Difference between LLP and Pvt. Ltd. Companies
Updated: Dec 13, 2022
Well, what is the difference between LLP and Private Limited companies? LLPs (Limited Liability Partnership) and Private Limited Companies have long been compared and the majority of people still remain confused between the two. Since the Limited Liability Partnership Act was brought in 2008, it is comparatively newer as compared to the laws governing Private Limited Companies since 1956 which were later updated in 2013.
Let us dive in and explain the very basic factors which differentiate LLPs from Private Limited Companies and make the two different forms of company equally desirable as per the context.
Limited Liability Partnership
The business framework is the founding pillar for any and all corporate firms. Limited Liability Partnerships have witnessed a handsome progress in the past few years yet still less recognized and implemented. As the Ministry of Corporate Affairs states,
LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.
Apart from its efficient procession irrespective of the stakeholders, LLP comes with liberty to own assets and settle contracts.
LLP ensures zero liability and absolute independence of any and all partners in case of unauthorized actions/ business decisions taken by a fellow contributor.
Shared and individual rights along with responsibilities within a LLP are driven by agreements and terms signed amongst partners or between partners and LLP.
What makes the concept of LLP unique would be it’s functioning dependent on the fusion of a corporate structure and a partnership firm structure.
LLP: A startup preference?
Why LLP has been the go-to preference of startups in India can be well reasoned with its flexibility avoiding prolonged legal procedures and likewise compliances. Comprising 81 sections and 4 schedules, Limited Liability Act was brought into action on April 1, 2008.
With an upper hand at operational aspect, we fathom the flexibilities in partnership while considering the LLP business plan.
The LLP incorporation charges along with annual MCA compliances and legal formalities are quite feasible and nominal.
Having conclusive advantages of contemporary limited company framework and traditional partnership, LLP offers maximum number of owners with no requirement of minimum contribution, compulsory audits, and detailed compliances which consequently results in savings.
Nevertheless, accommodation of tax advantages gives an extra edge.
Private Limited Companies
Moving on to Pvt. Ltd. Companies act Section 2(68) 2013, Pvt. Ltd. Companies can be defined as those companies whose Articles Of Association restrict the transferability of shares and prevent the public at large from subscribing to the securities of the company.
After updating the Act in 2013, there is no minimum capital required prior to which, it was an amount of INR 1 lakh.
Private Limited companies can have a minimum 2 and maximum 200 members, whereas in case of OPC, one member is eligible.
These companies are assertive towards small businesses and the individual liability lies in the amount of shares held by members.
Unlike LLP, Pvt. Ltd. Companies work on the dynamics that proceed with limited liability of a member resulting in selling of their own assets, i.e. stakes (not personal) in order to compensate the monetary funds in case of a company’s wound-up.
LLPs being more cheaper, affordable and flexible to run, an individual running a website for online business or other small businesses might extract the best out of the LLP corporate framework whereas in the case of raising funds and garnering participation by offering lucrative ESOPs, Pvt. Ltd. Companies are preferably popular in the game.
Audits are not made frequent until and unless a LLP crosses the 40 lakh turnover mark or 25 lakh revenue contribution mark.
Also with INR 11,000 as incorporation charges and INR 4000 as annual compliances LLP automatically becomes economically favorable. LLPs enjoy the advantage of rare possibilities of compliances leading to hefty fines.
Both LLPs and Pvt. Ltd Companies have their fair share of value as a separate legal entity as per LLP Act of 2008 and Companies Act of 2013 respectively.
A Pvt. Ltd. Company provides more room for promoters when it boils down to ownership and ownership sharing.
200 being the maximum number of shareholders in a Pvt. Ltd. Company and with shareholders not indulging in management, the company is provided with clear cut distinction in management and ownership.
Pvt. Ltd. Companies have well established structures in India for procession and thus, are at a higher pedestal when we comment on recognition worldwide and foreign direct investment.
Private companies also provide you with greater capital contributions, limited liability, greater degrees of assured stability and legal entities.
Shares of a Pvt. Ltd. Company cannot be publicly traded in any scenario.
Dynamics of Incorporation : Pvt. Ltd. Companies
Why Pvt. Ltd. Companies and LLPs have garnered the clout of small to mid-sized businesses (SMEs) to base their corporate structure on, can be explained as the legal assurance and protection provided to owners/shareholders and the efficiency of raising equity funds.
Perpetual succession plays a major role in consistent and uninterrupted functioning of a Pvt. Ltd. Company. Today clients, merchants and financial backers search for validity in the organizations they manage.
In the beginning of a Pvt. Ltd. Company, the data identifying with the organization, like name of the organization, date of incorporation, enlisted office address, status of the organization, and other data are made accessible in a freely accessible data set.
This component makes it simple to validate the presence of the business, improving business credibility.
Pvt. Ltd. Companies also prove to be an immensely valuable asset to partnerships and sole proprietors as they are not considered independent legal identities and eventually lose a lot of opportunities that come their way.
The Pvt. Ltd. Companies also have an enormous scope of effective business exit strategies as shares can be sold in parts or as a whole other entity without concerning the ongoing brand value.
Despite the difference between LLP and Private Limited Companies, both these business structures hold their fair share of value and added advantages that follow in their respective places. Both of the successful business frameworks have quite distinguishable features and processions yet share a few common grounds.
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