Private Limited Company vs LLP

Many Entrepreneurs starting a new business are curious about the comparison between a Private Limited Company vs LLP. Both entities offer many similar features required to run a small to large sized business, while also differing starkly on certain aspects. In this article we decode compare Private Limited Company vs LLP from the viewpoint of an Entrepreneur starting a new business.

Registration Process

The Private Limited Company Registration process and the LLP Registration process are very similar with some differences in the documents and forms being filed for incorporation. The steps for incorporation of a Private Limited Company are 1. Obtaining Digital Signature Certificate (DSC) for the proposed Directors, 2. Obtaining Director Identification Number (DIN) for the proposed Directors, 3. Obtaining name approval from MCA and 4. Filing for incorporation. LLP registration also has a similar process: 1. Obtaining Digital Signature Certificate (DSC) for the proposed Partners, 2. Obtaining Director Identification Number (DIN) / Designated Partner Identification Number (DPIN) for the proposed Partners, 3. Obtaining name approval from MCA and 4. Filing for incorporation. Both Private Limited Company and LLP are registered with the Ministry of Corporate Affairs and are issued a Certificate of Incorporation. The processing time for incorporation of a private limited company and LLP are also comparable with both entities taking on average about 20 days to incorporate.

Registration Cost

The Government fee for incorporation of a LLP is significantly cheaper when compared to the Government fee for incorporation of a Private Limited Company. LLPs have been introduced to meet the needs of small businesses and hence LLP enjoy lower government fee for incorporation. Also, the number of documents that have to be printed on Non-Judicial Stamp Paper and Notarized is lesser for LLP registration when compared to that of a Private Limited Company registration.

Features

Both LLP and Private Limited Company offer many of the same features. LLP and Private Limited Company are both separate legal entities and have assets and liabilities that are separate from that of the promoters. LLP and Private Limited Company are both transferable, though a Private Limited Company offers more flexibility when it comes to transferring or sharing of ownership. LLP and Private Limited Company both have perennial life, unless and otherwise closed by the promoters or a competent authority.

Ownership

Private Limited Company offers more flexibility for the promoters when it comes to ownership and ownership sharing. The ownership of a Private Limited Company is determined by its shareholding and a private limited company can have upto 200 shareholders. Further, since the shareholders do not directly participate in the management of the company, there is a clear distinction in a private limited company between the owners of share and the management. Hence, private limited company is advantageous when it comes to ownership and management features.

In a LLP, there is not a clear distinction between the owners and management. In a LLP, the LLP Partners hold ownership of the LLP and also hold powers to manage the LLP. Therefore, a Partner in a LLP will be both a owner and a manager, whereas in a Private Limited Company, the shareholders (owners) do not necessarily have to have management powers.

A private limited company is recommended for any business that is considering FDI or Employee Stock Options or Equity funding or Venture Capital funding.

Compliance

Tax compliances are similar for both private limited company and LLP. However, when it comes to compliance relating to the Ministry of Corporate Affairs, LLP enjoys significant advantages. A LLP does not have to have its accounts audited if the annual turnover of the LLP is less than Rs.40 lakhs and the capital contribution is less than Rs.25 lakhs. A LLP would however have to file LLP Form 8 and LLP Form 11.

A private limited company on the other hand would have to file annual return audited financial statements with the Ministry of Corporate Affairs each year.

Fines and Penalties

The penalty for non-compliance or late filing of documents with the Ministry of Corporate Affairs are most of the times higher for a LLP as a flat fee of Rs.100 per day is levied when the non-compliance continues with no cap on the liability. Therefore, LLPs could incur larger penalty or fines from MCA due to non-compliance. Therefore, it is important for the promoters of a LLP to be aware of the due dates and file the required documents with the registrar on time.

Know more about penalty for not filing company annual return.

Other Factors

Private limited companies have been in existence for longer than LLPs and enjoys widespread recognition in India and the world. Therefore, there are well established processes and procedures for Private Limited Companies. LLPs on the other hand is a recently introduced entity in India. Therefore, some of the rules, regulations and procedures are continuing to evolve. LLPs are also not as recognized in India as a private limited company, since it is a relatively new concept.

Private limited company offers its promoters a better image or standing than that of a LLP. Private limited company also enjoys better access to funding from banks and foreign direct investment.