Lot of entrepreneurs, wanting to start their new venture, get in touch with me. One common question all of them have is what should be the structure of their business entity. Although they are ready to take risks but at the same time also want a limited liability structure in case things go wrong. So, the options for the business entity structure boils down to 2 options i.e. either a Private Limited Company (Private Company) or a Limited Liability Partnership (LLP).
Thanks to the initiative of the Government for ease of doing business, both the options are cost effective. However, the compliance requirements of LLP are very less as compared to a Private Company.
Should this be the only criteria in choosing LLP over a Private Company?
No, there is lot more than just the compliance angle, which in my view should be taken care of.
In this Article, I would highlight areas where a Private Company has an edge over LLP:
1. Ease of Raising Funds:
Raising funds from external sources is much easier for a private company as compared to LLP. The simple reason behind this is that due to extensive reporting requirements under the Companies Act 2013, it ensures high level of transparency in activities which builds trust among the investors to invest in private companies. Further, if the investor is a non-resident then it is more likely that it will invest in private companies as the process is quite simplified. In case of LLP, raising funds seems a challenge and can be difficult. The investor, who wants to infuse capital, has to be admitted as a partner in LLP and will enjoy the rights of a partner.
2. Clear Distinction of Ownership
A Private Company offers a clear distinction between the shareholders and the management of the company. The directors, who manage the working of a company need not be the owners of the company too. The shareholders do not necessarily participate in the day to day management of the company. In LLP, the partners holds both the ownership and management powers which makes the distinction impossible.
3. Liabilities in case of default:
One of the biggest advantage of a Private Company over LLP is that in case of a non-compliance, the manner for determining the liability for ‘officer in default’ is provided in the Companies Act, 2013.
Whereas, in case of LLP, the liability for non-compliance falls on the designation partners and since there is no shield or protection, there can be instances where the designated partners are personally liable along with the LLP.
4. Future Expansion of Business:
Every entrepreneurs while establishing their business only thinks of its expansion. A Private Company opens a door for expansion of your business to a next level. Since, it attracts investors, liquidity is less of a problem for them and it’s easy to grab the opportunities that come their way. In case of LLP, liquidity can be challenge which can restrict its growth.
5. Listing with Stock Exchanges:
Listing with stock exchanges is another important aspect that one should consider before deciding on the entity type. If your vision is to raise public funds and get your entity listed with stock exchanges in future, you should go with a Private Company as it can be converted into public company at a later stage and the shares of the company can be listed with stock exchanges. Whereas, LLP cannot be listed with stock exchanges.
6. Credit Worthiness and Sale Value
A Private Company holds a higher credit worthiness as compared to LLP. Due to high degree of corporate compliance, fund raising and procurement process is quiet easy in case of Private Company. Since, it is possible to have a true and fair view about the company it becomes more worthy to the investors to invest in it. Further, the market value of a Private Company is much higher in compared to LLP ensuring a higher sale value.
7. Compounding and Penalties:
The compliance requirement in case of LLP is less when compared to a Private Company. However, there are reliefs that might be available to the private company in case of a non- compliances. Moreover, the standards to accounting and auditing, secretarial standards are well defined for a private company making it easier to understand and comply with, whereas there is no clear defined standards for LLP and in case of any non-compliances the compounding and penalties can be huge when compared to a Private Company.
Hence, it is clear that even though the requirements in LLPs are less, a Private Company has an edge over LLP. Due to high level of compliances and defined standards, a Private Company is well-regulated and has more opportunities than a LLP. So, if you have a long term plan for your business a Private Company is a better option for you.
For more information, you can write to me at firstname.lastname@example.org.