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How to choose between a Private Ltd. Company and LLP?

private limited company vs llp

When you decide to start your own business, you need to decide what kind of entity you want to incorporate. You can choose between:

In this article, let us help you understand the difference between a Private Limited company vs LLP (Limited liability Partnership) so that you can make an informed decision when you set up your own business.

What Is A Private Limited Company?

A Private Limited company is the most popular legal structure option for business in India. Let us understand the meaning of a Private limited company.

  • The general rule is that a Private Limited Company must have a minimum of 2 members and a maximum of 200 members.
  • The capital of a company is provided by a group of individuals known as shareholders. They entrust the management of the company in the hands of individuals known as the Board of Directors. As a shareholder, you can either run the business yourself or hire directors to run the company on your behalf.
  • In the case of a Private Limited Company, shares should be closely held by private people and they are not allowed to sell these shares to the general public through public offer.
    Although, a Private Limited Company is allowed to issue shares and any other securities through private placement to known people.
  • The liability of shareholders is limited, only to the extent of their shareholding (i.e., shareholder’s personal assets will not be utilized to repay the debts of the company).
  • A Private limited company has a separate legal entity and it is allowed to hold property/assets in its own name and can sue, be sued, hold or dispose of the property in its name.

What are the advantages you can experience if you choose to set up a Private limited company?

If you choose to incorporate a Private limited company, you can enjoy the following benefits:

  • The shareholders and the directors of a company have their independent identity and both will have a certain power to run and administer business.
  • There is no minimum capital requirement.
  • It is the best structure for fundraising. In case you need to raise funds from banks/NBFC’s/Foreigners, you should set up your business as a Private limited company.
  • Further, a Private limited company is allowed to offer its shares to its Employees. (popularly known as ESOP’s (Employee Stock Plan).
  • In comparison to other company structures, if you choose to incorporate a Private limited company, you can enjoy certain tax benefits.
Want to register a private limited company?

CLICK HERE

What Is A Limited Liability Partnership (LLP)?

An LLP is basically a hybrid of two concepts i.e., Private Limited Company and Partnership Firm. With an LLP you can get the benefit of both:

Limited liability as in case of a private limited company The flexibility to run business without many compliances as in the case of a Partnership firm

Let us understand the meaning of a Limited Liability Partnership.

  • It is a new form of business in which partners enjoy limited liability.
  • LLP requires a minimum of 2 Designated partners. However, there is no restriction on the maximum number of partners.
  • It is also treated as a separate legal entity and enjoys some tax benefits similar to a Private limited company.
  • As an LLP, however, you cannot raise money from the public.

What Advantages Can You Experience If You Choose To Set Up An LLP?

If you choose to incorporate a Limited Liability Partnership, you can enjoy the following benefits:

  • The registration cost of an LLP is lower as compared to that of a Limited company. Hence, it is more favorable if you plan to start a small business.
  • There is no minimum capital requirement.
  • The partners and the partnership are treated as separate entities. Hence, it has the structure of a partnership where you can enjoy the benefit of limited liability.
  • An LLP is easier to set up and manage compared to a Limited Company. There are few formalities and compliance requirements.
  • In the case of a Private Limited company, you have to appoint Statutory Auditor for conducting a statutory audit irrespective of your Capital or Turnover. However, there is no such concept for LLP’s. They don’t need to get their account audited up to a specific limit prescribed under the LLP act, 2008.
  • No restriction on taking or giving Loans/guarantee/security to or from Directors or relatives of directors. (There is a restriction for such kind of transaction in case of Limited company)
Here are Simple Steps To Incorporate An LLP

CLICK HERE

What Are The Differences Between A Private Limited Company VS LLP (Limited Liability Partnership That You Should Know?

In order for you to understand the differences, let us take a look at the chart below:

Sr. No. PARTICULARS PRIVATE LIMITED COMPANY LLP
1. Number of members Min. 2, Max. 200 Min. 2, No maximum limit
2. Number of Directors Min. 2, Max. 15 Min. 2, No maximum limit
3. Registration time 12-15 working days 10-12 working days
4. Name of the entity The name should end with Pvt. Ltd. The name should end with LLP.
5. Statutory meeting requirement Board meeting, Annual General meeting. Not Applicable
6. Audit Mandatory Not compulsory unless the partners contribution > 25 lakhs or turnover > 40 Lakhs
7. Loans to Directors Restricted No restriction on taking or giving Loans/guarantee/security to or from Directors or relatives of directors.
8. Dividend Distribution Tax Applicable Not Applicable
9. Cost of incorporation Lower in comparison to other companies Slightly Lower than a Private limited company
10. Business Model
  • 1. Companies having a considerable turnover
  • 2. Companies in need of external funding
  • 1. Smaller business such as startups
  • 2. Manufacturers/service sector

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Conclusion

When you have a business model which will generate a considerable turnover and you would like to raise funds for your business in the immediate future, it is better to incorporate a private limited company. Also, private companies are considered more reliable by investors compared to an LLP.

Further, a Private Limited Company is a type of organization closely held, usually by family, friends, and relatives.

However, suppose you are looking to start your business on a relatively smaller scale and wish to conduct your business with lesser hassles and compliance requirements. In that case, a Limited Liability Partnership is more suited for you. Ease of incorporation and simple compliance procedures have made LLPs a preferred choice among small businesses and professionals.

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