Starting a business is exciting, but deciding how to structure it can be overwhelming. Two popular choices in India are the Private Limited Company (PLC) and the Limited Liability Partnership (LLP).
Each structure comes with unique benefits, limitations, and compliance requirements. In this blog, we’ll dive deep into the details, helping you understand which option is better suited for your business needs.
1. Understanding the Basics of LLP and Private Limited Company
Before choosing, it’s essential to know what these structures entail:
Private Limited Company (PLC)
A Private Limited Company is a corporate entity with a separate legal identity, limited liability for its shareholders, and higher credibility.
It’s ideal for businesses aiming to raise external funding or scale quickly. PLCs are governed by the Companies Act, 2013 and require a minimum of two directors and two shareholders to register.
Key Characteristics:
- A separate legal entity from its owners.
- Shareholders’ liability is limited to their shareholding.
- Ability to raise funds through equity.
Limited Liability Partnership (LLP)
An LLP blends the flexibility of a partnership with the benefits of limited liability.
Governed by the LLP Act, 2008, it’s suited for smaller operations and professional services like law, accounting, or consulting. It requires two designated partners to register.
Key Characteristics:
- Combines limited liability with the advantages of a partnership.
- Partners aren’t personally liable for the LLP’s debts.
- Easy to manage with fewer compliance requirements.
2. Incorporation Process: What to Expect
The process of starting a business differs significantly between a PLC and an LLP.
Private Limited Company
Steps:
- Acquire Digital Signature Certificates (DSC) and Director Identification Numbers (DIN).
- The Articles of Association (AOA) and Memorandum of Association (MOA) should be submitted to the Registrar of Companies (RoC).
- Get the Certificate of Incorporation from the Ministry of Corporate Affairs (MCA).
Costs: Higher due to documentation, stamp duties, and compliance needs.
Timeframe: Typically 10-15 days if documents are in order.
LLP
Steps:
- Obtain Designated Partner Identification Numbers (DPIN) and DSC.
- File the LLP Agreement and incorporation documents with the RoC.
- Get the Certificate of Incorporation.
Costs: Lower compared to PLCs due to fewer formalities.
Timeframe: Faster, generally 5-10 days.
3. Compliance Requirements: Which Is Simpler?
Compliance is where the real differences shine.
Private Limited Company
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Annual compliance includes:
- Filing financial statements and annual returns.
- Holding board and shareholder meetings.
- Appointing an auditor.
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Statutory audits are mandatory, irrespective of revenue.
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Non-compliance can result in penalties or disqualification of directors.
Special Note: When managing compliance requirements, especially for a Private Limited Company, keeping track of financial filings, tax returns, and audits can feel overwhelming. Products like Suvit can simplify this by automating manual tasks like GST reconciliation and financial reporting, ensuring you stay compliant without spending endless hours on paperwork. This can be particularly useful for businesses looking to focus more on growth rather than administrative burdens.
LLP
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Simpler compliance with:
- Filing annual returns and statements of accounts only if turnover exceeds ₹40 lakh or capital contribution exceeds ₹25 lakh.
- Audits are required only above the specified thresholds.
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The lower compliance burden makes it appealing to small businesses and startups.
4. Taxation: Which One Is Cost-Effective?
Taxation for Private Limited Company
- Corporate tax rates range from 15% (for new manufacturing companies) to 22%-25% for others.
- Dividend Distribution Tax (DDT) was abolished in 2020, but dividends are taxable in the hands of shareholders.
- Eligible for startup tax benefits under the Startup India scheme.
Taxation for LLP
- LLPs are taxed at a flat 30% rate on profits, with no dividend tax.
- Profit withdrawals by partners aren’t taxed, making it more tax-efficient for small-scale operations.
- LLPs don’t qualify for certain startup tax benefits.
5. Funding and Scalability: Who Wins?
When it comes to raising capital or scaling, Private Limited Companies have an edge.
Private Limited Company
- Can issue equity shares to raise funds from venture capitalists and angel investors.
- Ownership is easily transferable through shares, making it easier to bring in new investors or exit.
- Preferred structure for businesses looking to scale nationally or globally.
LLP
- LLPs can’t issue shares, limiting their ability to attract equity investments.
- Ideal for self-funded businesses or professional firms where external funding isn’t required.
- Less suited for large-scale expansion.
6. Flexibility in Operations
Private Limited Company
Requires adherence to corporate governance standards, such as appointing directors and holding meetings. Stringent processes for decision-making and ownership transfer.
LLP
Greater operational flexibility with no mandatory board meetings. Partners can directly participate in decision-making, making it ideal for small teams.
7. Pros and Cons of Each Structure
Pros of Private Limited Company
Attracts investors due to structured governance and transparency. Easier to expand and scale. Limited liability for shareholders.
Cons of Private Limited Company
- Higher compliance costs and complexity.
- Statutory audits are required every year.
Pros of LLP
- Low compliance burden and cost-effective to manage.
- Partners enjoy limited liability protection.
- Suitable for professional services and small businesses.
Cons of LLP
- Can’t raise funds through equity.
- Less appealing to investors compared to PLCs.
8. When Should You Choose Each?
Private Limited Company
- If your business plans involve rapid growth, raising funds, or attracting investors.
- For startups targeting high scalability or global operations.
LLP
- Best for small businesses or professional firms like law, accounting, or consulting.
- Ideal if you want to minimize compliance and operational costs.
9. Which Is Better for You?
The decision between a Private Limited Company and an LLP boils down to your business goals.
If you’re aiming for growth, investment, and scalability, a Private Limited Company is the way to go.
On the other hand, if you prioritize simplicity, low costs, and flexibility, an LLP might be your best bet.
Both structures have their strengths and weaknesses, so take time to evaluate factors like funding needs, compliance, and taxation before making your choice.
Whichever you choose, getting the right guidance during the incorporation process will set your business on the path to success.
