Entrepreneurs frequently struggle to decide which type of business will work best for them when launching a new company. Which is better? Which will offer the ideal conditions for their firm to succeed? These questions are typical for understanding the different forms of the company. One must know the services and differences between LLP and Pvt ltd. When it comes to LLP vs Private Limited companies, they both offer limited liability to their partners and members and are distinct legal entities.
What is a Limited Liability Partnership (LLP)?
A limited liability partnership is an alternate corporate company structure that provides participants with the advantages of limited liability at a minimal compliance cost. It also allows the partners to organise their internal structure the same way a regular partnership would.
A limited liability partnership is a lawful entity accountable for its resources. However, the partner’s liability is limited. LLP is a combination of a business and partnership, and it differs from a limited liability company (LLC).
Features of LLP
- LLP is a corporate body with perpetual succession.
- An agreement between LLP and its partners must govern the rights and obligations of LLP and its partners.
- The partners’ liability gets restricted to their agreed-upon contribution to the LLP, which may be tangible, intangible, or both.
- Annual accounts for the LLP must accurately and fairly reflect its financial situation. Each LLP must file a statement of finances and solvency with the Registrar each year.
- The Indian Partnership Act of 1932 does not apply to LLP. The central government has the authority to investigate the affairs of an LLP, if necessary, by appointing a qualified inspector.
- Every LLP must contain a minimum of two partners and a minimum of two Designated partners.
Advantages and disadvantages of LLP
- There is no minimum contribution required.
- The number of business owners is unlimited.
- Lower registration fees
- There is no mandatory audit requirement, and the LLP Dividend Distribution Tax (DDT) is not applied.
- Non-Compliance Penalty
- Being unable to invest equity
- Higher rate of income tax
The registration process for LLP
Step 1: Obtain Digital Signature Certificate (DSC) & Director Identification Number (DIN)
The requirement of the directors’ DSC is for the submission of any online forms. Consequently, obtaining DSCs and DINs for two partners is the first stage in the process.
Step 2: Name Approval
The Registrar will only approve the name if the central government has no objection. The name must not be similar to trademarks, body corporates, LLPs, partnership businesses, or other entities.
Step 3: LLP agreement
The partners must then draft the LLP agreement and other documents required for registration. A limited liability partnership’s LLP agreement is essential because it specifies the partners’ and the LLP’s respective rights and obligations.
As soon as the LLP gets registered by submitting Form 3 online through the MCA portal, the partners formally engage in the LLP agreement. Within 30 days of incorporation, the partners must complete the registration process.
Step 4: Certificate for LLP incorporation
The form for incorporation of Limited Liability Partnership is the document used for incorporation of LLP. It must be filed with the Registrar, who has jurisdiction over the state where LLP’s registered office. The form is going to be used as LLP incorporation.
Step 5: Open a bank account and apply for PAN
As soon as partners receive the certificate of formation, they should apply for your LLP’s PAN, TAN, and bank account.
What is a Private Limited Company?
A private limited company is a business that is owned only by individual shareholders. In this situation, the shareholders’ responsibility is limited to the number of shares they hold under the limited partnership liability arrangement.
Characteristics of a private limited company
A minimum of two shareholders are needed to form such a company, just like any other. However, because it is still a small business, there is a 200-member limit on the total number of members. Furthermore, the company needs two directors to operate it.
Limited liability system:
Each shareholder or member’s liability in a private limited company is limited. In case of loss, the limited liability system obliges the shareholders to sell their assets to make up for the difference.
Separate legal entity:
A private limited company is a legally distinct entity that exists indefinitely. It means that the corporation continues to exist in the eyes of the law even if all the members pass away or the company goes bankrupt or insolvent. Unless it gets dissolved by resolution, the company will exist indefinitely and not impact the lives of its shareholders or members.
Minimum capital paid up:
A minimum paid-up capital of a private limited company must be Rs 1 lakh. It might increase if the Ministry of Corporate Affairs decides to do so occasionally.
Advantages and Disadvantages of Pvt Ltd Company
There is no chance of members losing their assets due to the limited responsibility the firm has as a private limited company. The shareholders of a failing company are responsible for paying shareholders by selling their assets.
Less number of shareholders:
A Pvt ltd company can be formed with just two shareholders compared to seven to start a public company.
Since investors, founders, and management are the sole owners of the company’s shares, they are free to transfer and sell their holdings to third parties.
As previously stated, the company continues to exist until it is formally dissolved legally and continues to operate even after a member’s death or departure.
The compliance procedures for shutting it down are one of the disadvantages of a Pvt Ltd company. Sometimes, it becomes overly complex and time-consuming.
- Apply DSC (Digital Signature Certificate)
- Apply for the DIN (Director Identification Number)
- Apply the name’s availability
- To register the private limited company, submit the MOA and AOA.
- Apply a PAN and TAN for the business. The Registrar of companies will provide a certificate of incorporation with a PAN and TAN.
- Open a current bank account in the company’s name.
Difference between LLP and Pvt Ltd company
- The law governing Pvt Ltd co. is the Companies Act 2013, whereas the Limited Liability Partnership Act 2008 governs LLP.
- The maximum number of members in a Pvt. Ltd. company is 200, whereas there is no limitation on the maximum number of partners in an LLP.
- An audit is always required in a Pvt Ltd company, whereas it is needed in LLP only when the turnover exceeds 40 lacs.
- In the case of Pvt Ltd company, annual accounts and annual returns must be filed, whereas, in the case of LLP, the partners must file the annual statement of accounts and solvency under LLP annual compliance and annual returns.
- The registration cost of LLP is much less than that of Pvt Ltd company.
- In the case of a Pvt ltd company, liability is limited to the amount of unpaid capital. In contrast, liability in the case of an LLP is restricted to the amount of contribution to the LLP.
Similarities of LLC and Pvt Ltd Company
LLP and Private Limited Company provide many of the same features.
- LLPs and Private Limited Companies are independent legal entities with separate assets and liabilities from the promoters.
- They both have their distinct legal entities, which implies that the law views a Private Limited Company or LLP as a different person.
- Tax advantages are provided to both business formations, and 30% of the profits would be exempt from taxes.
- The partners’ liabilities are limited in an LLP or a private limited company.
- Both businesses must register with the Ministry of Corporate Affairs.
- Unless and until the promoters or another competent body is terminated, LLP and Private Limited Companies have perpetual succession.
Why is LLP better than a Pvt Ltd company?
LLP is a more advantageous business form, combining the advantages of a private limited company and a partnership firm. The Llp and its partners are two different legal entities, and each partner’s liability is limited to contribution.
The charge for forming an LLP firm is meagre compared to the cost of creating a Private Limited Company. Compared to private limited companies, an LLP has fewer compliance responsibilities. Private limited companies are subject to severe ownership limitations and are allowed 200 shareholders, and LLPs get exempted.
Since its inception in 2008, the number of limited liability partnerships, or LLPs, has increased. LLPs give business owners the benefits of a private limited company without the drawbacks of partnership firms. It provides limited liability protection and tax benefits and can accommodate any number of partners. They are legitimate and reliable alternatives because people can register with the Ministry of Corporate Affairs.
A private limited company is one whose AOA (articles of association) restrict the transferability of shares and forbid the public from subscribing to them, as defined by the Companies Act of 2013. This distinguishing characteristic sets private limited companies apart from other public companies.
FAQs on the difference between LLP and Pvt Ltd
What is the primary distinction between LLP and Pvt Ltd company?
In a Private Limited Company, where the shareholders (owners) do not necessarily need management rights, a partner in an LLP will be both a proprietor and a manager.
Can a Private limited company be converted into LLP?
Yes, a private limited company can get converted into LLP.
Why is LLP better than Pvt Ltd company?
LLP has fewer responsibilities than Pvt ltd company, and it is less in cost.
Can a Pvt Ltd company join an LLP as a partner?
If there is no "security interest" in place at the time of the conversion application, a Pvt company or an unlisted public company may also get converted into an LLP.