Choosing the right business structure is one of the most critical decisions for entrepreneurs. It lays the foundation for how the business will operate, manage liabilities and raise funds, as well as how stakeholders will perceive it.
Among the many options available, Private Limited Companies (Pvt Ltd) and Limited Liability Partnerships (LLP) are two of India's most popular and widely adopted structures.
Both these structures offer the advantage of limited liability while being distinct in their governance, ownership, compliance requirements and suitability for different business types.
This blog provides an in-depth comparison of Pvt Ltd companies and LLPs, delving into their features, compliance requirements, taxation and funding options. By the end, you will have a clear understanding of which structure aligns best with your business goals and aspirations.
Table of Contents
Difference Between Limited Liability Partnership and Private Limited Company
The fundamental difference between a Pvt Ltd and an LLP lies in ownership and management. While a Pvt Ltd company is governed by shareholders (owners) and directors (managers), an LLP is managed by partners who own and operate the business. Additionally, compliance requirements, taxation and funding options differ significantly between the two.
Here is a table outlining the difference between LLP and a private limited Company:
While the differences between LLPs and Private Limited Companies are numerous, they share similarities in key aspects:
- Limited Liability
- Separate Legal Identity
- Registration Process with the MCA
- Perpetual Succession
Let’s understand the key features and registration process in detail for both Private limited companies and LLPs.
What is a Private Limited Company?
A Private Limited Company (Pvt Ltd) is a privately held business entity that operates under the legal framework of the Companies Act of 2013 in India (or similar laws in other countries). It combines the benefits of limited liability protection for its shareholders with certain restrictions to maintain its private nature.
This structure is popular among startups and small to medium-sized enterprises due to its ability to attract investments while offering limited liability protection and operational flexibility.
Features of Pvt Ltd Company
Listing down some key advantages of a Private Limited Company below:
1. Limited Liability
The liability of Shareholders is limited. Personal assets are generally protected from business debts.
2. Separate Legal Entity
A Private Limited Company is considered a distinct legal entity from its owners (shareholders). It can enter into contracts, own property, and sue or be sued in its own name.
3. Ownership
Owned by shareholders who hold shares in the company. Transfer of ownership is facilitated through the buying and selling of shares.
4. Management
Managed by directors who are appointed by the shareholders. The day-to-day operations are overseen by the management team, while major decisions are often subject to shareholder approval.
5. Number of Shareholders
Requires a minimum of two shareholders and can have a maximum of 200 shareholders.
6. Regulation and Compliance
Governed by the Companies Act and regulated by the Ministry of Corporate Affairs in India. Compliance includes filing annual financial statements, conducting annual general meetings and maintaining statutory records.
7. Investment and Funding
Easier to attract investment and funding compared to other business structures due to the well-defined ownership structure and limited liability.
8. Perpetual Succession
The company continues to exist even if its shareholders or directors in private limited company change, retire, or pass away. Ownership can be transferred seamlessly through the sale of shares.
Private Limited Company Registration
The Ministry of Corporate Affairs (MCA) has introduced a streamlined process for incorporating companies called the Simplified Proforma for Incorporating Company Electronically Plus (SPICe+). It consists of two parts: Part A and Part B.
1. Step 1: Acquire a Digital Signature Certificate (DSC)
• A Digital Signature Certificate (DSC) is a digital method of verifying or attesting documents.
• It is typically issued with one or two-year validity and is mandatory for all witnesses in the Memorandum of Association (MOA) and Articles of Association (AOA).
• Class 2 or 3 DSCs can be obtained through listed Government Certifying Agencies (CAs).
2. Step 2: Apply for Name Approval using SPICe+ Part A
• Part A facilitates 'Name Reservation' with two proposed names and one re-submission (RSUB).
• In case of name rejection due to various reasons, a re-filing with the specified fee is required.
Note: Simultaneous application for name approval (Part A) and Incorporation (Part B) through SPICe+ is possible, but only one name can be reserved.
3. Step 3: Apply for Company Registration using SPICe+ Part B
After name approval, Part B completes the registration process, including:
- • Application for allotment of Director Identification Number (DIN)
• Incorporation of the new company
• Submission of e-MoA (INC-33) and e-AoA (INC-34)
• Application for PAN and TAN (mandatory)
• Application for EPFO registration (mandatory)
• Application for ESIC registration (mandatory)
• Application for Professional tax registration (only for Maharashtra)
The entered information in SPICe+ Parts A and B is automatically transferred to associated forms like AGILE-PRO, eAoA, eMoA, URC1, and INC-9, as applicable.
4. Step 4: Open a Bank Account
Open a current account for your company to facilitate seamless financial transactions and business operations, handling various aspects such as receiving payments, making supplier payments and managing payroll.
5. Step 5: File for the Commencement of Business Certificate
The Commencement of Business Certificate, filed through Form INC-20A within 180 days of incorporation, is a declaration by the Director of the Company submitted to the Registrar of Companies.
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After the SPICe+ Form receives approval, the Registrar of Companies (ROC) issues the Certificate of Incorporation, confirming the successful registration of your company.
This certificate includes vital information such as the Company's name, registration number (CIN), date of incorporation, registered office address, and so on.
Example of CIN: U72200KA2013PTC097389
Read more about what each letter in a CIN signifies here.
What is a Limited Liability Partnership?
A Limited Liability Partnership (LLP) is a business structure combining features of a traditional partnership and a limited company.
Limited Liability Partnerships are often chosen by professional services firms, small businesses and ventures where the partners want the flexibility of a partnership along with the protection of limited liability.
Features of LLP
A Limited Liability Partnership (LLP) is a business structure that combines features of both a traditional partnership and a limited company. Limited Liability Partnerships are often chosen by professional services firms, small businesses, and ventures where the partners want the flexibility of a partnership along with the protection of limited liability.
Some key characteristics of a Limited Liability Partnership are:
1. Limited Liability
Similar to a private limited company, partners in an LLP have limited liability.
2. Separate Legal Entity
An LLP is a distinct legal entity from its partners. It can own property, enter into contracts, and sue or be sued in its own name.
3. Ownership
Owned by partners, and the ownership structure is defined by the LLP agreement. Transfer of ownership usually requires the consent of other partners.
4. Management
Managed by partners or a designated management team, as specified in the LLP agreement. Each partner typically has an equal say in the management decisions, making it a more collaborative structure.
5. Number of Partners
Requires a minimum of two partners, and there is no maximum limit on the number of partners in an LLP.
6. Regulation and Compliance
Governed by the Limited Liability Partnership Act in India, with less stringent regulatory requirements compared to a private limited company. Compliance involves filing annual returns and maintaining statutory records.
7. Flexibility
Offers greater flexibility in terms of internal management and decision-making processes compared to a private limited company.
Limited Liability Partnerships Registration
Here's a simplified guide on the steps for Limited Liability Partnership (LLP) registration:
1. Step 1: Apply for DSC
- Obtain a Digital Signature Certificate (DSC) from Government Certifying Agencies with one or two-year validity.
2. Step 2: Name Reservation
- Reserve the LLP's name using the LLP-RUN form.
3. Step 3: Apply for Registration through FiLLiP
- Complete the FiLLiP (Form for Incorporation of Limited Liability Partnership) and submit it to the Registrar. Alongside FiLLiP, submit the Subscriber sheet and Partner's consent (Form 9) as additional documentation.
4. Step 4: File LLP Agreement
- File the LLP Agreement using Form 3 on the MCA portal within 30 days of LLP registration.
After the FiLLiP Form receives approval, the Registrar of Companies (ROC) issues the Certificate of Incorporation, a crucial legal document confirming the successful registration of your company.
This certificate includes vital information such as the LLP's name, registration number (LLPIN), date of incorporation, registered office address, and more.
Example of LLPIN: AAA-1234
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LLP vs Pvt Ltd Ownership
- Shareholders vs. Partners
- Pvt Ltd Ownership: Shareholders own the company but may not be involved in day-to-day management. Primarily managed by Directors.
- LLP Ownership: Partners typically manage the business and have a direct role in decision-making.
- Transfer of Ownership
- Pvt Ltd: Shares can be easily transferred from private limited company members, making it simpler to onboard or exit shareholders.
- LLP: Ownership transfer requires the consent of other partners, which can be complex.
LLP vs Pvt Ltd Compliance
- Compliance for Private Limited Companies
- Hold the First Meeting of the Board of Directors within 30 days of the Incorporation of the Company. It is compulsory to host four meetings in a year with a gap not more than 120 days.
- Hold an Annual General Meeting every year, on or before September 30th, during business hours and in the registered office.
- Appoint the company's first auditor within 30 days of incorporation, who will serve until the end of the first AGM.
- File Form ADT 1 within 15 days of the appointment of the subsequent auditor.
- File Annual Returns (AOC 4 and MGT 7) within 30 and 60 days of holding the AGM, respectively.
- File Form ITR-6 for Income Tax Return annually.
- File Form DIR-3 KYC to disclose details of the Directors.
- Compliance for Limited Liability Partnerships
- File an LLP agreement within 30 days of incorporation. The penalty of ₹100/day will be levied if an LLP fails to comply with this condition.
- File the form DIR3 for the DIN allotment in case of an existing company.
- File two annual statements for Annual Return and Statement of Accounts and Solvency using Forms 11 and 8, respectively.
- Sign, verify and file the Income Tax Return (ITR) annually.
- Depending on their shareholding capacity, you and your partner must deposit their contribution into the relevant bank account within the specified time frame.
- Get a GST registration since it is a legal compulsion per the GST Act.
- Audit your accounts through CAs if the company's annual turnover exceeds Rs 40 lakhs or the contribution surpasses ₹25 lakhs of the threshold limit.
LLP vs Pvt Ltd Funding
- Equity Financing
- Pvt Ltd Company funding: Easily attracts investors by issuing shares, making it suitable for startups seeking venture capital or private equity.
- LLP funding: Equity financing is not possible since partners cannot issue shares.
- Debt Financing
- Both structures can access loans, but Pvt Ltd companies have additional options like issuing debentures or convertible notes.
LLP vs Pvt Ltd Foreign Direct Investment (FDI)
- Pvt Ltd Company funding: Easily attracts investors by issuing shares, making it suitable for startups seeking venture capital or private equity.
- LLP: FDI in LLP is allowed only in sectors where 100% FDI is permitted and is subject to approval in other cases, making it less flexible.
LLP vs Pvt Ltd Taxation
- Taxation for Pvt Ltd CompaniesIncome tax for Pvt Ltd companies:
- 25% if the turnover is up to ₹400 crore (as per recent provisions).
- 30% for larger companies.
- Taxation for LLPsLLP taxation rate is 30% on their total income plus a surcharge (if applicable) and cess.Both LLPs and Pvt Ltd companies are treated equally under the GST regime:
- GST registration is mandatory for businesses with annual turnover exceeding ₹20 lakhs (₹40 lakhs for goods in some states).
- Compliance includes filing monthly or quarterly GST returns, depending on turnover.
Company Registration with Razorpay Rize
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Our package includes:
- Company Name Registration
- 2 Digital Signature Certificates (DSCs)
- 2 Directors’ Identification Numbers (DINs)
- Certificate of Incorporation(COI)
- MoA & AoA [Applicable for Private Limited Companies and OPCs]
- LLP Agreement [Applicable for LLPs]
- Company PAN & TAN
*Prices and documents can differ based on the company type.
Which Company Type Should You Register Your Business With?
Before proceeding with the registration of either an LLP or a company, it is crucial to evaluate the following factors carefully.
• Consider the nature and size of your business
- If you operate a small business with a limited workforce, opting for LLP registration might be more favourable, given the relatively lighter compliance requirements compared to a company. On the other hand, for larger businesses with substantial employee numbers and capital needs, registering as a company provides greater flexibility in raising capital.
• Fundraising requirements
- If your goal is to raise funds through equity, choosing a company structure is imperative. However, if your fundraising needs are more straightforward, the LLP structure may be a more suitable option.
• Tax rates
- It's essential to compare the tax rates applicable to both company and LLP structures, as there can be significant differences. Opt for the structure that aligns with your financial goals based on total income or turnover.
• Personal liability protection
- While an LLP offers limited liability protection, a company structure treats the company as a distinct legal entity, safeguarding shareholders' personal assets.
Ultimately, the choice between a company structure and an LLP structure hinges on the unique characteristics of your business, including its nature, size, and capital requirements.
Find Your Ideal Company Type
If you still need more help deciding which company type to register with, don't worry! We’ve got you covered with our latest tool - "Know Your Company Type."
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Explore side-by-side comparisons of popular company types for added clarity and make informed choices effortlessly!
Frequently Asked Questions
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
(LLP)
- Professional services
- Firms seeking any capital contribution from Partners
- Firms sharing resources with limited liability
One Person Company
(OPC)
- Freelancers, Small-scale businesses
- Businesses looking for minimal compliance
- Businesses looking for single-ownership
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
One Person Company
(OPC)
- Freelancers, Small-scale businesses
- Businesses looking for minimal compliance
- Businesses looking for single-ownership
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
(LLP)
- Professional services
- Firms seeking any capital contribution from Partners
- Firms sharing resources with limited liability
Frequently Asked Questions
Which is better, LLP or Pvt Ltd?
The choice between an LLP and a Pvt Ltd company depends on the nature and goals of the business:
- LLP: Best for small businesses, professional services and firms looking for flexibility and cost-effective compliance. LLPs are ideal for businesses that do not need external investors or plan to scale aggressively.
- Pvt Ltd: Suitable for businesses planning to raise funds, scale operations or build a more structured and credible entity. Pvt Ltd companies are preferred by startups seeking venture capital or private equity investments.
Refer to the detailed difference between LLP and Pvt ltd company for more context.
Does LLP need to file a tax return?
Yes, all LLPs must file an Income Tax Return annually, irrespective of whether they have generated income or incurred losses. Key requirements include:
- ITR-5 Form: Used for filing LLP income tax returns.
- Tax Audit: Mandatory if the annual turnover exceeds ₹1 crore.
- LLPs must file tax returns by the end of the financial year.
How is the salary from LLP taxed?
- Partners' Salary: Salaries or remuneration paid to partners of an LLP are treated as business expenses for the LLP and are deductible from its taxable income.
- The salary received by partners is taxed as personal income under the Income Tax Act, based on their applicable income slab rates.
- Employee Salary: Salaries paid to employees of an LLP are subject to TDS (Tax Deducted at Source) and standard income tax rules.
Can an LLP have employees?
Yes, an LLP can hire employees just like any other business entity.
- Employees of an LLP are entitled to all statutory benefits, such as Provident Fund (PF), Employee State Insurance (ESI) and gratuity, if applicable.
- Salaries paid to employees are subject to payroll taxes, such as TDS and GST compliance (for specific payments like consulting fees).
Why do people prefer LLP?
Many small businesses and professional firms prefer LLPs due to their unique advantages:
- Low Compliance
- Cost-Effective
- Limited Liability
- Tax Efficiency
- Flexibility in Management
- Separate Legal Entity
LLPs are especially favoured by professionals (like consultants, lawyers, or accountants) and small businesses that prioritise simplicity and operational control.
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