-Depth Comparison by Setindiabiz

When starting a business in India, one of the most crucial decisions entrepreneurs face is selecting the most appropriate legal structure. This choice can significantly impact the company’s operational efficiency, tax obligations, compliance requirements, and ability to attract investment. The two most common forms of business entities in India are the Private Limited Company and the Limited Liability Partnership (LLP). Each structure offers distinct advantages and limitations, making it important to understand their differences before deciding.
A Private Limited Company is often preferred by those seeking to raise funds and expand rapidly, offering benefits like limited liability, ease of share transfer, and a separate legal identity. In contrast, an LLP combines the features of a partnership and a corporation and is favoured for its simpler compliance requirements, tax advantages, and flexibility in management. The following table provides a detailed comparison of various critical factors a startup should consider while deciding between these two forms of incorporation in India. This comparison aims to guide entrepreneurs in making an informed choice that aligns with their business objectives and long-term vision.
Factors Company (Private Limited) Limited Liability Partnership (LLP)
Eligibility Criteria
  • Minimum Shareholders: 2
  • Maximum Shareholder: 200
  • Number of Directors: 2-15
  • Capital?: No minimum or maximum prescribed under the Companies Act, 2023
  • Registered Address
  • A new & unique name
  • Minimum Partners: 2
  • Maximum Partners: Unlimited
  • Designated Partners: 2-15
  • Capital?: No minimum or maximum is prescribed, but there must be some capital.
  • Registered Address
  • A new & unique name.
Formation
Simple & online process to be followed at www.mca.gov.in. The process starts with obtaining a digital signature for all the promoters, making a name reservation, and then filing for incorporation. The issue of the certificate of incorporation marks the completion of the incorporation process.
The LLP incorporation is done on the same lines as company incorporation. However, after the issuance of the certificate of incorporation, the LLP agreement needs to be entered between partners on appropriate stamp paper, and the notarised LLP Agreement is filed in Form 3 within 30 days of incorporation.
Compliance Burden
Higher
  • Mandatory Audit
  • ROC Annual Returns
  • ITR Filing
  • Records & Registers
Relatively Lower
  • Statutory audit when turnover reaches 40 lakhs or capital is 25 lakhs.
  • ROC Annual Returns
  • ITR Filing
  • Records & Registers
Liability
Shareholders have limited liability, which means their assets are protected in case of business failure. Liability is limited to the amount invested or pomosed to be invested in the company.
Partners have limited liability for protecting their assets. Liability is typically limited to the contribution made in the LLP.
Taxation
Subject to corporate income tax. Dividends distributed to shareholders are also taxed.
  • Manufacturing Companies: 15%
  • New & Small Companies: 22%
  • ₹ 400+ Crore Turnover Company: 25%
  • Surcharge & Education Cess
Profits of the are taxed at the LLP level, the current income tax rate for the LLP is 30%. However, there is no tax on profit distribution among the partners.
Fundraising
Easier to raise funds from investors. Preferred by venture capitalists and angel investors. The popular options to raise the funds are as follows
  • Rights Issue from existing shareholders
  • Through Private Placement
  • Preference Shares
  • Debentures
  • ISAFE/ CCPS
Raising funds can be challenging.
Ownership & Management
Clear distinction between owners (shareholders) and managers (directors). Allows for professional management.
Partners manage the business directly, although they can designate certain responsibilities.
Transferability of Interest
Shares can be easily transferred, facilitating changes in ownership. In private limited companies; the existing shareholders would have the first right of refusal.
Transfer of partnership rights may require consent of other partners and is generally more cumbersome. The transfer would require amending the LLP Agreement, Stamp duty payment and notary followed by filing of Form 3 to the ROC.
Perpetual Succession
The company enjoys perpetual succession, meaning it continues to exist even if the shareholders change.
The LLP can also have perpetual succession, but the entry and exit of partners can be more complex.
Foreign Ownership
Foreign nationals and entities can be shareholders, subject to compliance with FEMA regulations. The FDI is permitted in sectors open for 100% foreign investment as well as restricted sectors.
Foreign Direct Investment (FDI) in LLPs is allowed under the automatic route only in sectors/activities where 100% FDI is allowed.
Statutory Audit
The statutory audit of the financial statements are mandatory regardless of turnover or capital.
Not required if turnover is less than INR 40 Lakhs or capital contribution is less than INR 25 Lakhs.
Annual Filings
Mandatory filings with the RoC include financial statements in form AOC-4, annual returns (Form MGT-7/7A), etc.
Annual statements of accounts and solvency in Form 8 and annual return in Form-11 must be filed with the MCA.
Dissolution
The winding up of defunct companies can be done easily by filing a simplified application in STK-2 form. However, winding up of active companies is more complex and time-consuming.
The LLP Form 24 can be used to close an inactive LLP, while an active LLP requires an application to be filed before the NCLT.

In conclusion, selecting the most suitable legal structure for your business can be a challenging task. Both Private Limited Companies and LLPs have their own advantages and limitations, making it essential to evaluate and compare the features of each before making a decision. While Private Limited Companies offer benefits like limited liability and ease of fundraising, LLPs offer more straightforward compliance requirements and flexibility in management. Ultimately, the choice should align with your business objectives, long-term vision, and growth plans. Seeking professional advice from a legal consultant can also help you make an informed decision that sets your business up for success.

Conclusion

Understanding Company

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