Private Company vs. LLP - Which is Better for you?
The question is a very subjective one and cannot be answered as a ‘Yes’ or a ‘No’
Registration of Private Limited Company
We will answer the question indirectly by telling you the advantages and disadvantages of both which will in turn help you decide which is better for you!
Private Limited Company: -
Advantages
- Ease of raising Seed and Venture Capital: - If you’re planning on raising Seed or Venture Capital then only a Private Limited Company makes sense for you. Angels, Seed Funds or Venture Capitalists only fund a Private Limited Company .
- Limited Liability: -The liability of the shareholders of a Private Limited Company is Limited to their Shareholding. Thus, if the Private Limited Company makes a Loss, shareholders won’t have to pay the Loss beyond their Unpaid Share Capital.
- Separate Legal Entity: -A Private Limited Company is separate and distinct from its Shareholders and Directors. It can buy and sell property, enter into contracts, sue or be sued upon in its own name. The death, insanity, incapacity or insolvency of its shareholders and/or directors does not affect the existence or business of the Company in any way.
- Perpetual Existence: -Once formed, a Private Limited Company has a life-time existence until and unless it is liquidated.
- A good way to reward and retain talent-ESOP’s: -The success of a business depends on the quality of the team or the talent behind it. It is very necessary for businesses to retain and attract talent. A Private Limited Company can issue ESOP’s or Sweat Equity Shares (as it is commonly referred to) to deserving employees in order to retain and reward them. This is not possible if business is registered as a Proprietorship, Partnership or LLP.
Disadvantages: -
- Compulsory Audits: - It is compulsory to get the Books of a Private Limited Company audited irrespective of the Turnover of the Company.
- Mandatory Compliance: - There are a lot of Mandatory Annual Compliance for a Private Limited Company. 4 Board Meetings, 1 AGM, Audit, 3 ROC Form filing, maintaining registers Etc. are some of the mandatory compliance.
- Higher Income Tax: - The rate of Income Tax is 25% in case of Private Limited Companies if they have a turnover of less than Rs. 50 crores and is 30% in all other cases. The rate of Income tax for an LLP is 30%. On the face of it, a Private Limited Company looks more a tax efficient structure but if you take Dividend Distribution Tax (DDT) into account then a LLP turns out to be economical. A LLP works out to be 10% more tax efficient than a Private Limited Company.
LLP
Advantages
1. Limited Liability: -
The biggest advantage of a LLP is Limited Liability. The partners are only liable to contribute their agreed Capital. If the LLP incurs a Loss, the the Partners/Designated Partners do not have to pay for the Losses of the LLP beyond their agreed capital. Also, the partners of the LLP are shielded from the unauthorized acts of the other Partners.
The biggest advantage of a LLP is Limited Liability. The partners are only liable to contribute their agreed Capital. If the LLP incurs a Loss, the the Partners/Designated Partners do not have to pay for the Losses of the LLP beyond their agreed capital. Also, the partners of the LLP are shielded from the unauthorized acts of the other Partners.
2. Separate Legal Existence: -
A LLP is separate and distinct from its Partners. It can buy and sell property, enter into contracts, sue or be sued upon in its own name. The death, insanity, incapacity or insolvency of its Partners does not affect the existence or business of the LLP in any way.
A LLP is separate and distinct from its Partners. It can buy and sell property, enter into contracts, sue or be sued upon in its own name. The death, insanity, incapacity or insolvency of its Partners does not affect the existence or business of the LLP in any way.
3. Perpetual Existence: -
Once formed, a LLP has a life-time existence until and unless it is dissolved.
Once formed, a LLP has a life-time existence until and unless it is dissolved.
4. A status like a Private Limited Company and flexibility of a Partnership firm: -
A LLP is a Business entity which is formed by combining the advantages of a Private Limited Company and a Partnership Firm. It has the advantages of a Private Limited Company like Limited Liability, Separate Legal Existence and Perpetual Existence and advantages of a Partnership Firm like Flexibility in rotation of funds, no compulsory audits, minimum compliance etc.
A LLP is a Business entity which is formed by combining the advantages of a Private Limited Company and a Partnership Firm. It has the advantages of a Private Limited Company like Limited Liability, Separate Legal Existence and Perpetual Existence and advantages of a Partnership Firm like Flexibility in rotation of funds, no compulsory audits, minimum compliance etc.
Disadvantages
- Cannot raise Venture Funding: - A LLP CANNOT raise venture, seed or angel funding in a LLP. So if you plan to Start a Company which will require such funding, DO NOT form a LLP.
- Longer time to Register: - A LLP takes generally 25–30 working days to Register (We are counting the time taken to issue the PAN as well)
Here is a head to head, point to point comparison of the Two!
Registration of Private Limited Company
Private Limited Company vs LLP
Limited Liability and Perpetual Succession: – The liability of the Shareholders / Directors / Partners / Designated Partners of a Private Limited Company or an LLP is limited.
And, Perpetual Succession means that the death or incapacity of the Shareholder / Directors / Partners / Designated Partners does not affect the existence a Private Limited Company or an LLP.
Separate Legal Entity: – A LLP and a Private Limited Company are separate legal entities. They have a separate identity as per law and are different from their Shareholders / Directors / Partners / Designated Partners.
They can hold properties, sue or be sued upon etc. in their own name.
Venture, Seed and Angel Capital: – A venture, seed or an angel fund will ONLY fund a Private Limited Company. Thus, if you are certain to raise venture capital in the future then form a Private Limited Company and NOT an LLP.
Income Tax: – The rate of Income Tax is 25% in case of Private Limited Companies if they have a turnover of less than Rs. 50 crores and is 30% in all other cases.
The rate of Income tax for an LLP is 30%. On the face of it, a Private Limited Company looks more a tax efficient structure but if you take Dividend Distribution Tax (DDT) into account then a LLP turns out to be economical. A LLP works out to be 10% more tax efficient than a Private Limited Company.
Audit: – Audit is compulsory for a Private Limited Company every year.
An LLP has to get its books audited if its Capital exceeds Rs 25 lacs or if its Turnover exceeds Rs 40 lacs.
Compulsory Compliance: – A Private Limited Company has to file 3 e-forms with the ROC every year while an LLP has to file two.
Both have to file their Income Tax Returns every year and TDS returns every quarter.
Meetings: – A Private Limited Company MUST have 1 Board meeting every quarter (i.e. 4 Board meetings per year) and one Annual General Meeting every year.
There is no such condition for LLP’s.
Maintaining Registers: – A Private Limited Company has to maintain certain Books and registers as stipulated by the ROC.
No such requirement for an LLP.
ESOP’s: – Employee Stock Option Plan or Sweat Equity Shares are issued to your Employees. Post the issuing of equity shares, the employees become part owners of your Company. They are widely used by Companies such as Infosys, TCS, Facebook, Google etc. to retain their employees and attract talent.
Not possible with an LLP.
Registration of Private Limited Company
