Why Private ltd and not LLP(Limited Liability partnership)
Clients registering their business have this doubt often. To choose PVT ltd or LLP. Before advocating PVT LTD, i would like to present some of the similarities and dissimilarities between both.
- Seperate Legal Entities
- Limited Liability
- Incorporation with ROC
- Audits and Annual filing*
- DIN and DPIN
- Share Certificates in case of Company
- Agreement to amended in case of LLP, everytime a partner is changed
- Tax Treatment is different
Most of people choose Pvt Ltd due to its limited liability advantage. But in case of LLP and Pvt Ltd, the liability is same ie Unlimited. Than why to choose Pvt Ltd, As per me the reasons are:
- Its easier to run a pvt ltd, in case of dispute arises. The shareholder can sell his shares and exit. But in case of LLP, the agreement has to be redrafted and filed to ROC.
- It is very easy to get investors for Pvt Ltd, as what matters is the Shares. Just issue the shares to investors and get money.
- Its not possible to convert LLP into Pvt ltd.
- In LLP, the process of bringing in additional human resources into the core group of founders is not as easy and smooth as it is with a Private Limited Company.
- Issuing ESOP looks impossible in case of LLP
- Cant List the shares in case of LLP
- The law around bringing in capital, diluting and liquidating stake and secondary market transactions is very evolved for Companies.
However the only advantage to LLP over Pvt Ltd comes from Income Tax Act, As per Income Tax Act whenever a company shares the profit with Shareholders(Dividend), Dividend distribution tax have to be paid, but in case of LLP it does not apply.
The above analysis is general in nature and may change from case to case.
While it may be good to have a pvt ltd. as one prferred mode of business it is better to have LLP if you are a small business. There are many business which by nature of it must be registered as a LLP. Such as restaurants, local stores etc. since these business will often remain in the family itself. Also, one will need an expert to handle the legal compliance of the private limited, there are hardly and legal compliance with a LLP.
Also, as Pulkit pointed out that the company has to pay a dividend distribution tax on share dividend it is not that these profits are exempted from taxation in LLP. The only difference is that in case of a pvt. ltd. company the shares holders are not supposed to pay tax on the dividend received however in case of a Limited Liability Partnership the profit shared is taxable and the partners are supposed to pay tax on their profit share.
The Share taken by partners from LLP is not taxable in hands of partners. Tax provision to LLp are same as partnership firms.