Most of the early start-ups remain confused on whether to opt for Limited Liability Partnership or for a Private Limited Company. Both seem equally attractive and have its share of benefit. Most of the consultant informs us to go for the one which is ‘best suited for us’. But seldom have we known what suits us!

This article is our endeavor to decode what really suits us. Let us first understand how Limited Liability Partnership (LLP) is different from PrivateLimitedCompany.

Answer to this is: A Private Limited Company is governed by The Companies Act, 2013 whereas an LLP is governed by The Limited Liability Partnership Act, 2008. However, all approvals relating to both Private Limited Companies and LLPs are given by the Registrar of Companies (ROC).In LLP, the LLP Partners hold ownership of the LLP and also hold powers to manage the LLP. Therefore, a Partner in a LLP will be both owner and a manager, whereas in a Private Limited Company, the shareholders (owners) do not necessarily have to have management powers. So, there are certain such scenarios where incorporating LLP is better option than incorporating Pvt Ltd Company and vice versa.To understand this, we shall ask a few questions which should be answered by you.

1. Do I foresee investment from external investors in my organisation?
2. Am I a foreign resident who wish to open an organisation in India?
3. Do I want to start with one form and then convert it to another form?
4. Do I wish to minimize the compliance cost?
5. Do I wish to pay remuneration to the directors/ designated partners for their service and if so how much?

We hope that you have been able to provide answer to the above question. Now let’s try to analyze them one by one-

Do I foresee investment from external investors in my organisation?

If I foresee external investment to my organization then Private Limited Company is the way to go. This is because instruments of investments which are used by the Investors are limited in case of a LLP. Whereas in case of a Private Limited Company there are various ways of investments and hence the Seed Fund/ Angel/ Venture Capitalist prefer Private Limited company over LLP.

Am I a foreign national who wish to open an organisation in India?

If I am a foreign resident who wish to open an organization in India then Private Limited Company can be more effective. A foreign resident has to take the approval of Foreign Investment Promotion Board (FIPB) before incorporating a LLP in India. The process of application to FIPB is a lengthy and costly process. However, in case of Private Limited Company we need not go through the same.

 

 Do I want to start with one form and then convert it to another form?

Most of us believe that we can start with one and then we can convert it to another. As per the LLPAct, 2008 it does not cover the conversion of LLP into Company but after MCA has notified Companies (Authorized to Register) Amendment Rules, 2018, which came into force on 15.08.2018, says conversion of LLP into Company is now possible under section 366 of Companies Act,2013.However, it is a bit tedious process compared to the conversion of Private Limited Company into LLP.

Do I wish to minimize the compliance cost?

The compliance cost is a bit high for a Private Limited Company comparing to a LLP. This is because Auditing is mandatory for a Private Limited Company, which is not so for a LLP. However, if the LLP is having a contribution of more than 25 lakhs or the annual turnover more than 40 lakhs then auditing is also compulsory.

Do I wish to pay remuneration to the directors/ designated partners for their service and if so how much?

In case of a Private Limited company there isn’t any limit of remuneration. However, in case of an LLP there are certain limits above which there are stringent taxation rules applicable. Hence, Private Limited Company holds an upper hand over here.

We hope this article helps you to resolve your doubt to certain extent.

 

 

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For any query, support or feedback, reach us at Setting up a business in India or Call/WA us at +91-9230033070 for any support/query/feedback.

 

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