Should I register my Start-up as LLP or Private Limited Company?

So now that you have decided to start up your dream business venture, the obvious question is which form of legal entity to choose, and which option is better suited for your nature of business and ambition. Enthusiastic ideas, sense of freedom and drive to create a legacy are few of the reasons why any person would want to start his/her business. Sole proprietorship, Co-operatives, Partnerships, Limited companies, Limited Liability partnerships (LLP), etc are some common types we hear about. In this article we endeavour to answer most basic of your questions which might help you to choose the best option among LLP and Private Limited.

Limited Liability Partnership (LLP) is basically a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. The Limited liability Partnership Act, 2008 regulates the LLP in India.

Private Limited Company (Pvt Ltd) is registered and regulated by the Companies Act, 2013. A Pvt Ltd company are held by shares that cannot be publicly traded and the liability of the shareholders of such company are limited to the amount of shares respectively held.

To begin with take a look at the snapshot of advantages of choosing either LLP or private limited form of business.

Is it more complicated registration process for private Limited compared to LLP?

To register an LLP, a minimum of two designated partners (individuals and at least one of them should be a resident in India) will be required. There is currently no maximum limit of partners an LLP can have.
Similarly for Private Limited a minimum of 2 Directors (at least one of them should be resident in India) and 2 Shareholders are required and a maximum of 15 directors and 200 shareholders are allowed.

conclusion

Both entities can be registered through Ministry of Corporate Affairs portal and costs and takes about same or similar time and money. Hence initial set-up cost comparison is really not the reason to choose either of the options

“To know more about the procedure to register private limited company or LLP click here to read about our services”

Is LLP taxed differently from Private Limited?

This is the key difference to be considered for choosing LLP over Private limited, to explain further

For a Private Limited Company:

For the company,

The current income tax rate for domestic companies is a minimum of 25%* and an additional Surcharge and Health and Education Cess.

For the Shareholders/Directors,

Additionally, in case of dividend distributed, shares are held as an investment then income arising in nature of dividend shall be taxable under “Income from other sources”
Remuneration paid to Director is taxable under the head “Income from Salary”
Further, Loan cannot be given to Director as mentioned under Section 185 of the Companies Act, 2013

For a Limited Liability Partnership:

For the LLP,

Income is taxed at flat 30% + surcharge of 12% (where taxable income including capital gain exceeds Rs. 1 crore) + Health and Education Cess of 4% (on the amount of income tax and surcharge).
Any interest paid by Partner on Loan given will be taxed and should be shown as Interest income

For Partners,

Remuneration received will be taxable under the head “Income from Salaries”
Interest on capital contribution of a partner is exempt upto 12% of the capital contribution made. Over and above 12% is taxed as “Profits or Gains from Business or Profession”
Profit Distribution is tax free: An income received as Share of Profit is exempt under section 10(2A) of the Income tax Act,1961 to avoid double taxation.

conclusion

To conclude LLP is way more tax efficient compared to private limited by cutting down tax by nearly 50%.

Effective tax rate on profits (Average)

Private Limited: 25% + 34% (shareholders) = ~60%

LLP - 34%

Why are Investors keener to fund Private Limited compared to LLP?

A Private Limited company differentiates between ownership and management, i.e., Ownership is different from management. Owners need not necessarily be the managing the company, it can appoint a team of directors to manage the company, and this creates a shield for owners or shareholders from any misdoings of the management.
However, in an LLP, it is compulsory for contributors to be partners of the LLP. Hence, LLP does not have a layer of directors to create that differentiation between ownership and management.

conclusion

This is the single most reason why investors shy away from LLP structure as Venture Capital funds or Private Equity funds do not want to assume any responsibility for the deeds of the management.

Second reason is that private limited company legally have to follow a stringent compliance regime like accounting standards, Internal financial controls, Director reporting, Quarterly Board Meetings, AGM and other formalities which are not applicable for LLP. So inherently private limited companies are more credible compared to LLP to invest in.

Is it costly to operate and maintain a private limited whereas LLP is simple?

Both LLPs and private limited companies from the date of registration should maintain proper books of accounts either on cash or accrual basis. However, an LLP is required to have its accounts audited by a practicing Chartered Accountant, if its annual turnover, in any financial year exceeds Rs.40 lakhs or its contribution exceeds Rs.25 lakhs. However, all Private Limited companies compulsorily needs to get their books audits annually.
Annual Filings
LLP-

Annual filings are mandatory as per the MCA for all LLPs irrespective of turnover. An annual return (Form 11) needs to be filed by May 31st every year, i.e., within 60 days of close of financial year.
An additional Statement of Accounts and Solvency of LLP (Form 8), a declaration by the designated partners regarding information related to statement of assets and liabilities and statement of income and expenditure of the LLP to be filed within 30 days from the end of six months of close of financial year, i.e., to be filed by 30th October of each financial year.
If LLP fails to comply with annual compliance requirements penalty of INR 100 per day per form late filing fees in shall be levied.

Private Limited

All Private Limited Companies must ensure all compliances concerning Companies Act, 2013 like annual filings which include MCA Form AOC-4 (filed within 30 days from date of AGM) and MCA Form MGT-7 (filed within 60 days from date of AGM) discloses details of its shareholders, directors, etc., and details of the annual accounts and returns to the companies' registrar.
If company fails to comply with Annual compliance requirements, late filing fees as per the period delayed. This fee is comparatively lower to LLP late filing fees.

conclusion

To conclude the Private limited companies have extensive compliance requirements from maintaining books of accounts as per accouting standards, getting it audited by CA, conducting AGM and Board meetings and filing of annual returns which required company secretary certification, hence is more expensive compared to LLP. However failure to comply with LLP norms is more damaging.

We have only discussed two types of business structures above, and we do know an entrepreneur still has a challenging task to choose a structure based on numerous factors. But the clarity about the vision, mission and scale of business conduct will assist to decide easier. An entrepreneur would need a basic design stating the level of control needed, the level of compliance they will be able to follow, the amount of investment required for initial set-up and further activities, etc to assist in business structure selection.

Disclaimer:

“Information contained herein is for informational purposes only and should not be used in deciding any particular case. The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts have been made to provide authentic information, it is suggested that to have better understanding and obtaining professional advice after thorough examination of particular situation.”

By Sushama Mohandasan

CA Final

Prepared On:
03/02/22

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