Understanding the Business Entity - Limited Liability Parterniship

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Understanding the Business Entity - Limited Liability Parterniship


Before selecting a business structure entrepreneurs have to carefully understand the existing different entities and weigh the pros and cons of all the business types equally. However, the most common entities chosen are Limited Liability Partnerships (LLPs) and Private Limited Companies. The number of LLPs is growing ever since its introduction in 2008. Although both private limited companies and LLPs have more or less the same benefits and complications, there are some differences in terms of legal aspects, taxation, compliances, and so on.

Key Difference between LLP & Pvt Limited company in India


Following are the differences between LLPs and private limited companies that can help entrepreneurs decide the most suitable one for their business.

Popularity:

Private limited companies are in existence for a long time and are quite popular among business owners. It has established processes and rules. LLPs are not as popular as Private limited companies but are comparatively easy to set up.

Funding:

Private limited companies have greater applicability. As private limited company distinguishes between shareholders and directors, the chances of funding are high. Also, the option of ESOPs or Employee Stock Options enhances employee retention.

Formation and registration process:

Both the entities are registered with the Ministry of Corporate Affairs (MCA) and receive an incorporation certificate post registration. The registration process is similar with the only difference being in the documents and forms filed.

Registration process of private limited companies:

1. Application for DSC (Digital Signature Certificate) and DIN (Director Identification Number)

2. for Directors

3. Application to check the availability of the proposed name

4. Filing of the EMoa and EAOA

5. Application for PAN and TAN

6. Incorporation certificate

Registration process of LLPs

1. Application for DSC (Digital Signature Certificate) and DIN (Director Identification Number)

for Partners

2. Application to check the availability of the proposed name

3. Application for PAN and TAN

4. Incorporation certificate

5. Drafting of LLP agreement

The duration of registration for both the companies take around 20 days

Cost and maintenance:

A new business wouldn’t be in a very strong financial position to spend and hence comparing the costs is an essential part. A minimum of Rs 15,000 is required to register a private limited company which includes documentation, taxes, agent fees, etc, an addition of Rs 15,000 to 20,000 per year to comply with all the MCA’s mandatory compliance requirements. Another recurring Rs 15,000 per year to fulfil all the auditing requirements. This sums up to Rs 40,000 to 45,000 per year.

An LLP is much cheaper. The registration fee comes up to 11,000 and around Rs. 4,000 for MCA’s compliance. Moreover, auditing has to be conducted only when the annual turnover exceeds Rs. 40 lakh and the 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.

Penalties:

some private limited companies do not care to comply with MCA regulations. which can lead to hefty fines of up to Rs. 1 lakh per year. With an LLP, given its low costs, it is very unlikely that companies would not comply. So LLP is a better choice to start a small business that does want to increase funding or offer ESOPs to employees.

Ownership

With respect to ownership, private limited companies offer much more benefits as the ownership is based on shareholding. There can be a maximum of 200 shareholders in a private limited company abd they do not directly get involved with the management and are disticnt. In LLP companies, the owners and management are the same. As both handle the business affairs and take the management powers equally.

Compliance:

Although the compliance requirements are almost similar for both the entities, LLP has its own compliance perks. There is no yearly audit for LLPs if the annual turnover is below 40 lakhs and the capital investment is below Rs 25 lakhs. Whereas Private limited companies have to go for a mandatory yearly audit.

If you are still confused, take time to dwell on this question and do in-depth research, approach a professional legal service provider because once you decide to register an LLP, there are high chances to 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.

Read the detail guide about LLP in India.

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