The biggest dilemma when a person wants to start a business is whether to start as a Private Company or LLP. Both entities offer many similar features that are required to run a small to large sized business, while they are also different in certain manners. In this article we are going to elaborate both type of business forms. Both LLP and Private Companies business model are developed to suit the needs of the Business and hence there are few Pros and Cons of LLP as well as Private Limited Company.
Therefore, learning the basic difference and features of both is important before anyone can take a decision to start (incorporate) an LLP or a Private Company.
| Particulars | Private Company | LLP |
| General Meaning | A Private Limited Company is a separate legal business entity held by small group of people. The liability of the members of a Private Limited Company is limited to the number of shares respectively held by them. | Limited Liability Partnership is a separate legal entity and an alternative form of business that gives the benefits of Limited Liability and flexibility of partnership. |
| Governing Act | Companies Act, 2013 | Limited Liability Partnership Act, 2008 |
| Definition as per Act | Section 2(68) of the Companies Act, 2013 defines a Private Company as under:
A Company having a minimum paid-up share capital as may be prescribed, and which by its articles- (i) restricts the right to transfer its shares; (ii) except in case of One Person Company, limits the number of its members to two hundred; Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that— (A) persons who are in the employment of the company; and (B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and (iii) prohibits any invitation to the public to subscribe for any securities of the company. |
Section 2(1)(n) of the Limited Liability Partnership Act, 2008 defines a Limited Liability Partnership as under:
LLP means a partnership formed and registered under the Limited Liability Partnership Act, 2008.
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| Governing Authority | Ministry of Corporate Affairs | Ministry of Corporate Affairs |
| Minimum Requirements | 1. 2 unique names
2. Atleast 2 Directors and 2 Members 3. If a body corporate is Director then it has to nominate a natural person 4. DSC and DIN of proposed Directors and Members 5. Proposed business activity |
1. Minimum 2 Designated Partners (DP)
2. Atleast 1 of the DP shall be Indian resident 3. If a body corporate is DP then it has to nominate a natural person 4. DPIN/DIN and DSC of both the DP. 5. Name of the LLP should be unique |
| Registration Process | 1. Obtain Name approval from MCA
2. File application for incorporation |
Same as of Private Company |
| Registration Fees | Higher than LLP | Lesser than Private Company |
| Charter document | Memorandum of Association and Articles of Association | LLP Agreement |
| 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. There is a clear distinction in a private limited company between the owners of share and the management. | 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. |
| Transfer | Shares can be easily transferred from one shareholder to another. | Transfer from one partner to another is governed by the LLP agreement. |
| Compliances | A Private Company has to ensure various compliances as prescribed under the Companies Act, 2013. | Compliance requirement for LLP is lesser than a Private Company. |
| Statutory Audit | Audit is mandatory for Private Company irrespective of its turnover or capital. | Audit is mandatory if contribution exceeds Rs. 25 Lakhs or turnover exceeds Rs. 40 Lakhs |
| Tax Structure | A Private Company is required to pay Income Tax and Dividend Distribution Tax. | A LLP is required to pay Income Tax only. |
| Existence or Survivability | Existence of a Private Limited Company is not dependent on the Directors or Shareholders. Could be dissolved only voluntarily or by Regulatory Authorities. | Existence of a LLP is not dependent on the Partners. Could be dissolved only voluntarily or by Regulatory Authority. |
| Benefits |
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| Dissolution | Process is lengthy and time consuming | Dissolution is less procedural than Company |
Other Factors
Private Company and LLP have a lot of similarities yet they both are different in many of its characteristics and structures. If you are an entrepreneur who needs external funding and are aiming towards good turnover, a Private Limited Company is a recommended business structure for you. Private limited company also enjoys better access to funding from banks and foreign direct investment. While in case you are more than one person who wishes to start the business together as partners with limited liability than Limited Liability Partnership is for you.
In simple words, LLP is a beneficial platform for the small and medium entrepreneur to run their business in comparison with Private Company. Usually LLP’s are recommended to Small Business Owners, professionals and enterprises in service industry which is not capital incentive or a business idea where promoter is not looking for investment.
Whereas Private Companies are ideally suited for capital intensive business or for Promoters who are willing to raise funds through investors or Public Issue, etc.
