Basic Primer on Limited Liability Partnership (LLP) vs. Private Limited Company
- Blog|Company Law|
- 4 Min Read
- By Taxmann
- |
- Last Updated on 23 December, 2023
Latest from Taxmann
Table of Contents
- Introduction
- What is Limited Liability Partnership and Private Limited Company?
- Comparison between Private Limited Company and LLP
- Conclusion
1. Introduction
For an entrepreneur starting a new business, choosing amongst the most appropriate business structure based on numerous factors, and analysing its pros and cons is a crucial step towards his/ her entrepreneurship journey. Two such business structures include a Private Limited Company (hereinafter called Pvt. Ltd.) and Limited Liability Partnership (hereinafter called LLP); both being governed by two different acts viz. the Companies Act, 2013 and Limited Liability Partnership Act, 2008 respectively. Both these structures can be compared on various parameters which shall be looked into further in this article.
2. What is Limited Liability Partnership and Private Limited Company?
LLP is an alternative form of business structure that was introduced in the year 2008, combining the benefits of limited liability of a company and the flexibility of a partnership. The liabilities of the partners in an LLP are limited and separate. Their personal assets are not liable to the attachment if the LLP is suffering or winding up legal consequences of debt or repayments.
Section 2 (68) of the Companies Act, 2013 defines a private limited company as a separate entity that is held privately and provides for limited liability i.e. the liability of its members is limited to the number of shares held by them. It does not freely transfer its shares to the public like other public companies.
3. Comparison between Private Limited Company and LLP
Pvt. Ltd and LLP, both the types of business structures have certain similarities as well as differences, as discussed below:
| Particulars | Private Limited Company | Limited Liability Partnership |
| Act Applicable | Companies Act, 2013 | Limited Liability Partnership Act, 2008 |
| Registration with | Ministry of Corporate Affairs (MCA) | Ministry of Corporate Affairs (MCA) |
| Registration Prerequisite | Directors Identification Number (DIN) | Designated Partners Identification Number (DPIN) |
| Directors/ Designated Partners Required | Minimum – 2 Directors
Maximum – 15 Directors |
Minimum – 2 Designated Partners
Maximum – No limit |
| Members Required | Minimum – 2
Maximum – 200 |
Minimum – 2
Maximum – No Limit |
| Minimum Share Capital | No requirement for minimum share capital. | No requirement for minimum share capital. |
| Board Meeting | Minimum 4 board meetings to be held each year within 120 days of the previous board meeting. | Not mandatory |
| Annual General Meeting | Mandatory at least once in a year. | Not mandatory |
| Statutory Audit | Mandatory | Not mandatory unless partner’s contribution exceeds Rs. 25 Lakhs or annual turnover of the partnership exceeds Rs. 40 Lakhs. |
| Annual Filing of Return | Annual Statement of Accounts and Annual Return filed with ROC in Form AOC 4 and MGT 7 respectively. | Annual Accounts and Annual Return filed with ROC in LLP Form 8 and LLP Form 11 respectively. |
| Legal Compliance | Lengthy and Complex. | Less and Simple. |
| Liability | Limited up to the capital contribution. | Limited up to the agreed contribution. |
| Company Name | Should end with Pvt. Ltd. | Should end with LLP. |
| Transferability of Shares | Transferable among members only. Can be restricted by Articles of Association (AOA). | Transferable on execution of agreement before the notary. |
| Suitability | Entrepreneurs looking to deal with large amount of capital, high risk and demanding expert managerial skills in business. | Startups, businesses, trade, manufacturers, etc. starting at a moderate scale initially. |
| Cost of Registration | Depends on authorised capital and stamp duty in each state. | Less in comparison to a Company. |
| Management and Ownership | Separation of management and ownership. Directors are responsible for the management and ownership lies with the shareholders. | No difference between management and ownership. |
| Existence of Business | Perpetual | Perpetual |
| Withdrawal of Capital | Capital can be withdrawn by the shareholders only by approval of court. Company may buyback the shares subject to the provisions of the Companies Act. | Subject to LLP agreement. Partner may reduce their contribution after giving notice and obtaining approval from the creditors. |
| Interest on Capital | No such provision for shareholders. | Partners may be given interest on capital subject to the LLP agreement. |
| Remuneration | Directors can take remuneration without any restriction. | Working partners can take remuneration subject to the LLP agreement. |
| Termination of Ownership | Shareholder may by transferring his/her shares, terminate the membership subject to conditions in AOA. However, shareholder cannot resign from the company. | A partner even after transferring all the rights continues as a partner in LLP unless LLP agreement provides otherwise. Also, partner may resign from the LLP. |
| Removal from Ownership | Not possible. Only the shares may be transferred from one shareholder to another. | Possible, subject to the LLP agreement. |
| Tax Structure | Complex. | Comparatively simpler. |
| Name Security | Name is secured and unique. | Name is secured and unique. |
| Permanent Account Number (PAN) | Separate PAN other than shareholder/director. | Separate PAN other than partners. |
| Foreign Direct Investment (FDI) | Eligible via Automatic and Government Route. | Eligible via Automatic Route subject to certain conditions. |
| Fund Raising from Venture Capital | Better chances as shareholding can be offered to them via ESOP, shares, etc. | Possible by adding as partners in the LLP. |
4. Conclusion
Thus, both the types of business entities have their own advantages and disadvantages. One must keenly analyse all the parameters of both the business structures before selecting the most suitable one. The concept of a private limited company has been around in India for a while and is considered a reliable business model. LLP is relatively new but is easy to set up with limited resources. None of them can be classified as better or best, rather it is upon one’s own requirement and objective to select between the two alternatives and achieve the desired outcome.
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