Private limited company or Limited Liability Partnership-Which one to chose for a startup? - Business & Economy - Entrepreneurship - TIK Share

Private limited company or Limited Liability Partnership-Which one to chose for a startup?


CA Pulkit Sharma

2015-12-12

Often people ask which one is better for a startup or business at lower level to chose from - a Private Limited Company or a Limited liability Partnership (LLP).

Both have significantly similar features, yet both are meant for different purposes.

From my understanding and knowledge on this topic and practical experience, my advice depends on certain significant points discussed in this post.

Why to chose a registered format compared to unregistered formats such as Partnership firm?

Many times entrepreneurs starting their business have this doubt and my consultancy with them starts with this point.

When one have an option of registering as a partnership firm, why should he go for a private limited company or LLP. Registering a private limited company or LLP, increase compliance costs.

A Partnership firm can also be registered with sub-registrar, though partnership firm is not a totally unregistered format but does not enjoy certain benefits which a private limited company or LLP does.

It is very important to understand some basic terms which are considered as a benchmark for choosing a right format for your organization.

What is limited liability?

Liability refers to obligations. In business, obligations simply convert to monetary obligations.  When one says limited liability, he refers to limited obligation.

Limited liability means your obligation towards financial liabilities is limited to your subscribed share in ownership of organization.

For example, if you have subscribed 100 shares worth Rs. 1,00,000, your obligation is limited to Rs. 1,00,000 or unpaid amount whichever is lower under any given circumstances.

Though the liability is always limited in case of a private limited company or a LLP but in some cases this clause does not work. In case of frauds, statutory dues and personal guarantees liability is not restricted to your assured obligation.

What is difference between separation of ownership and management?

In case of a private limited the concept of ownership and management is defined. Shareholders are the owner of company and directors manage the company.

Think of a scenario where an investor wants to invest in your business but do not want to be part of any day to day obligations of the business. The best choice in this case you have is forming a private limited company.

Shareholders directly cannot interrupt the management from taking operational or any other decisions which are bound to be their powers.

A business requiring VC funding has to be formed as a private limited company (with exceptions), shareholders will invest the money and management (directors) will run the business.

In a limited company the difference is clear, whereas in case of a partnership firm or any other form their no difference between management and owners.

In case of a limited company, shareholders cannot be held responsible for wrong doings of management.

The above points give an idea about features that limited company or LLP enjoy.  Now coming back to the main discussion Private Limited Company vs Limited Liability Partnership (LLP), let’s start with the basics and move to advance features upon which you should decide the type of registration.

What is the main difference between a Private Limited Company and Limited Liability Partnership (LLP)?

Speaking in Programming language, A LLP IS CHILD OF PRIVATE LIMITED COMPANY (A SUB-CLASS OF MAIN CLASS), i.e. it derives some features of a private limited company but not all.

Private limited company or Limited Liability Partnership-Which one to chose for a startup?

Some of the difference between LLP and a Private Limited Company are:

FEATURES

PRIVATE LIMITED COMPANY

(LIMITED LIABILITY PARTNERSHIP)LLP

Minimum Members/Partners Required

2

2

Maximum Members/Partners Allowed

200

Not restricted

Loans and Deposits

A Private Limited Company can take loan from Directors

No restrictions

Share certificates for investment

Only a private limited company can issue shares.

No Such option

Liability

Limited

Limited

Perpetual Succession

In case of death of a share holder, Private Limited company will continue and his legal heirs will become the owner of shares.

Legal heirs are not entitled to become partner. However a clause can be inserted in agreement to entitlement.

Tax Implications

Double taxation, tax to be paid on profits and dividend declaration.

No double taxation, there is not tax on distribution of profits of LLP.

Audits

Compulsory audit by a Chartered Accountant under Companies Act

Compulsory Audit by a Chartered Accountant if Turnover exceeds Rs. 40 Lakhs or Capital of LLP exceeds Rs. 25 Lakhs or More.

Annual Filings

Applicable

Applicable

 

Which format should I choose for my business, a Private Limited Company or LLP?

I have discussed the major key factors to influence your decision. However to put them in a simple language, you should look at the larger goal of business and then decide.

If you wish to run your business with family members, without any need of investment the option could be a LLP.

If you are looking for investment and tenure of initial members is not fixed, your best option is a Private Limited Company.

It is impossible to cover each and every angel, Have any doubt discuss it below.