Top 7 Differences Between Private Limited and LLP Company Formation

There are a large number of differences between private limited and LLP Company.  These are two modern forms of organizations that an entrepreneur can start. Entrepreneurs have various options to choose from while registering a new company in India.

These forms differ on legal aspects as well as the control that the entrepreneur has on the enterprise. Each of these forms can have benefits as well as complications. Hence; requires to picked only after weighing their pros and cons. These include the level of risk and liabilities the founder of the company has to bear. Next, the degree of control that the owner wishes to exercise in the organization. Additionally, factors like type of business, the size of its operations and tax implications affect the selection of the form. Lastly, the capital requirement for starting and running the business also affects this choice.

‘Limited Liability Partnership’ or LLP format. LLP is introduced as a sophisticated and legal version of the existing partnership companies in India. It has empowered many entrepreneurs by addressing challenges of the traditional partnership form. However, when compared to private limited companies, both these forms starkly differ on certain aspects.

Following are the differences between private limited and LLP Company which help an entrepreneur decide the most suitable one.

India has over 15.27 lakhs of registered companies as per data compiled by corporate affairs ministry: Economic Times, February 2016

1.  Recognition

A privately limited form of business has been in existence for a long time which enjoys a widespread acceptance and recognition across the country and the world. Thus, it has established processes and procedures. Therefore the procedures and rules are still new and evolving. LLP’s has become popular since they offer the benefits of a private limited company and addresses the downsides of a partnership business. LLP’s have proven to significantly economical to start and maintain.

2.  Formation Process Differences Between Private Limited and LLP Company

The registration procedures for both the forms of organizations are very similar with few differences in the documentation and incorporation process.

Both types of company structure require obtaining Digital Signatures Certificates (DSC) and Director Identification Number (DIN) for directors. It also requires Designated Partner Identification Number (DPIN) for partners, obtain name approval from MCA and filing for incorporation.

Additionally; private limited companies need to create and issue a memorandum and articles of association.  A copy of which is filed with the Registrar of Companies (RoC). For companies filing under LLP requires producing an LLP agreement among the partners.

3.  Registration Costs

When it comes to cost; differences between private limited and LLP Company is something every entrepreneur would like to consider. A private limited company registration costs approximately Rs. 20000/- to start. This includes the cost of documentation, filing for the name and few licenses. However, there is a recurring cost annually of Rs. 15000-20000/- to maintain a private limited company. LLP registration cost is economical in comparison. It approximately costs Rs. 15000/- to register and Rs. 4000/- to comply with MCA regulations.

4.  Legal Aspects

Both the forms of organizations, separate the ownership of the founders or directors of the company. Each of the forms has its own legal existence and a company common seal. Both the companies cease to exist forever unless, and otherwise the promoters of the company or competent authorities decide to close the business.

Regarding the closure of a private limited form of company is technically more challenging and time-consuming as compared to LLP. A private limited company is registered under the Companies Act, 2013. LLP is registered under the Limited Liability Partnership Act, 2008.

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5. Ownership

Another significant differences between private and LLP Company is that a Private limited companies are more flexible regarding ownership of the enterprise due to easy transfer of shares as compared to LLP.  Since shareholders do not participate in the management of the business, the shareholders and the management are distinguished. This form becomes more advantageous due to this feature. In the LLP format, there is no clear distinction between the owners and the management. The LLP partners hold the ownership of the company along with the power to manage it.

6.Compliance Requirement

When comparing the differences between private and LLP Company, the latter one enjoys a significant advantage as compared to private limited companies.

An LLP doesn’t have to audit its books of accounts if the revenue is less than 40 Lakhs or capital contribution is less than 25 Lakhs. On the other hand, a private limited company has to audit its books of accounts annually.

7. Fines, Penalties, and Taxes

Another major differences between private limited and LLP Company is companies formed under private limited companies have to comply with MCA regulations. If a company is non-compliant, it is liable to pay hefty fines of up to Rs. One Lakh every year. At the same time, LLP has simple structure and policies that ensure that business owners skip the fines altogether. LLP forms are much simpler from taxation purposes since there are only two forms of tax applicable, income tax and alternative minimum tax. However, a private limited company has to pay a tax of the earning of the company, dividend distribution tax, and alternate minimum tax. Thus the tax benefits of LLP over PVT Company are more beneficial for the enterprises.

Private limited companies have enjoyed a wider acceptability and possess a greater applicability across the world. For private limited companies, it is easier to raise funding and offer employee stock options to attract talent to the company. Another major difference between private limited and LLP Company is that the entrepreneur saves time on compliance matters. Wherease; running an LLP company, which is a taxing process while managing a private limited company.

Consider the above mentioned differences between private limited and LLP Company if you are starting a new firm. 

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