Introduction
When a normal person intends to start a business, it is often unclear to him which business form is best for the new business entity. The 2 most common business form an entrepreneur selects is a Private Limited Company in India and Limited Liability Partnership. These are two different ideas governed by Indian corporate law.
The main difference between both structures is that the members of the Private Limited Company is restricted to transfer shares held by them and Limited Liability Partnership members can transfer share by executing an agreement before a notary. So in this article, we will learn the differences between a Private Limited Company and a Limited Liability Partnership.
What is a Private Limited Company?
The shareholders of a private limited company are protected legally and have the benefits of limited liability protection. In India, a private limited company sits somewhere between a partnership and a public limited company with wide ownership. It can be formed by at least two individuals.
What is Limited Liability Partnership?
A Limited Liability Partnership is an entity that requires at least two individuals and has no upper limit for the number of partners. This is an alternative corporate business structure.
Difference between a Private Limited Company and Limited Liability Partnership
It is easy to say the incorporation procedure of both a Private Limited Company and a Limited Liability Partnership is simple. Thus, it is not a question of ease of incorporation but the question here is the direction and future of the company. The following differences difference between a Private Limited Company and Limited Liability Partnership:
- Private Limited Company provide the benefit of limited liability protection to the members whereas the Limited Liability Partnership provides the benefit of flexibility of partnership firms as well as limited liability protection.
- If we compare in terms of the cost of forming a company then a Private Limited Company is more than Limited Liability Partnership.
- The requirements of statutory compliance are strict for a Private Limited Company than the Limited Liability Partnership. It should be noted that there is no requirement to audit the financial statement and accounts if an LLP has not exceeded the threshold of INR 40 lakhs as the total turnover or revenue contribution of INR 25 lakhs for the particular financial year. On the other, the Private Limited Company should audit the financial statements and accounts of the company.
- A Private Limited Company has restrictions on the maximum number of members, which means that the company can have a maximum of 200 members. Whereas a Limited Liability Partnership does not have such restriction on the maximum number of members.
- A Private Limited Company is obligated to hold 4 board meetings within a financial year. These 4 board meetings must be conducted within 120 days of the last board meeting. But the Limited Liability Partnership is required to hold only one annual board meeting for all partners in a financial year.
- There are several taxes imposed on Private Limited Company such as wealth tax, surcharge, and dividend distribution tax. But all these taxes are not imposed on a Limited Liability Partnership. As a result, the LLP enjoys many tax benefits. I
- At the end, the name of the Private Limited Company "Pvt Ltd" must be inserted and for Limited Liability Partnership "LLP" must be inserted.
- A Private Limited Company can accept Foreign Direct Investment via an automatic route or government route, whichever is suitable. Whereas the Limited Liability Partnership can accept Foreign Direct Investment only via automatic route.
- If a Private Limited Company fails to comply with the mandatory compliance such as filing an annual return, filing financial statements, and insolvency, etc. with MCA can lead to hefty penalties of up to INR 1 lakhs. But if the LLP fails to comply with the mandatory compliances then the penalty is very low as compared to the Private Limited Company.
Similarities between Private Limited Companies and Limited Liability Partnerships
The following are the similarities between an LLP and a Private Limited Company:
- A minimum of 2 directors or shareholders are needed for both LLPs and Private Limited Companies to start the incorporation procedure.
- The members or shareholders are safeguarded against any debts or losses incurred by both LLP and Private Limited Company. The members or shareholders are only accountable for the nominal value of the shares they own in the company as per the provisions.
- Both LLP and Private Limited Company are separate legal entities from their members or shareholders and also a body corporate.
Bottom line
There are a few similarities and many differences between a Private Limited Company and Limited Liability Partnership. The key difference is that there is a maximum limit on the number of members in a Private Limited Company in India whereas the LLP has no such limit regarding the number of members.
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