Company vs. LLP – Which is better?
Limited Company means a Company registered under the Indian Companies Act (Companies Act, 2013). Broadly there are two types of Companies in India, viz. Private Company and Public Company. For comparison Private Company is more similar and alternative to Limited Liability Partnership (LLP) and vice versa. Hence, we have restricted this article to Private Company comparison only.
Limited Liability Partnership (‘LLP’) is a form of enterprise that merges certain advantages of a partnership with those of a company. Viewed as an ‘alternate or hybrid corporate vehicle’, an LLP achieves the best of both corporate forms by granting to the members of the LLP, the flexibility of organizing their internal managerial structure as a partnership based on mutual-understanding, while limiting the liability of the partners to the extent of their interest in the partnership, which is corresponding to the separate legal personality of a company.
Both LLP and Private Companies business model are developed over a period of time to suit the needs of the Business and hence there are few Pros and Cons of LLP as well as Private Limited Company, however, neither of them is perfect suited for all nor absolutely redundant. Therefore, learning the basic difference and features of both is important before anyone can take a decision to start (incorporate) an LLP or a Private Company.
Usually LLP’s are recommended to entrepreneurs, professionals and enterprises in service industry which is not a capital-intensive industry to form commercially efficient vehicles suited to their requirements.
Flexibility in Operation
LLP is a partnership firm and alternative business vehicle that provides the benefits of limited liability with the flexibility of partnership firm which is regulated by a partnership deed executed between the partners. However, unlike Partnership firm, LLP has a perpetual succession and it can hold property in its own name.
While in case of Company, Companies Act requires a formal board structure and decision making at validly constituted meetings, passing of resolutions and maintenance of minutes of meetings and other statutory records to enable the Members/Directors take benefit of Limited Liability and other features of Private Company.
Private Limited companies have long been in existence and hence there is legal certainty about the various aspects of the Company. On the other hand, In India LLPs received formal recognition through the Limited Liability Partnership Act, 2008 (“LLP Act”) with effect from 2009 even though the theoretical inception of the concept of an LLP first occurred in 1957 as a recommendation by the 7th Law Commission of India. Which means LLPs are still a new concept and many a times, bank may not be willing to give loan to LLP or a person not familiar with the concept will see it with suspicion even after decade of its existence. However, of late, India is witnessing an upward moving trend in LLP registrations and conversion of traditional unlimited partnerships to the LLPs giving it a sought-after status in the Indian corporate scenario.
LLP which is a hybrid of Partnership Firm and a Company form of business is comparatively cheaper to maintain than the Private Company. As LLPs are not required to hold regular Board Meetings, maintain Statutory Registers and even filing fees are very less.
However, in case of delay in filing, LLP Act, 2008 charges penalty without any upper limit which in case of Private Company such additional fees are applicable only in case of delay in filing Balance Sheet and Annual Return of the Company.
Since we have discussed various differences between LLP and Private Company, let us see the similarities between two:
The liability of an LLP as well as Company is limited to the respective Capital Contribution or subscription of Paid up capital. Which means no personal tangible or Intangible assets of the Partners of LLP or Members of Company are used to pay off the liability of the Company or LLP.
Both LLP and Company are a separate legal entity and has its separate legal existence from its Partners or Members. Which means an LLP or a Company can hold asset in its name, can sue someone or can be sued by someone. Unless in exceptional cases, acts of LLP or a Company will not be treated as an Act of its Partners/Board or Members.
Since LLP and Company has its separate legal existence, it can hold properties in its own name unlike Partnership firms or sole proprietorship. Below is the Table with Main Pointers for your key highlight.
|Particulars||Limited Liability Partnership (LLP)||Private Limited Company|
|Minimum and Maximum Individuals in Business?||Minimum 2 Individuals is mandatory and no maximum Limit.
In case if Body Corporate like Company or another LLP becomes partner, such Body Corporate will need to nominate any Individual to be Designated Partner to ensure that the LLP has at least 2 Individual as Designated Partner.
|Minimum 2 Members and Maximum 200.
Also, similar to LLP, even Private Company will need 2 individuals as a Director. While Body Corporate can become share holder of the Company, a Private Company will need minimum 2 Individual as a Director of the Company.
|Registration||LLPs are registered under LLP Act, 2008 is registered with Registrar through ministry of Corporate Affairs (MCA)’s online portal www.mca.gov.in
With effect from October 2, 2018, now Government has introduced LLP-RUN and FiLLiP to simplify the process of incorporation of LLP at par with Companies.
Currently, with FiLLiP, promoters can apply for Name Approval, DIN and Incorporation of LLP.
|Registration of Private Companies are now much easier and centralized process. On the occasion of 69th Republic Day of India, in order to ease of doing business in India, now the name application is made a very simple through RUN (Reserve Unique Name) Portal on MCA and entire Incorporation Process along with DIN Application etc. is clubbed into one form more commonly known as SPICe Form.
Also, the Company Incorporation process is a centralized process where Government promises to process applications for incorporation in a day. Which means that effectively a Company can be incorporated in 4-6 working days.
Additionally, now along with Incorporation of a Company, Government also allots PAN and TAN to Company at the time of Incorporation to reduce the timeline to start a Business in India.
|Taxation||Profit of LLP are taxable at 30% plus surcharge. However, sharing of profit among the member is not liable to tax under current tax structure.||Private Companies with turnover upto Rs. 250 Crores are liable to pay tax at 25% plus surcharge and other Companies are liable for 30 % Tax rate. However, Dividend paid to Shareholders even from PAT (Profit After Tax) is taxable at 16.55%.|
|Charter Document||A Partnership Agreement or an LLP agreement is the main charter document of LLP. Partners of LLP has a flexibility in finalizing the same.||Memorandum and Articles of Association (MoA and AoA) of the Company is the main charter document. The skeleton is provided in the Act and various regulations of Companies Act, 2013 controls the same. Which means that Company or its Shareholder has very limited scope in defining or relaxing the Compliance.|
|Meetings||Meeting in case of LLPs are voluntary and it is purely driven by the LLP Agreement.||Companies are required to hold minimum 4 Board Meeting every year and also minimum 1 General (Shareholders) Meeting, most commonly known as AGM.
A Company cannot hold its General Meeting on Public Holiday or during non-business hours. Also, minimum notice is required for Board Meeting as well as Shareholders Meeting.
|Addition/change in Ownership||In case of LLP any change in ownership has to be affected only and only by alteration of Agreement which should be signed by all the Partners of LLP.
Stamp duty will be applicable as per State of exection.
As a result, transfer of Ownership in LLP is a bit difficult and cumbersome task.
|Ownership in Private Limited Company can be transfer simply by executing a Security Transfer Form (known as SH-4) and on payment of Stamp duty.
While in case of Private Companies, transfer of Securities requires Board Approval, Consent of only owners whose securities are transferred is required.
|Compliance and ROC Filing||Only 2 form is mandatory to file every year viz.
Form 8 (for Accounts) by October 30th of every year; and
Form 11 (Ownership declaration) by May 31st every year.
|Companies are required to file quite a few forms as compared to LLPs.
While Balance Sheet, Annual Return is mandatory it might require filing intimation regarding appointment of Auditor etc.
|Auditor Appointment||Appointment of Auditor is not mandatory. Also, only LLPs which crosses threshold limit of Turnover or contribution will require to have its accounts Audited by qualified Chartered Accountant.||Appointment of Auditor is mandatory for a term of 5 years at a time even for a Company with no operation.|
|Ideally Suited for?||LLPs are ideally suited for Professionals, Small Business Owners and business which is not capital incentive or a business idea where promoter is not looking for investment.||Private Companies are ideally suited for capital intensive business or for Promoters who are willing to raise funds through investors or Public Issue etc.|
The author is the Founder and Partner at JMJA & Associates LLP. With over 10 years of work experience in various listed companies and conglomerates, he has a rich and varied experience in his portfolio.
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