DIFFERENCE BETWEEN PRIVATE LIMITED AND LLP

One of the most important decisions for every startup entrepreneur to make before starting up is to decide which type of company to register. The following types of registration are available in India. You must have read many articles on different types of company registration. Many people are confused between company and llp and partnership firm.  In order to decide the best type of registration suitable for you and your business, you need to ask these 3-4 questions to yourself.

  1. ARE YOU PLANNING TO RAISE FUNDING OR INVESTMENT ?
  2. ARE YOU PLANNING TO REGULARLY ADD DIRECTORS OR PARTNERS?
  3. ARE YOU PLANNING TO TAKE ANY FORM OF BANK LOANS?
  4. WOULD YOU LIKE TO APPLY FOR STARTUP INDIA REGISTRATION?

Let us understand these points in detail and how it impacts your decision on type of company

1.  ARE YOU PLANNING TO RAISE FUNDING OR INVESTMENT ?

This is the first and most important point to consider before choosing whether to make a private limited company or LLP.

Answer – It is easier to rise funding or investment in private limited company as investors prefer private limited company for funding.

2.  ARE YOU PLANNING TO REGULARLY ADD DIRECTORS OR PARTNERS?

Do you plan to regularly add directors on partners in your business.

Answer – It is easier to add Directors  and Shareholders in a private limited company. In LLP, everytime you have to add them as Partners and file Supplementary Agreement Deed.

3.  ARE YOU PLANNING TO TAKE ANY FORM OF BANK LOANS?

The point to think about is whether you plan to take Bank loans or finance from Banks or NBFCs.

Answer – Practically, we have heard from many entrepreneurs and startups that banks prefer to fund private limited companies but not partnerships or LLP which is a type of partnership.

4.  WOULD YOU LIKE TO APPLY FOR STARTUP INDIA REGISTRATION?

If you are planning to apply for Startup India Registration and obtain government benefits, then both private limited and LLP are equal.

 

In the table below, we have highlighted the difference between company and LLP on these points.

In this article, we will cover the main differences between these different types of registration to help you to choose and decide which type of registration is best for you.

Point Private Limited LLP
Ease of Doing Business Y Higher x Lower
Income Tax Rate Y 25% of profits x 30% of Profits
Maximum persons x Maximum 20 Directors Y No Maximum Limit
Adding Director / Partner Y Easy to add Directors x Not so easy to add partners
Making shareholders Y Possible to add shareholders without giving Directorship x Only partner can be added with share
Compliance & Meetings x Higher Y Lower
Distribution of Profits x Dividend distribution tax applicable Y No dividend distribution tax

 

There are many more differences between a company and LLP. But according to us, these are the main difference between private limited company and LLP. What is important for one entrepreneur may not be important for another entrepreneur. For example, many startup founders like LLP more than private limited company as it is easy to distribute profits at the end of the year with less formalities. Also the compliances are less in Limited Liability Partnership as compared to Private Limited Company.  On the other hand, many startup founders prefer to register Private Limited Companies over LLP as it investors prefer to fund private limited companies rather than LLP since investors don’t want to become “partner” in the business but just a Director or a Shareholder. Most startups prefer Private limited company registration over LLP Registration as investors and venture capitalists and private equity (PE) funds and investment companies mostly invest in private limited companies. LLP are most suited when the business is smaller in size and the entrepreneur or startup founder is not sure about the business future and many not be seeking to raise funding or investment. Most LLP don’t raise funding and are family owned business. Law firms and professional firms prefer to register as LLP due to partnership feature and ease of management.

So, the difference between private limited and LLP is very important to understand before you start business. However, it is not that difficult decision since LLP can be easily converted to Private Limited Company when the business grows.  So, if you are unsure of which type of company to register and don’t want to spend much on compliance cost, the go for LLP. If the idea works out, then the LLP can be converted to private limited if required. And if you are highly confident of yourself and your business idea, which is a good thing too, then go for immediate registration of private limited company from day one.

Call Finance Bazaar