LLP vs Private Limited Company: Should More Start-ups Pick LLP?

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llp vs company

Limited liability partnerships (LLPs) are growing in number since their introduction in 2008, but they should be more popular than they now are. This is because the LLP offers nearly all the benefits of a private limited company, with none of the downsides of a partnership firm. It offers limited liability, offers tax advantages, can accommodate an unlimited number of partners, and is credible in that it is registered with the Ministry of Corporate Affairs (MCA). At the same time, it has fewer compliances than a private limited company and is also significantly cheaper to start and maintain.

Why Private Limited Companies Are Popular

Private limited companies have greater applicability. In addition to all an LLP can offer, a private limited company distinguishes between shareholders and directors. This makes it possible to raise funding and attract talent by offering ESOPs. If you’re looking to do either of the two in the near term, go ahead and register one. But if you’re starting a web development shop or running a small business online, there’s no need. In fact, even if you are looking to raise funding, but not for a couple of years, you should strongly consider an LLP over a private limited company.

Cheaper To Start & Run

As a new business, you won’t have money to throw around. While legal should not be ignored (documentation, in particular, is an area that start-ups ignore), registration costs should be kept as low as possible. So let’s compare costs of starting and running and LLP to a private limited company.

A private limited company costs at least Rs. 15,000 to start. But once this is done, you need to shell out at least Rs. 15,000 a year to comply with the MCA’s rules and regulations, some of which begin as soon as you incorporate. Then there’s the need for an audit, which will again cost you a minimum of Rs. 15,000. That works out to Rs. 45,000 a year.

An LLP is much cheaper. It costs just around Rs. 11,000 to register and around Rs. 4,000 to comply with MCA regulations. Moreover, you only need to conduct an audit once you have a turnover of over Rs. 40 lakh and paid-up capital of over Rs. 25 lakh. This means that for the price of starting a private limited company you can start and maintain an LLP in its first year.

Know More: Advantages, Procedure & Cost of LLP Registration

Penalties Won’t Arise

Many private limited companies don’t or can’t pay to comply with MCA regulations. This can lead to hefty fines of up to Rs. 1 lakh a year. With an LLP, given its low costs, it’s unlikely that you wouldn’t be able to comply. This would ensure that you skip the fines altogether.

So if you’re starting a business that isn’t likely to raise funding or offer ESOPs to employees, an LLP is a good choice. It will keep your start-up costs low and ensure you aren’t running around fulfilling compliances instead of running your business.

Do, however, take time to dwell on this question, because once you decide to register an LLP, you will likely get several licenses and approvals in its name (profession tax or shops and establishments registration, for example). If, at any point, you need to switch from an LLP to a private limited company, considerable effort would be required.

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Vakilsearch's resident expert on starting up, compliance and accounting, he holds a Masters in Accounting and an LLB.

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