Understanding The Difference between LLP and Private Limited Company

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LLP and Private Limited Company Limited

Most aspiring entrepreneurs may often find themselves trapped in the question and uncertainty regarding the difference between a private limited company and LLP. These business structures offer several standard features to run a small or large company, though, in some ways, they do vary. 

In this article, we will understand the difference between the two by comparing Private Limited Company to LLP for a new entrepreneur.

Registration Process

The registration process for private limited companies and the LLP registration process is very identical with differences in the documentation and forms that are submitted for incorporation.

Here are the steps for private limited company registration in India; 

1. Get the Digital Signature Certificate (DSC) dedicated to each proposed Directors.

2. Getting the Director Identification Number (DIN) for each of the proposed Directors.

3. Apply to MCA for availing the company name approval.

4. Filing for private limited incorporation.

The process for LLP registration is also quite similar; 

1. Proposed partners will avail the Digital Signature Certificate (DSC).

2. The proposed partner will apply for availing the Director Identification Number (DIN) or   Designated Partner Identification Number (DPIN).

3. Apply to MCA for the name approval.

4. Filing for LLP incorporation. 

All Private Limited Company and LLP are licensed and a Certificate of Corporation given to the Ministry of Corporate Affairs.

The processing times in which private limited company and LLP are also incorporated comparable to the two companies which take approximately 20 days to include on average.

Registration Cost

If an LLP is incorporated, the government fee is considerably cheaper than the government fee for private limited company registration in India. LLPs are formed to meet the needs of small firms and thus LLP charges lower government fees.

Also, the number of documents that have to be printed on Non-Judicial Stamp Paper and Notarized is lesser for LLP registration when compared to that of a Private Limited Company registration.

Features

LLP and Private Limited Company has many of the same characteristics. The LLP and

Private Limited Companies are also independent legal bodies with distinct assets and liabilities from those of the advocates. All LLP and Private Limited Companies are transferable, but a private limited company provides more flexibility in transfers or sharing.

Both LLP and Private Limited Company live a lifetime until the promoters or competent authority exits and otherwise.

LLP is a separate licensed legal entity under the 2008 LLP Act. For the obligations of the LLP, the partners in an LLP are not directly liable. Partner shall be responsible only to the extent of the LLP contribution and shall have minimal liability.

Private Limited Company is a separate registered legal entity under the 2013 Company Act. The directors and owners of a company under private limits are not directly responsible for the corporation’s liabilities. Shareholders are accountable only to their share capital in a restricted way.

Ownership

Private Limited Company provides promoters with more flexibility over ownership and interest. Its shares own a private limited company, and a private limited company may hold up to 200 shareholders.

Therefore, given that the shareholders are not actively involved in the business management, the distinction between shareholders and control are evident in a private limited company. In terms of ownership and management features, private limited companies are also advantageous.

In an LLP, the owners and managers are not differentiated. Within an LLP, the LLP partners are LLP managers and also have management authority over the LLP. While a Partner in an LLP is both an investor and a manager, while shareholders (owners) do not usually have management powers in a private limited company.

Any business seeking FDI or employee stock options or equity or venture capital funding is recommended for a private limited company.

Fines and Penalties

For a flat fee of Rs.100 a day, the penalty for non-conformity or late submission of documents to the Department of Corporate Affairs is often higher, as if the non-compliance persists without a limited liability cap. As a result, LLPs can be subject to higher penalties or MCA fines because of failure to comply. 

Therefore, LLP proponents must be aware of the due dates and send the appropriate documentation to the registrar on time.

Compliance

In both private limited company and Corporation, tax policy is equivalent. However, LLP has significant advantages in terms of compliance with the Department of Corporate Affairs. An LLP is not expected to audit its accounts if the LLP’s annual revenue is less than Rs.40 lakhs, and the capital investment is lower than Rs.25 lakhs. 

On the other hand, a private limited company will have to file annually audited financial reports with the Ministry of Corporate Affairs.

The LLP tax structure is more natural. LLP is subject to income tax only. The payment of dividends is not available on LLP. After the benefit, the distributed income was reported, and the tax charged by LLP is tax-free in the pockets of the partners. Tax is levied on the company at a rate of 30% and all partners must ensure annual filing of LLP.

Though, it is essential to note that both, private company and LLP have to pay Alternate Minimum Tax.

Other Factors

The penalty for non-compliance or late submission of documents to the department of management Affairs for a flat fee of Rs.100 a day is often higher than if it continues without a limited liability restriction. LLPs may, therefore, be subject to higher penalties or MCA fines due to non-compliance. LLP advocates must also be mindful of the due dates and send the correct paperwork to the registrar on time.

The private limited company has a higher reputation or credibility than an LLP for its promoters. Registered private companies now have greater access to bank funding and foreign direct investment.

Foreign Ownership

LLP – Foreigners are only permitted to invest with approval of the Foreign Investment Promotion Board (FIPB) and the Reserve Bank of India.

Private limited company – foreigners can invest in a private limited company

Automatic path approval business in most industries.

Existence or Survivability

Partnership – The life of a joint organization relies on the partners. Should be ready for breakup by a partner’s death. LLP- The life of an LLP is not partner-dependent. Only voluntarily or by a Company Law Board Order may be revoked.

Private limited enterprise- The life of a private company is not contingent on managers or shareholders. Also, voluntarily or by regulatory bodies may be separated.