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LLP vs Private Limited? [Part 1]

LLP vs Private Limited? [Part 1]

LLP or Limited Liability at first may seem to be a really easy option as compared to forming a private limited company, but is it really so?
Before taking a long term decision and crucial decision like this you need to know what really is a Limited Liability Partnership and a Private Limited Company.

What is LLP?

Limited liability partnership is a form of organization where your firm is a separate legal entity from the partners and the partners are not liable for the unauthorized actions of other partners or their misconduct, in simpler words they are insulated from ‘joint liability’. They have perpetual succession just like any other organization form. Also, and most importantly the liability of the partners would be limited to their agreed contribution. In layman’s language: no personal assets of the partners are exposed to risk, except in case of fraud on the part of the partner.

Why LLP?

Cost Effective: Forming a LLP requires less cost than forming a company. You can also apply for registration of LLP online. The registration cost of the LLP is determined on the basis of the capital contribution.

Taxation: LLPs are taxed in the similar manner as are the other general Partnership firms.

  • Effective Tax: 30.9%
  • Exempted from Surcharge of 10 %

But, LLPs pay less tax as compared to the companies.

Partners and Capital: In case of LLPs there is no restriction on the maximum no. Of partners, though minimum of 2 partners are required. Also, no minimum capital contribution in case of LLPs is there.

Management: In case of the private limited companies, the corporate shareholders cannot take part in the day to day operations of the company, whereas, in LLP partners are designated to manage the operations of the firm. The partners are responsible for ensuring compliance with the laws and related regulations.Also, in case of no LLP agreement, the firm can function according to the framework mentioned in the Schedule 1 of Limited Liability Partnership, 2008.

Audit , Disclosures and Filing Requirements: Every LLP is required to file annual return, within 60days of end of the financial year.
An LLP, except for those having a turnover of 40lacs or a contribution not exceeding 25 lakhs in a financial year, are required to get their accounts audited according to the provisions of LLP Act, 2008.

No mandatory insurance is required for an LLP.

No Board meeting requirement, board constitution, director details etc. Which are required in a private limited company.

Why not LLP?

  1. LLP cannot raise funds from public.
  2. No separation of management from owners.
  3. A provision for a foreign partner is there, but no clarity for foreign investors.
  4. Foreigners can form a LLP only if they include one partner who is a resident of India.
  5. Banks prefer private limited company over LLP to give loans.
  6. FDI was introduced in LLP Act in May, 2011 so procedural problems may arise.

Inc42’s Take

LLP is useful structure if want to get rid of all the extra restrictions and other statutory requirements. And if you plan on raising funds from foreign sources or through VCs then Private Limited Company is a more practical option.

LLP is ideal for small and medium business enterprises, and also for professionals like CA, CS, CWA, etc. who can for Multi-disciplinary firm.

Still confused on what to do, which one to choose, read the case studies in the next part.