A comparison highlighting the key differences, advantages, and disadvantages of LLPs and private limited companies is given hereunder with a view to help entrepreneurs and business owners to make informed decisions on what type of organisation they should form based on their specific needs and circumstances.
The Table highlights the advantages and disadvantages of an LLP (Limited Liability Partnership) and a Private Limited Company form of organization in India, quoting relevant legal provisions.
| Criteria | LLP (Limited Liability Partnership) | Private Limited Company |
| Governing Law | Limited Liability Partnership Act, 2008 | Companies Act, 2013 |
| Legal Status | Separate legal entity | Separate legal entity |
| Liability | Limited to the extent of capital contribution (Section 27, LLP Act, 2008) | Limited to the extent of shares held (Section 2(68), Companies Act, 2013) |
| Number of Partners/Shareholders | Minimum 2 partners, no maximum limit (Section 6, LLP Act, 2008) | Minimum 2 and maximum 200 shareholders (Section 2(68)(ii), Companies Act, 2013) |
| Formation and Registration | Easier and less expensive, requires incorporation document and LLP agreement (Sections 11 and 23, LLP Act, 2008) | More complex and expensive, requires MOA and AOA, and various other documents (Section 7, Companies Act, 2013) |
| Compliance Requirements | Lower compliance requirements, need to file LLP Form 8 (Statement of Account & Solvency) and LLP Form 11 (Annual Return) | Higher compliance requirements, need to file financial statements, annual return, board meetings, etc. (Sections 92, 134) |
| Audit Requirements | Mandatory only if turnover exceeds ₹40 lakh or capital contribution exceeds ₹25 lakh (Rule 24, LLP Rules, 2009) | Mandatory irrespective of turnover or capital (Section 139, Companies Act, 2013) |
| Number of Partners/Shareholders | Minimum 2 partners, no maximum limit (Section 6, LLP Act, 2008) | Minimum 2 and maximum 200 shareholders (Section 2(68)(ii), Companies Act, 2013) |
| Formation and Registration | Easier and less expensive, requires incorporation document and LLP agreement (Sections 11 and 23, LLP Act, 2008) | More complex and expensive, requires MOA and AOA, and various other documents (Section 7, Companies Act, 2013) |
| Compliance Requirements | Lower compliance requirements, need to file LLP Form 8 (Statement of Account & Solvency) and LLP Form 11 (Annual Return) | Higher compliance requirements, need to file financial statements, annual return, board meetings, etc. (Sections 92, 134) |
| Audit Requirements | Mandatory only if turnover exceeds ₹40 lakh or capital contribution exceeds ₹25 lakh (Rule 24, LLP Rules, 2009) | Mandatory irrespective of turnover or capital (Section 139, Companies Act, 2013) |
| Taxation | Taxed as a partnership firm, no dividend distribution tax (Finance Act, 2009) | Taxed as a company, subject to dividend distribution tax (Section 115-O, Income Tax Act, 1961) |
| Foreign Investment (FDI) | Allowed under automatic route (Press Note No. 12 (2015 Series), DIPP) | Allowed under automatic route, subject to sectoral caps and conditions (Consolidated FDI Policy, DIPP) |
| Transfer of Ownership | More restrictive, requires consent of all partners (Section 42, LLP Act, 2008) | More flexible, shares can be transferred subject to restrictions in AOA (Section 56, Companies Act, 2013) |
| Management Structure | Managed by designated partners, flexibility in management structure (Section 7, LLP Act, 2008) | Managed by board of directors, more structured and regulated (Sections 149 and 173, Companies Act, 2013) |
| Statutory Meetings and Records | No mandatory requirement for statutory meetings (LLP Act, 2008) | Mandatory requirement for board meetings, annual general meetings (Sections 173 and 96, Companies Act, 2013) |
| Conversion | Easier to convert to other forms like a private company (Section 56, LLP Act, 2008) | Conversion to LLP is possible but involves more complex procedures (Section 366, Companies Act, 2013) |
Advantages of LLP:
- Ease of Formation: Formation process is simpler and less expensive compared to a private limited company.
- Lower Compliance: LLPs have fewer compliance requirements.
- No Audit Requirement for Small LLPs: Audit is mandatory only if turnover exceeds ₹40 lakh or capital contribution exceeds ₹25 lakh.
- Tax Benefits: No dividend distribution tax.
Disadvantages of LLP:
- Transfer of Ownership: More restrictive as it requires consent of all partners.
- Less Prestige: May be perceived as less prestigious compared to a private limited company, especially for large-scale operations.
Advantages of Private Limited Company:
- Limited Liability: Liability is limited to the extent of shares held.
- Ease of Transfer of Ownership: Shares can be easily transferred subject to restrictions in AOA.
- Access to Capital: Easier to raise funds through equity, attracting investors.
- Higher Credibility: More credible and prestigious for conducting business, attracting investors and loans.
Disadvantages of Private Limited Company:
- Higher Compliance Requirements: More statutory requirements and compliance, making it more expensive and time-consuming to maintain.
- Mandatory Audit: Audit is mandatory irrespective of the turnover or capital.
- Complex Formation Process: Formation process is more complex and involves higher costs.
Conclusion: Understanding the differences between LLPs and private limited companies is essential for making an informed decision about your business structure. LLPs offer ease of formation, lower compliance requirements, and certain tax benefits, making them suitable for smaller businesses or partnerships. On the other hand, private limited companies provide higher credibility, ease of ownership transfer, and better access to capital, which can be advantageous for larger operations. By carefully considering the specific needs and circumstances of your business, you can choose the structure that aligns best with your long-term objectives.
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