Private Limited Entity and Limited Liability Partnership : Comparative study.

Comparative study on Private Limited Entity and Limited Liability Partnership

Author: Shivya Malhotra, a 4th year law student from UPES, Dehradun.

Introduction

To achieve independence in today’s era, carrying on business can be a great option. But it requires a lot of efforts like formulating a business plan, the kind of business that is to be established or else sometimes it can be difficult to identify capability of the factors available. The business plan usually involves naming of the company, arranging the funds and making the plant that how to execute the business. It is alas necessary to decide that whether the business should be a Limited Liability Partnership or Private Limited entity.The business landscape is diverse, offering entrepreneurs a range of structures to choose from when establishing their ventures. Two popular options are Private Limited Entities (Private Limited Companies) and Limited Liability Partnerships (LLPs). This article aims to provide a comparative study of these business structures, highlighting their key features, advantages, and disadvantages.

Objective

To understand the kind of business suitable for a particular kind of a person or a situation in which a person wants to starts a business.

Keywords

Limited Liability Partnership, Private limited Entity/company, Advantages, Disadvantages,

1. LLP VS Pvt. Ltd. – Overview

A Limited Liability Partnership (LLP) is a regular business entity which is defined under section 2(n) of the LLP Act 2008. It means a partnership formed and registered under the LLP Act 2008. Regardless of the number of partners in an LLP, all partners have limited liability towards the company but it’s limited to the contribution they themselves have made Cor partner is not held responsible for the bar partner’s liability.

In Private Limited Company, private investors hold shares, and the public cannot trade those shares on the stock exchange a Pvt. Lid Company, shareholders may differ from the company owners. Therefore, profits and liabilities are typically shared among the company owners as per the Companies Act 2013.[1]

• Advantages of LLP Vs Advantages of Pvt. Ltd. Entity.

The advantages of registering a business as an LLP are as follows:-

• Easy to start and manage as it has fewer formalities.
• Less cost of registration as compared to the cost of registration of a company.
• Has a separate legal existing from its partners.
• Death of a partner does not affect the existence of the LLP as it has perpetual succession.
• Can be started with minimal amount of capital.
• Partners have limited liability.

The advantages of registering a business as a Pvt. Ltd. Company are as follows:-

• In order to establish a Pvt. Ltd. Company, one does not require a minimum paid up capital.
• Cost of registration can be high.

3. Disadvantages of LLP vs Disadvantages of Pvt. Ltd. Entity.

The disadvantages of registering a business as an LLP are as follows: –

• Have to pay high penalty for non- compliance.
• If there are two or more members the LLP will work and if the number of members goes below two the LLP dissolves at that time.
• It is difficult to raise funds from various sources which cannot be the shareholders of the LLP.

The disadvantages of registering a business as a Pvt. Ltd. Entity are as follows: –

• Maximum number of members of a Pvt. Ltd. Company are limited to 200.
• There are restrictions on the transfer of shares among the public Pvt. Ltd. Company are not allowed to issue prospectus to the general public for subscribing the shares.[2]
• Grounds to differentiate Pvt. Ltd. Entity and LLP.
• Board Meetings

Private Limited companies must hold at least four board meetings within every 120 days, in every financial year. All shareholders of such companies are required to attend this meeting. Whereas, in case of LLP such meetings are necessary to be conducted.

• Foreign Investment

Foreign investment can be made in LLP as well as in Private Limited Company. In the case of LLP government approval is not necessary or we can say that a Foreign Direct Investment is permitted via the automatic route. However, in the case of Pvt. Ltd. Company, various sectors such as defence, printing, postal and courier, petroleum, etc. are not covered under the automatic route. In such cases the approval from the Foreign Investment Promotional Board is required.

• Tax Compliances.

A Private Limited company must conduct a statutory audit without any failure. Its not mandatory for LLPs to maintain such audits unless the annual turnover or partner contribution exceeds Rupees 40 lakhs or Rupees 20 lakhs, respectively. It is mandatory for both the companies to file their financial statements with a supporting form attached to it and it must be filed with the ROC every year.

• Registration process

The registration process of LLP and Pvt Ltd Company is almost same but has few differences. Both are registered with Ministry of Corporate Affairs but LLP is registered under Limited Liability Partnership Act, 2008 whereas the Pvt Ltd Company is registered under the Companies Act, 2013. They both has to file the registration application with the ROC.

The partners of the LIP must obtain the Designated Partner Identification Number for the registration of the LLP. The directors of the company must obtain the Director Identification Number to register the Pvt Ltd company.

A FILLIP form must be filed by the LLP whereas the SPIC form must be filed by the Pvt Ltd company in order to register the company. The name of the LLP must contain the word “LLP’, while the name of the Pvt Ltd Company must contain the word Pvt Ltd.

Governing document of an LLP is the LLP agreement made between the partners. This document is not the public document and is registered with MCA. The governing documents of the Pvt Ltd company are Memorandum of Association and Article of Association. These are the public documents and therefore the third party can obtain them by paying prescribed fees to the MCA.[3]

Conclusion

Both Private Limited Companies and Limited Liability Partnerships have their merits and demerits, making them suitable for different business scenarios. The choice between the two depends on factors such as business size, growth ambitions, ownership structure preferences, and regulatory considerations. Understanding the nuances of each structure is crucial for entrepreneurs seeking to establish a resilient and legally sound business entity.

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[1]Hdfcbank,https://www.hdfcbank.com/personal/resources/learning-centre/sme/what-is-difference-between-pvt-ltd-and-llp#:~:text=LLPs%20must%20have%20a%20minimum,directors%20and%20maximum%20fifteen%20directors

[2]https://companyregistrationonline.in/blog/comparative-analysis-llp-plc/

[3]https://www.hdfcbank.com/personal/resources/learning-centre/sme/what-is-difference-between-pvt-ltd-and-llp#:~:text=LLPs%20must%20have%20a%20minimum,directors%20and%20maximum%20fifteen%20directors