Which one is right for you - LLP or Pvt. Ltd. company?

There are various business structures in India and the two most popular ones are the Limited Liability Partnership (LLP) and Pvt. Ltd. Company. Both structures have limited liabilities and LLPs do not require a minimum share capital whereas a Pvt. Ltd. Company requires a minimum paid-up capital. You should choose a structure based on your financial operations and management.

Whichever you choose you will have to register it with the Ministry of Corporate Affairs (MCA). Registering a company gives it a legal existence and other benefits. Registration process can be done online but it is best to hire professional services to get your company incorporated.

What is an LLP?

An LLP is a corporate body that is established and incorporated under the Limited Liability Partnership Act, of 2008. To form an LLP you will need two or more partners and it can be any individual or a corporate body. At least one partner has to be a resident of India. An LLP has a separate legal existence from its partners and any change in the constitution of the partners does not affect its existence. An LLP has perpetual succession.

The rights and duties of the partners of an LLP are governed by the mutual agreement between the partners. In the absence of an agreement, the rights and duties are governed by the provisions of the Act and LLP Rules 2009.

An LLP is a more favoured business structure with small businesses offering professional services and startups, consultancy and more. It is favourable for medium enterprises like medical professional services, legal firms, family-operated businesses, IT firms and more. LLP registration is mandatory as per the LLP Act of 2008.

What is a Pvt. Ltd. company?

According to the Companies Act of 2013, a Pvt. Ltd. Company should have a minimum paid-up share capital of Rs. 1 lakh or higher as per the law. A Pvt. Ltd. Company exists as a separate legal entity and has a perpetual succession. The name of the company should have the words ‘Private Limited’ at the end.

To form a Pvt. Ltd. Company minimum of two members are required and the number should not exceed 200. The company should have a minimum of two directors. The shares of the company can be issued among its members and they cannot be transferred freely unlike public companies.

A Pvt. Ltd. Company is favourable for small businesses and startups who want to grow quickly. It is favourable for manufacturing businesses, tech startups, taxation, financial services, marketing, transport, agriculture, telecommunications and more.

Pros of LLP

• As the structure of the operation of an LLP is flexible it is best suited for small enterprises and investment by venture capitalists.

• A partner is not responsible for the unauthorised behaviour or misconduct of other partners. In an LLP there is no limit on the number of partners. Indians and foreigners can be its members.

• The personal assets of the partners are safe as the liability of an LLP is limited to the assets it owns. An LLP gives the dual advantage of a company and a partnership firm combined in a single form.

• An LLP does not require minimum paid-up capital therefore it is a better choice for individuals with nil or very low capital and who want to start a business. 

Pros of Pvt. Ltd. Company

• The liability of the shareholders is limited to the contributions they make to the Pvt. Ltd. Company.

• As the company has to be registered with the MCA in India therefore it is considered to be trustworthy. The company has to file annual returns with the MCA and is considered to be credible.

• The directors of the company can take loans from other Pvt. Ltd. companies. In this company the directors are permanent there is no need for retirement by rotation.

• The company has more options for taking debts and loans from banks and it can issue convertible debentures and debentures. Startups and high-growth businesses prefer this structure as it allows them to offer employee stock options.

A Pvt. Ltd. Company is a relatively expensive option though it can easily raise capital. It is suitable for manufacturing enterprises that require a lot of startup capital. An LLP is best suited for businesses that sell professional services.