LLP vs Pvt Ltd – which one is better for your business? Many people who are starting a business for the first time are curious to know the difference between LLP and PVT Ltd. Though both of these business structures share some similarities in terms of business operation, there are also specific differences in each of these business structures.
Private Limited companies are governed by the Companies ACT 2013, while the Limited Liability Partnership Act 2008 governs LLP companies. This article will cover the key details of LLP vs Pvt Ltd business models from the Entrepreneur’s standpoint.
What is LLP?
LLP stands for Limited Liability Partnership. In this business model, there are multiple partners in a company who hold only limited liability toward the organization. The minimum number of people required in LLP is two, and there is no cap on the maximum number of partners.
In this business model, each partner is accountable for their acts, and it does not affect the other partners. Moreover, partners only need to sell their properties if any loss is incurred in the business.
Advantages of an LLP
- The process involved in creating an LLP firm is straightforward, and even first-timers can manage it easily.
- Compared to a Private Limited Company, the cost of registration is less.
- There is no minimum capital needed to start an LLP firm.
- All other business models, whether public or private, require a compulsory audit of their accounts. However, in an LLP case, no mandatory audit is needed.
- Dividend Distribution Tax is not applicable in the case of LLP. In a company, when the owner wants to withdraw the profit, they must pay an additional tax. In the case of LLP, it is not applicable.
What is Private limited?
Private Limited Company is a business structure operated and owned by a small group of people. This business structure and share transferability are limited and prevented from being publicly traded.
Advantages of Private Limited
- Owners of the Private Limited company have limited liability, meaning their assets are protected if the company is liquidated. If the company goes bankrupt, the owners need to pay only the amount invested in the company.
- Due to Private Limited’s credibility, it can easily attract more funding for the business. You can attract the funds by issuing bonds, taking out loans, or issuing new shares.
- It is best suitable for anyone who is relatively new to the business and is not having enough resources to set up a public limited company. Moreover, this business model best suits anyone who wants complete control over their business.
- It provides protection from creditors, as the personal assets of the business owners do not go into liquidation in case of business bankruptcy.
Similarities Between LLP and Private Limited
- Separate Legal Entities: Both of these business models have separate legal entities, which means that they are treated as different individuals by law.
- Liability: In both business structures, the business owners are safe because their personal assets do not go into liquidation in case of bankruptcy.
- Registration Process: Both of these business types need to get the registration done from the Ministry of Corporate Affairs.
- Tax Benefits: The tax benefit on both these business types is 30% of the profits.
LLP vs Pvt Ltd – What is the Difference Between Them?
Below are the essential points consider while comparing the LLP vs Pvt Ltd. Go through each point to understand the difference between these two business structures.
The process for registration of LLP and Private Limited is somewhat similar. However, the documents that need to be filled in for the incorporation vary. Private Limited companies are registered as per the Companies Act of 2013, whereas LLP registration is done as per the Limited Liability Partnership Act 2008.
Director Identification Number (DIN) is needed to register a Private Limited Company, whereas Designated Partner Identification Number (DPIN) is required for LLP registration.
When comparing LLP vs Pvt Ltd, Limited Liability Partnership requires a lesser registration amount than the Private Limited Company incorporation. It is because the government of India has focussed LLP mainly on small businesses.
Also, the number of documents needed for the LLP registration is less than the Private Limited Company registration.
As mentioned earlier, the law treats both LLP and Private Limited Companies as separate entities. Both of these business structures can hold assets and liabilities. In the case of Private Limited Companies, the shares are easily transferable to the shareholders, which is not the case with the LLP.
Private Limited Companies need to hold the board and general meetings often, which is not the case with the LLP. Also, the Private Limited Companies need to have a Memorandum of Association and Article of Association that defines the goals, business objectives, etc. On the other hand, the LLP agreement is enough to run the Limited Liability Partnership.
In the case of a Private Limited Company, flexibility in ownership can be observed, and a maximum of 200 shareholders can hold it. These shareholders need not be a part of the management and do not have administrative powers.
On the other hand, in LLP, partners can act as both owners and also run the company. There is no additional distribution of shares or directors involved in this.
Foreign Direct Investment is allowed in the case of a Private Limited Company without the need for any government approval. On the other hand, You can do FDI even in the case of LLP, but certain restrictions are involved.
Though the tax compliances remain the same for LLP and a Private Limited Company, LLP has more advantages than a Private Limited Company when it comes to compliance related to the Ministry of Corporate Affairs.
In the case of LLP, tax auditing is optional if the annual turnover is less than 40 lakhs and the annual contribution is less than 25 lakhs. On the other hand, irrespective of the turnover, the Private Limited Company has to get the financial statements audited by the Ministry of Corporate Affairs.
Fine and Penalties
The penalty cost for late filing of documents in the case of LLP is Rs.100 per day. This fee increases if the filing is done on time. It is not the case with Private Limited Companies. So, when comparing LLP vs Pvt Ltd in terms of fines and penalties, LLP is little expensive than private limited.
The tax compliances for both business structures are the same. However, apart from the annual income, a Private Limited Company also has to pay a dividend distribution tax when the profits are distributed to the shareholders.
An LLP is taxed 30%, while the Private Limited Company is taxed 25% in addition to the cess and surcharge.
When comparing llp vs pvt ltd, Both business models offer a different set of benefits to new business owners. It depends on the size and long-term objectives of the business, and the owner decides which kind of business model they want to opt for.
For example, if you have limited capital and want to run a small business with one partner, then it is recommended to go with LLP registration. On the other hand, a Private Limited Company is the best fit if you are looking for a long-term business and high growth.