Business Models – Limited Liability Partnership Vs Private Limited Company
In this post, we shall compare 2 business models via Private Limited Company and Limited Liability Partnership (LLP). It is important to note that both the models have their own advantages and limitations. Entrepreneur should know entire details and select the model that suits him most. Thus, comparison between features of Company and LLP comes necessary.
Choosing the right business mode plays very pivotal role in the entire business prospect. Thus having the correct model is crucial for short run and long run business life and also for everyone who is involved in doing that business. The most common business model that exists today are Sole proprietorship, Partnership, Limited liability partnership and Private limited company.
The registration process of private limited companies is governed by the Ministry of Corporate Affairs in India. Whereas, the law governing LLPs is contained in the Limited Liability Partnership Act, 2008.
There are many similarities in the formation process of a private limited company and LLP. Very few differences are also there in the formation process of both types of business models.
When it comes to registration cost, costs are comparatively lower in case of LLP than the private limited company. Both the models take on an average 15-20 day’s time for registration/ incorporation process.
Advantages of LLP formation
- Renowned form of business
- Simplicity in formation
- Body corporate
- Perpetual succession
- Limited liability
- Flexible to manage
- Easy transferable ownership
Disadvantages of LLP formation
- Inability to raise moneys/funds from public in general
- LLPs must have at least 2 members
- Any act of one of the partner of LLP firm, without the knowledge of other partners, may bind the LLP.
While private limited company enjoys similar advantages, below are few disadvantages of its formation.
Disadvantages of Private limited company formation
- Compliance formalities
- Division of ownership
- Restriction on public participation
The LLP format of business model has gained quite good popularity in India within shorter span of time. One of the factors contributing majorly in this success is the certain advantages of LLPs over companies in terms of taxation benefits. Various provisions which are applicable to a private limited company, does not apply to LLPs. This includes provisions like deemed dividend u/s 2(22)(e), presumptive taxation, etc. Section 44AD of the Income Tax Act, 1961 prescribes presumptive taxation provisions. LLP is not an eligible assessee for the purpose of section 44AD, and hence LLPs cannot offer its income for taxation under this section.
Audit of accounts –
Audit of LLP under LLP Act is mandatory if its turnover exceeds Rs. 40 lakhs in any financial year or its capital contribution exceeds Rs. 25 lakhs (Rule- 24(8))
Whereas as per provisions of Companies Act, 2013, a private limited company is required to get its accounts audited annually irrespective of its turnover or capital contribution.
Conversion of entity into LLP-
LLP form of business model is much flexible when it comes to conversion aspect. Any private company/ unlisted public company that is willing to get converted into LLP form can easily do that by simply applying through Form 18. Conversion is the added advantage for LLPs. It is also to be noted that the listed companies cannot be converted into LLPs. On registration of LLP, all assets and liabilities of the Company shall be transferred in the name of LLP and the Company shall be deemed to be dissolved and removed from the records of ROC.
Winding up –
Any LLP can close down its business on the basis of provisions laid down in sections 63, 64 & 65 of LLP Act, 2008. These sections govern the process of winding up. Winding up is a process whereby all the assets of business are disposed off to meet the liabilities and if any surplus remains then it is distributed among the owners, The LLP Act, 2008 provides two modes of winding up of LLP as voluntary winding up and compulsory winding up.
Section 270 of the Companies Act,2013 prescribes the manner in which a Company can be wound up.
- Winding up by the Court
- Voluntary winding up. It can be further divided as:
- Member’s voluntary winding up
- Creditors’ voluntary winding up
- Winding up subject to supervision of court
To sum up-
Private limited companies are considered as more credible by the investors than LLPs.
Whereas LLP is considered as a good option for new ventures. Also India has witnessed, in most of the cases that LLP is a better alternative to convert the existing model. The press release issued by the Ministry of Corporate Affairs, dated 05 January, 2018, states that during FY 2014-15, 1516 and 1617, total 66,759 new LLP formations have been done and 747 companies have been converted into LLPs. And out of these numbers, only Maharashtra state has contributed 22,731 formations i.e. 33.67%
Still have any issues in making decision?
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CA Bhagyashri Kadganchi has post qualification experience of 4 years. Her area of expertise are Statutory Audit, IFRS, IndAS and Taxation. Bhagyashri believes in sharing the knowledge and is always motivated to learn new things. To know more visit her Linkedin profile.