Many Entrepreneurs starting a new business are curious about the comparison between a Private Limited Company and Limited Liability Partnership (LLP). Both entities offer many similar features required to run a small to large-sized business, but also have some differences on certain aspects. In this article we decode Private Limited Company vs. LLP from the viewpoint of an entrepreneur starting a new business.

Limited Liability Partnership (LLP)

A limited liability partnership is a form of corporate structure where the partners have limited liabilities. This means that you, as a partner of your firm, will not be personally responsible for business debts and obligations. In simple words, If there is a lawsuit against the LLP, your personal assets such as your car or your house will not be at risk. This is different from a traditional form of partnership where the partners are personally liable for business debts and obligations.

However, a partner will be held personally liable for wrongful acts done by him, for instance fraud to creditors, but not for acts done by other partners, thus striking a perfect balance of liability and giving other partners adequate protection. Not to forget, a  LLP business structure has more internal flexibility as compared to a traditional partnership. You can organise it as per your mutual agreement.

Another advantage is that the law does not impose many compliance requirements such as Board Meetings, Annual Meetings, Resolutions, etc. on LLP. However, a private company as well as a public company has to comply with these requirements imposed by Companies Act. This means, less paperwork and less filing requirements. In a traditional form of partnership, if a partner leaves the firm or dies or a new partner joins, the existing partnership comes to an end and you have to enter into a partnership agreement all over again. However, since LLP is a separate legal entity, its existence will not be affected by entry or exit of the partners.

Tax saving is an additional benefit. An LLP is exempted from taxes like Dividend Distribution Tax. Loans to partners are also not taxable as income.

However, Fines and Penalties for non Compliance or late filing of documents with Ministry of Corporate affairs are most of the time higher for LLP as a flat fee of Rs.100 per day is levied when the non compliance continues with no cap on the liability, Therefore LLP could incur larger penalty or fines from MCA due to non compliance.

Private Limited Company

While it is true that to comply with numerous statutory requirements such as Board Meetings, Annual Meetings, Resolutions, compulsory statutory audit etc., the absolute notion that an LLP is a better model than private limited company is not misconceived. A private limited company has some distinct advantages for large sized businesses, such as capital raising, offering ESOPs, distinguishing between management and ownership etc.

Structurally a LLP doesn’t have a fixed maximum number of members; minimum paid up capital for incorporation etc. But a person can be brought within the ambit of an LLP only as a Partner. A company based structure gives more options to bring in a person into the Company. He can be brought in as a shareholder, with no position on the Board. A private limited company enjoys better access to funding from banks and foreign direct investment.

Taxation wise, A LLP has a less complex taxation structure with no applicability of dividend distribution tax, low tax rates, conditional statutory audit, etc. However, there is a cap on the remuneration that can be paid to a Partner or Director under Sec. 40 (b) of the IT Act, 1961.

While it beneficial for a firm to be an LLP if it intends to run a small scale concern covering a particular area, it may so happen that when the scale of operations gets big, the firm would need to infuse additional stakeholders and professionals in the management from outside to manage the day to day affairs of the business. A LLP can be only funded by accruals; it cannot raise funds from the public raising external capital.

Moreover, due to stringent compliances, a private limited company enjoys high creditworthiness. The cumulative effect of all of this is that it is easier to get investors onboard a private company than an LLP. This, coupled with the fact that diluting your stakes in secondary market is easy in a private company model, demonstrates that an entrepreneur looking to build a scalable startup and looking for funding should adopt the private company model. Most of the big startups are not in the form of LLPs but a company. Even those who adopt LLPs initially, convert their business to private limited company later.

The structure and governing law of Company makes it easier for infusion of stakeholders, investors, professionals in the Company. Another point where a Company scores above LLP is that it enjoys better credibility and confidence of investors, stakeholders, partners as compared to LLP due to adherence to stringent compliances under Company Law, Income Tax and other laws in force.

To Conclude

In LLP, you get the best of a traditional partnership and a company. Therefore, it is most suitable for small to medium sized businesses. There is no requirement of minimum capital contribution either. This means that formation cost is not high at all and you can start a Limited Liability Partnership with any amount of capital.

In the long run, the advantages that an LLP gives are less significant, and are in fact countered by some major disadvantages. For eg., issuing ESOPS to your employees is logically impossible, getting investors into your Company is relatively more difficult and diluting or liquidating your stake on the secondary markets is not possible either.

Thus, there is no absolute rule that makes one business entity better than the other. The selection of same should be purely a case specific based on factors such as the objectivity of the founder, business rationale, funding requirement, ownership and management control and such other factors.