Introduction
Starting a business is an exciting endeavor, but choosing the right legal structure can make a significant impact on your company’s success. Two popular options for entrepreneurs are Private Limited Companies and Limited Liability Partnerships (LLPs). In this blog post, we will delve into the nuances of each structure to help you determine which is better suited to kick start your business journey.
Limited Liability Partnerships
LLP is a new corporate form that enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner. In India, this need has long been recognized for businesses which may require a framework that provides flexibility suited to requirements of service, knowledge and technology based enterprises
A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore can exhibit aspects of both partnerships and corporations An LLP combines features of a partnership and a corporation, offering limited liability to its partners. It Governed by the Limited Liability Partnership Act, 2008.
Taxation:
- LLPs are taxed as a separate legal entity, with partners being taxed individually on their share of profits.
- No dividend distribution tax (DDT) on profit distribution to partners.
- Lower tax rate compared to companies for profits above a certain threshold.
- 80IAC Exemption for Recognized Start-ups:LLPs that qualify as recognized start-ups can take advantage of tax benefits under Section 80IAC of the Income Tax Act. This exemption can result in substantial tax savings for eligible LLPs, encouraging innovation and entrepreneurship.
Annual Compliance:
- Annual Return Filing: LLPs are required to file Form 11 with the Registrar of Companies (RoC) annually, disclosing details of partners, capital contribution, etc.
- Income Tax Return: LLPs need to file income tax returns (ITR) using Form ITR-5.
- Audit Requirements: LLPs are subject to audit if their annual turnover exceeds a specified threshold, currently set at ₹40 lakhs for business and ₹25 lakhs for professionals.
- An LLP does not have to conduct board meetings or an Annual General Meeting (AGM) since the owners manage the business.
- An LLP must file the statement of account and solvency and annual returns with the ROC in Form 8 LLP and Form 11 LLP
Advantages:
- Limited liability protection for partners, safeguarding personal assets.
- Less stringent compliance requirements compared to companies.
- Flexible management structure allows partners to manage the business directly.
- The death of a partner does not affect the existence of the LLP. It has perpetual succession.
- It can be started with a minimal amount of capital.
- The partners have limited liability
Disadvantages:
- Limited access to funding compared to companies, as LLPs cannot issue shares.
- Not suitable for businesses planning to raise funds through public offerings.
- Restrictions on types of businesses that can operate as LLPs, such as banking, insurance, and other financial services.
- The penalty for non-compliance by an LLP is heavy.
Private Limited Company (PLC)
A Private Limited Company is a type of business that is owned and operated by a small group of people. Private stakeholders are in charge of such entities. A Pvt. Ltd. company’s liability arrangement is less severe than that of an LLP or a sole proprietorship, which puts firm assets at risk in the event of a financial crisis. Although all partners in a Pvt. Ltd. corporation are responsible for the company’s loss, there is one exception. Shareholders can be subjected to such losses up to the number of shares held by them. Meaning, a member’s liability for recouping a business loss is limited to the number of shares they own.
Taxation:
- When a Pvt Ltd company earns less than Rs.400 crores, it should pay a tax of 25%. When the company’s annual revenue exceeds Rs.400 crores, it must pay a 30% tax. Pvt Ltd companies can also choose between the new rates of 22% (for existing companies) and 15% (for new companies).
- Dividends distributed to shareholders are taxed at the individual level.
- DDT applicable on distribution of dividends at a rate of 15%, plus surcharge and cess.
Annual Compliance:
- Annual General Meeting (AGM): PLCs are required to hold AGMs within a certain timeframe each year, typically within six months from the end of the financial year.
- Annual Return Filing: A Pvt Ltd company must file its annual financial statements and annual return with the ROC in Form AOC 4 and Form MGT 7, respectively.
- Financial Statements: Preparation and filing of financial statements including balance sheet, profit and loss account, and cash flow statement in compliance with Indian Accounting Standards .
Advantages:
- Separate legal entity with perpetual succession, enabling continuity of business operations.
- Easier access to funding through equity financing and venture capital, as PLCs can issue shares.
- Suitable for businesses planning to scale and go public in the future, offering liquidity options for shareholders.
Disadvantages:
- The members of a Pvt Ltd company are limited to 200.
- It restricts the transfer of shares of its members.
- It cannot issue a prospectus inviting the public to subscribe to the company shares.
Conclusion:
In conclusion, the choice between a Private Limited Company and LLP boils down to your specific business requirements and long-term goals. While Private Limited Companies offer credibility and limited liability protection, LLPs provide flexibility and lower compliance costs. By carefully evaluating your needs and seeking professional advice, you can confidently select the ideal legal structure to kickstart your entrepreneurial journey. Remember, the success of your business hinges on making informed decisions from the outset. Choose wisely and embark on your entrepreneurial adventure with confidence!