WHAT IS BETTER FOR STARTUPS: A PRIVATE LIMITED COMPANY OR LIMITED LIABILITY PARTNERSHIP?

WHAT IS BETTER FOR STARTUPS: A PRIVATE LIMITED COMPANY OR LIMITED LIABILITY PARTNERSHIP?

MEANING OF PRIVATE LIMITED COMPANY

Private limited company is a business structure that requires minimum 2 shareholders and directors. Private limited company is a separate legal entity that has the ability to contract under its name[1]. Private limited company also protects the owner’s assets through limited liability when the company is facing some loss. Private limited company is also approved by the government under the Department For Industrial Policy and Promotion, also known as startup plan.

 

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MEANING OF LIMITED LIABILITY PARTNERSHIP

It is a form of alternative corporate business structure that provides partners with limited liability and low enforcement costs. It also helps the partners to organize their internal structure in the same way as they would in a typical alliance. A limited liability corporation is a legal organization that is responsible for all of its properties. The partners' liability, on the other hand, is limited.

 

ADVANTAGES OF PRIVATE LIMITED COMPANY

  1. Stability and growth- Private limited company is usually preferred by startups because it provides them with stability and growth.
  2. A separate legal identity- Private limited company has a separate legal identity from its members which means that the owners are responsible for the company’s profit as well as loss.
  3. Funding options- Funding is very important for startups and private limited company is a structure that provides various funding options like ESOP and more.
  4. Credibility- Customers, retailers, and investors today search for trustworthiness in the companies they do business with. When creating a private limited company, information such as the company's name, date of incorporation, registered office address, status of the company, and other details are entered into a publicly searchable database.
  5. Transfer of shares- It is easy to transfer shares by filling out and signing a share transfer form and handing over the buyer of the shares along with the share certificate.
  6. Startup India Scheme- Private limited companies can register under the government scheme known as Startup India Scheme which also benefits startups by providing tax exemptions to those startups that are recognized.

 

BENEFITS OF CHOOSING PVT OVER LLP

When it comes to global acquisitions, equity or venture capital financing, the mechanism is relatively straightforward thanks to the high degree of accountability and governance in place. In comparison to LLPs, obtaining external funds for a private limited company is a much easier method.

The market growth and diversification model is easy to execute for a private limited partnership, but it is more complicated for an LLP due to the LLP agreement's limitations in implementation and modification. The LLP arrangement, as well as its regulatory compliances, must be updated on a regular basis, which is a time-consuming operation.

With the new adoption of the ‘Zero payments' concept, there is scarcely a discrepancy between the Incorporation process and costing factor between the case of a Private Limited Entity and a Limited Liability Partnership (LLP). Furthermore, in the case of a Private Limited Entity, the ease of doing business is an added bonus[2].

 

ADVANTAGES OF LIMITED LIABILITY PARTNERSHIP

  1. Distinct legal identity- Limited liability partnership provides a separate legal identity. One party is not liable or responsible for the wrongdoing or negligence of the other.
  2. There is no limit on the number of owners in business- In LLP the minimum number of partners is 2 but there is no limit on the maximum number of partners.
  3. Low cost of registration- The cost of registration as LLP is low as compared to private limited company.
  4. Low Tax- Another advantage of LLP is that an LLP has to pay low tax as compared to private limited company.
  5. Very flexible to manage- LLP is flexible to manage as the partners can decide the way they want to manage the LLP.

 

BENEFITS OF CHOOSING LLP OVER PRIVATE LIMITED COMPANY

A limited liability partnership is defined as a corporate or incorporate entity established under the Limited Liability Partnership Act 2008[3]. The LLP is a legal body apart from its partners, with permanent succession. The LLP's life, rights, and obligations would not be impacted by changes in the partners. The definition of a Joint Liability Partnership is younger to that of a Private Limited Corporation.

The Limited Liability Partnership combines all of the benefits of a partnership corporation with the special characteristics of a private limited company. The regulatory costs in an LLP are lower than those of a Private Limited Company. In the case of an LLP, there are a slew of extra tax advantages. A private limited company is expected to file at least 8 to 10 compliances each year, whereas a Limited Liability Partnership is only required to file the Annual Report and a Statement of Accounts and Solvency.

Both businesses, whether private or public, are forced to have their accounts audited, regardless of their share capital. However, there is no such provision in the case of LLPs. Accounts must be audited regularly under the LLP Act, with the exception of LLPs with a turnover of less than Rs. 40 lacs or a donation of less than Rs. 25 lacs in any financial year.

There are many advantages to LLPs over PLCs. With all of these advantages, LLP formation is an excellent option for early-stage businesses. Although PLCs have their advantages, LLPs have been grossly undervalued in terms of assisting in the creation of a company's base. Since their inclusion in the LLP Act of 2008, LLPs have proved to be an absolute miracle for brick and mortar businesses.

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CONCLUSION

Private Limited Company and Limited Liability Partnership are two distinct corporate entities regulated by separate statutes, the Companies Act 2013 and the Limited Liability Partnership Act 2008. Both companies, i.e. Pvt Ltd and Limited Liability Partnership, have much of the same features needed to operate a small to medium-sized enterprise, though still differing in certain ways. Both Pvt and LLP have their own advantages and disadvantages, in my opinion LLP is the better option for startups as it shows flexibility in partnership and has a  low cost of formation.

 

BY – RISHIKA KAPOOR

 


[1] (Section 2 (68) Companies Act, 2013)

[2] (Why chose Private Limited Company over Limited Liability Partnership, tax guru)

[3] (Ministry Of Corporate Affairs - llpact)