One of the most looked after forms of Company registration in India are Private Limited Company registration & LLP Company Formation. Both of these are governed under the rules & regulation of Company registration act, 2013 but are different in their structural formation. For an entrepreneur or a Startup Registration, it is essential to identify the said difference between Private Limited Company registration & LLP Company formation.
1. Registration process
The registration process of a private limited Company & LLP are more or less the same subject to differences in the filing of documents & forms.
Obtaining DSC of directors/partners >>> Director Identification Number (DIN)/ Designated partner identification number (DPIN) >>> Name approval from MCA >>> Incorporation filing certificate.
Both Private limited Company & an LLP Company are issued certificate of incorporation from MCA.
2. Cost of registration
LLP Company’s cost of registration is on a lower end of the scale as compared to private limited Company registration. LLP was introduced by the government to help small businesses functioning. Also, the legal documentation is less for LLP as compared to a private limited Company.
LLP is considered as a separate legal entity viz. registered under the LLP Act, 2008. Partners so associated with the LLP are not personally liable for any act. Partners have limited liability and are only liable to the extent of their contribution to the LLP.
Private Limited Company is registered under the Companies Act, 2013 as a separate legal entity. Its directors & shareholders are not personally liable. Shareholders have limited liability and are only liable to the extent of their share capital.
Private Limited Company offers more flexibility in terms of ownership for the promoters. Private Limited Company can have up to 200 shareholders and they do not directly participate in the management of the Company. Hence there is a clear distinction between shareholders & the management of the Company.
In an LLP, there exists a grey area between the owners and management. LLP Company partners hold ownership rights & the powers to manage the LLP.
5. Income Tax Compliances
A Private Limited Company is required to pay a Dividend Distribution Tax @ 16.50 %. Such dividend income is tax-free in the hands of the shareholders.
LLP Company registration is subjected to Income tax & Dividend Distribution tax is not applicable to LLP. Once profits are declared & tax is paid, the income so distributed is considered tax free in the hands of the partners. Tax is levied @ 30%.
6. Foreign direct investment/FPI
Foreigners are allowed to invest in an LLP with prior approval of Reserve Bank of India (RBI) & Foreign Investment Promotion Board (FIPB) approval.
Foreigners are allowed to invest in a Pvt. Ltd Company under the Automatic route in most sectors. If you are a Startup and plan to raise funds in the future be it in India or from outside or you plan to issue ESOP’s, Private limited company is a suitable structure for you.
Private Limited Company can be converted into an LLP & Vice-versa.
LLP can be converted into Private limited company, provided in minimum of 7 partners are present, approval from all the partners is compulsory, advertisement in the local and national newspaper should be done, No Objection Certificate from the ROC where registration of LLP was done. After this new company incorporation process begins for LLP to get converted into a private limited company.
8. Audit compliance
For a private limited Company, it is compulsory to get their accounts audited but for an LLP Company, it depends on the turnover & the investment per se. If the turnover limit exceeds 40 lakh & investment is more than 25 lakh then auditing becomes compulsory for LLP.
FREQUENTLY ASKED QUESTIONS ABOUT LLP & PRIVATE LIMITED COMPANY
Q What are the disadvantages of LLP?
- Public disclosure of financial statements
- Income is treated as personal income & taxed accordingly
- No flexibility over profit retention
- At least 2 members are required to run LLP
Q Is LLP a good idea?
Yes, Incorporating an LLP is a good idea because it offers most of the benefits which a company registration possess & at the same time the liability is limited up to the contribution of the partners.
Q Can we convert LLP to private limited Company?
Yes, we can convert an LLP into a private limited company after its final incorporation the certificate is issued subject to certain conditions:
- At least 7 partners must be present during conversion
- Approval from all partners is compulsory
- Advertisement in local/national newspaper
- NOC from registrar
Q How can I start an LLP in India?
Similar to a company registration an LLP has to go through a process for registration viz. DSC application >>> DIN/DPIN >>> Name approval from MCA >>> Filing for incorporation certificate.
All the guideline issued by MCA under companies act 2013 applies to LLP Whereas LLP is also bound by LLP Act 2008.
Q Can LLP take loan from bank?
Yes, a LLP can apply for a loan facility from the bank whereas; final sanction of the loan will totally depend on the individual merit of the partnership firm.
Q What are the benefits of an LLP Company?
- Personal assets are protected from the liabilities of the business in a LLP formation.
- LLP is deemed as a legal person in the eyes of law. LLP’s can buy, rent, lease, own property, employ staff, enter into contracts, and they can be held accountable.
- Limited Liability the partnership can appoint two companies as members of the LLP.
- By registering your LLP with MCA you can prevent others from registering under the same name.
Q Is GST applicable for LLP?
Yes, GST is applicable to every LLP just like any other business enterprise.
Chartered Accountant by profession, CA Sanket Agarwal has an experience of above11 years in Cross Border compliance , Import Export , International Taxation & is a passionate content creator.