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Among the many other hassles of business incorporation, deciding on the exact mode for a
business can indeed by cumbersome. Deciding on the exact mode for a business can indeed
by cumbersome. As it is said, the first step is always the hardest, and so it is in case of
deciding on a business vehicle.
LLP or Company? What should you for.
LLP or Company: A Catch-22 situation?
To begin with, let us deal with the nature and scope of LLPs and Private Limited Companies,
and their viability against each other. Limited Liability Partnerships (LLPs) are a recent
phenomenon in India, owing their birth to the enactment of the LLP Act, 2008.
Aiming at taking the best of both the worlds - the reduced liability and greater
creditworthiness of a company and the flexibility and freedom of a firm - LLP is the most
successful cross breed between a firm and a company.
A private limited company (PLC), on the other hand, is a limited liability company, governed
by the Companies Act, 1956.
In a Copmay the shareholders liability is limited to the extent of their contribution only, and
which has a strict legal regime governing it, in order to safeguard the shareholders against
risk to their investment.
LLP or Company: 4 Similarities
Things would be much easier in the decision-making process, if the following pointers vis-avis the 'LLP or Company' question are remembered:
Both an LLP and Company need to be compulsorily registered with the ROC, in order for
them to be legally valid.
Both have a separate legal entity, as in, both an LLP and a Private Limited Company have a
perpetual succession and a common seal, they can sue and be sued, and they can hold,
acquire, alienate and transfer property in their separate names, independent of the
shareholders/partners, as the case may be.
In both the models LLP or Company, foreign nationals can be involved either as partners or
as shareholders, as applicable.
Both Private Limited Companys and LLPs can enter into mergers, amalgamations,
compromise, or other arrangements.
LLP or Company: Differences
Thus, the only substantial differences between the two models i.e LLP and Company lie in
their:
Tax liabilities
Compliance requirements, and
Tax Liability
PLCs: Presently in India, PLCs are more heavily taxed than LLPs. According to the current
tax rates, Private Limited Companies are liable to pay the following taxes at the mentioned
rates:
Tax
Rate
30%
18%
LLPs: LLPs enjoy lesser tax liability when compared to PLCs. They are liable to pay the
following taxes at the mentioned rates:
Tax
Rate
30%
Compliances
Apart from the difference in taxation, the two forms of business differ in the degree of
compliance required by them, and also in their statutory administrative mechanisms. Below is
the detailed representation of the same.
PLCs:
LLPs:
The name should end with LLP.
The partners are liable only to the extent of their contribution. That is, there is limited
liability.
There have to be a minimum of 2 partners, and there is no maximum number of
partners prescribed.
Annual accounts, Solvency Report and the Annual Returns are to be compulsorily
filed before the ROC.
Audit is to be done only if the contribution of partners exceeds Rs. 25 lakh, or if the
turnover is above Rs. 40 lakh.
Oppression and mismanagement do not have statutory redressal mechanisms.
The perceived creditworthiness and attractiveness in the eyes of bankers and investors
is low.
There is a statutory protection for whistleblowers.
The dissolution procedure is simpler when compared to PLCs. Its either voluntary, or
backed by an NCLT Order.
FDI is possible through the approval route only; and that too, in only those sectors
where 100% FDI for companies is permitted.