Which is best LLP or Pvt Ltd?
When starting a business, there are many legal structures to choose from, such as sole proprietorships, partnerships, Limited Liability Partnerships (LLPs), and private companies. Among these, LLPs and private companies are particularly popular.
This article will compare LLPs and private companies to help determine which structure might be best for your business. For those considering a partnership, forming an LLP can limit your liability towards third parties. The regulations and guidelines for LLPs are outlined in the Limited Liability Partnership Act, 2008.
Similarly, a private company with Private limited company registration in Bangalore is another business structure that limits the liabilities of its owners. It offers a streamlined approach to business operations, akin to that of an LLP. Additionally, recent amendments to the Companies Act, 2013, have introduced a special class of private companies known as One Person Companies, which can be formed with just one member.
What is LLP?
An LLP with LLP registration in Bangalore is considered an alternative corporate business vehicle that offers the advantages of a company with limited liability while allowing its members the flexibility to organize their internal structure like a partnership based on a mutually agreed-upon arrangement.
This structure enables entrepreneurs, professionals, and service-providing enterprises to create commercially efficient entities tailored to their specific needs.
What is the nature of LLP?
A Limited Liability Partnership (LLP) is established and registered in accordance with the Limited Liability Partnership Act, 2008, as a corporate entity.According to Section 3(1), it is a separate legal entity from its partners and has perpetual succession as stated in Section 3(2) of the statute. Changes in the partnership’s composition do not affect the LLP’s existence, rights, or liabilities.
To establish an LLP, at least two partners are necessary. These partners can be individuals or corporate bodies. Under Section 5, an individual can only become a partner if they are not:
- Declared of unsound mind by a court of competent jurisdiction, with the finding still in effect, or
- An undischarged insolvent, or
- A person who has applied for insolvency adjudication with the application pending.
The mutual rights and duties of partners within an LLP, as well as those between the LLP and its partners, are typically governed by an agreement among the partners or between the LLP and the partners, subject to statutory provisions. In the absence of such an agreement, the provisions of the Act and the LLP Rules, 2009, will govern these rights and duties.
Limited liability
In an LLP with LLP registration in Bangalore, a partner’s liability is limited to their contribution or stake in the LLP. One of the key benefits of an LLP is the concept of severable liability, meaning a partner is not liable for the independent or unauthorized actions or misconduct of other partners.
However, if an LLP or its partners are found to have acted with the intent to defraud creditors or engaged in fraudulent activities, their liabilities will be unlimited for any debts or other obligations of the LLP.
An LLP must have at least two designated partners, with at least one being a resident of India. An LLP may choose to have a common seal.
All LLPs are necessary to submit income tax returns and annual filings with the Registrar of Companies. Registration of an LLP is mandatory under the LLP Act, 2008.
The LLP Agreement and Incorporation Document are the principal documents of an LLP, with the agreement serving as proof of the partnership.
LLPs must use “LLP” or “Limited Liability Partnership” in their name. For income tax purposes, LLPs are treated as partnership firms.
Private limited company
A private company is widely chosen as the legal structure for businesses and start-ups, especially for those aiming to build scalable ventures.
As per Section 2(68) of the Companies Act 2013, a private company is defined as a company with a minimum paid-up share capital of one lakh rupees or any higher amount specified by law.
This section also mandates that the company, through its articles of association, must:
- Limit the shareholders’ right to transfer shares.
- Except in the case of a One Person Company, restrict the number of its members to two hundred.
Features of Pvt ltd Company
A private company possesses a distinct legal identity, making it accountable to its debtors and creditors for managing its assets and liabilities. It enjoys perpetual succession, meaning its existence is not tied to that of its members.
To obtain private limited company registration in Coimbatore,
- At-least a minimum of two members are necessary, and
- A maximum cannot exceed 200.
However, a special type known as a One Person Company allows a single member to establish the company. The memorandum of association outlines the capital contribution and the number of members among which the capital is divided.
Private companies must have at least two directors, with the maximum number specified in the Articles of Association. Shares in a private company are not freely transferable among non-members.
The quorum for meetings in a private company is typically set at two members. The company name must use “Private Ltd” at the end.
Private Ltd companies preserve their books of accounts for eight years. Certification of incorporation is necessary for their formation, and they must hold statutory meetings and file statutory reports. Now that we have covered the basics of both business structures, we will analyze them in comparison to each other.
What are the pros and cons of Pvt ltd Company?
Pros of Pvt ltd Company
The liability of shareholders in a private limited company is limited to the amount of their contribution. Getting private limited company registration in Chennai helps entrepreneurs raise funds through equity, facilitating expansion while limiting liability and raising capital simultaneously. Banks prefer this structure for providing working capital and managing business finances.
A Pvt ltd company with Private limited company registration in Bangalore has perpetual succession, meaning its existence is not dependent on the lifespan of its members. This form of business is considered more trustworthy, as the details can be verified with the Ministry of Corporate Affairs, and the company is registered with the Registrar of Companies (ROC).
In a private limited company, it is not necessary to receive subscriptions before initiating share allotment. Directors are permanent, and the requirement for retirement by rotation does not apply. Section 184 of the Companies Act does not apply to private companies, allowing an interested director to participate in voting on matters of personal interest. Directors can borrow loans from the company, although this is not recommended.
Restrictions on directors’ remuneration are minimal. Start-ups and high-growth businesses prefer this structure as it allows offering employee stock options to attract top talent. These companies hold board meetings and file annual returns with the Ministry of Corporate Affairs (MCA), lending them more credibility compared to LLPs or general partnerships.
A private limited company has more options for raising debt than LLPs. In addition to obtaining bank loans more easily, they can issue debentures and convertible debentures. A private company can sue and be sued as it is a distinct legal entity.
Private limited companies can also attract foreign direct investment (FDI) more liberally through the automatic route.
Cons of Pvt ltd Company
A private company is subject to Dividend Distribution Tax (DDT) and Minimum Alternate Tax (MAT). It is a relatively expensive option, with registration costs varying based on the number of directors, members, authorized share capital, and professional fees, which may depend on the complexity of the task. If you want to hire a lawyer to handle it, you can frame a power of attorney for this purpose.
You must submit annual accounts and returns to avoid penalties or having your company name struck off the Registrar of Companies. The cost of hiring an accountant and key managerial personnel can be a burden for start-ups.
Private companies typically have limited financial and managerial resources. Shareholders face restrictions on transferring shares, making it difficult to exit the company. Although safeguards exist, minority shareholders may still get disadvantages by majority shareholders.
Additionally, shareholders cannot easily determine the real value of their investment, as private company shares are not listed on any stock exchange and are not easily transferable.
Pros and cons of LLP
Pros of LLP
Due to its structural and operational flexibility, an LLP with LLP registration in Chennai is well-suited for small enterprises and investment by venture capitalists. As a partner, you are not liable for the independent or unauthorized actions or misconduct of other partners. Changes in the partnership do not affect the LLP’s existence, rights, or liabilities.
The maximum number of partners in an LLP is unlimited. Both Indians and foreigners can be partners. Partners are not personally liable to outsiders for the LLP’s debts and obligations.
An LLP combines the benefits of a company and a partnership firm in a single organizational form. The partners’ personal assets have protection, as the LLP’s liability has limitation to its assets. There are no minimum capital requirements, making it an attractive option for individuals with little to no capital, unlike the mandatory setup costs of a Private Limited Company.
Audits are not necessary for an LLP unless its turnover exceeds Rs. 40 Lakhs or its capital contribution exceeds Rs. 25 Lakhs, unlike the mandatory audits for Private Limited Companies. Additionally, LLPs are not subject to Dividend Distribution Tax or tax surcharges, nor are they liable for paying Deemed Dividend Taxes (DDT). Interest from loans to partners is devoid of tax.
Getting LLP registration in Chennai is easier and more cost-effective compared to other forms of company registrations. LLPs face fewer government interventions, restrictions, and compliance requirements. Furthermore, FDI guidelines have been significantly liberalized for LLPs.
Cons of LLP
Raising funds for an LLP can be more challenging compared to private companies, which can issue and sell new shares to raise capital. Consequently, most LLPs are bootstrapped. An LLP cannot be left dormant, as it may be deregistered by the Ministry of Corporate Affairs.
Although not legally required, having a Partnership Agreement is crucial to avoid issues in governing internal relationships. A well-drafted contract outlining the rights and duties of each partner is essential.
The LLP Act does not include provisions for dealing with oppression and mismanagement. Private equity funds and venture capitalists are unlikely to invest in LLPs that has LLP registration in Coimbatore; as this would require them to become partners.
Conclusion
In conclusion, a Private Limited Company and an LLP (Limited Liability Partnership) serve distinct purposes.
Private companies are ideal for enterprises in manufacturing, which require substantial start-up capital, or in service sectors that sell software or operate with a software-as-a-service business model.
In contrast, Limited Liability Partnerships are best suited for businesses that offer professional services, as these businesses rely heavily on the professional skills and experience of their partners.
It is also fairly common for start-up founders to initially register as an LLP and then convert it to a private limited company just before raising funds.
