LLP or Private Limited Company?
LLP or Private Limited Company? This is one of the most asked questions by new and old entrepreneurs. What’s the most suitable structure to start his/her business? A simple google search would yield thousands of results and tens of good articles on the subject. I would share some of the good ones with these entrepreneurs but nevertheless, a few questions remain unanswered in those articles. So, I thought of compiling a simple table, although not exhaustive, (with the least amount of legal and financial jargon) to address such unanswered questions. LLP is the newest kid on the block. LLP structure was introduced with the passing of The Limited Liability Partnership Act, 2008, which came into effect in early 2009. This structure has been in the west for many decades. The traditional partnership businesses burdened the partners with unlimited liability, many times this burden induced by other partners with the “principle of agency” at play. One partner’s actions leading to a massive loss became all partners’ burden. It had the potential to bankrupt the partners of the firm. LLP structure addresses this point primarily by borrowing the concept of “limited liability” from the corporate structure. On the other side, a typical corporate structure would entail a long list of compliance costs which can be prohibitive to many businesses. The fusion of traditional partnerships and corporates is LLP.
Hope the readers find the table useful. If any doubt still persists, please feel free to write to me or leave your query in the comment section. We shall be happy to get back. S No .
Particulars
Private Limited Company
LLP
1
Governing Law
Companies Act, 2013
Limited Liability Partnership Act, 2008
2
Name
Must contain suffix ‘Ltd’ or ‘Pvt Ltd’
Must contain suffix ‘LLP’
3
Organizational Structure
Rigid & governed by Companies Act
Flexible & governed by LLP Agreement
4
Loans & borrowings (Other than from Banks & Financial Institutions)
Directors cannot borrow and lend money to Company. There is a Cap on shareholders lending to Company
No Restrictions. Governed by LLP Agreement
5
Convening of Meetings
Board Meetings are mandatory Annual General Meetings is Mandatory
No Mandatory requirement. But however, the partners may decide to have periodical meetings and the same will be governed by LLP Agreement
6
Intimating ROC regarding Creation of Charge
Mandatory when a charge is created on assets of the Company
Not Mandatory
Maintenance of Statutory Records
Many Registers are required to be maintained like Shareholders/Members Register, Directors Register
No such requirement
8
Increase in Capital
Require to Pass Ordinary resolution in General Meeting and file form SH-7.
Only require to amend LLP Agreement and File e-form Form-3.
9
Annually form filling requirement
There are many E-forms like AOC-4, Form –MGT-7 and E – form-ADT-1
Only Two annual form Eform- 8, E-form-11
7
10
11
12
13
Require to Take disclosure from director under Section184(1)
No such requirement
Audit of Accounts
Audit is Compulsory.
Require only if Turn over above 40 lacs or Contribution more than 25 lacs.
Related Party Transactions
Transaction to be at arm’s length price only and as per provisions of Secton-188 of Companies Act-2013.
No Restrictions. Governed by LLP Agreement
Reporting RequirementsFDI-FEMA
Single Master Form (SMF) has to be filed with RBI within 30 days from the date of allotment. FLA Return – Annually before 15th July
Single Master Form (SMF) has to be filed with RBI within 30 days from the date of receiving of Capital Contribution from Partner FLA Return – Annually before 15th July
Disclosure of Interest
Income Tax S N o
1 2
Particulars
Private Limited Company
Rate of Tax
Tax Rate 25% (If Turnover is less than Rs.400 Crore. However, the Companies can choose to pay taxes @ 22%, without any deductions) Tax Rate @ 30 % (If Turnover exceeds 400 Crore) Surcharge; Income 1 Crore to 10 Crores -7% more than 10 Crores -12% Health & Education Cess: 4 %
MAT (Minimum alternate tax)
MAT -15% On Book profit
LLP
Tax Rate @ 30 % Surcharge; Income Exceeds 1 Crore – 12% Health & Education Cess: 4 %
Not Applicable AMT (Alternate Minimum Tax) 18.5% in special cases where there is deduction u/s
10AA/80IB etc.,
3
4
Profit Distribution
Salary/Remuneration to Directors/Partners
Taxable in the hands of Shareholders based on their tax slab
Profit distributed post tax is exempt from tax
No Restriction/Cap on payments to Directors
Aggregate of 90 % of the first Rs.300,000/- Plus60 % of the Balance Profit In the case of loss maximum salary allowed as expense for tax purpose will be Rs.1,50,000/-
Companies Act vs LLP Act Other Statutes S No .
Particulars
Private Limited Company
LLP
1
Provident Fund on Salaries to Directors/Partners
Director Remuneration is covered for the purpose of Provident Fund
Designated Partner’s Remuneration is not covered for Provident Fund
Labour Laws
As per labour laws a Whole Time Director is an employee and eligible for Gratuity Leave encashment Leave as per statute
Designated Partners are not Employees and hence provisions of labour laws are not applicable
2
Others S No.
1
Particulars
Private Limited Company
LLP
Investment by Angel Investors/PEs/VCs
Preferred
Not preferred
The write-up is for general understanding. We suggest the readers to discuss with their consultants before deciding on choosing either of the structures. Author:
T R Venkatesh Babu B.Com, FCA
Venkatesh is a practicing Chartered Accountant specializing in the field of direct taxes and corporate laws and compliance. He is the founding partner of Venkatesh Bhaskar & Associates. He has served as Chairman of Bangalore Branch of ICAI (2011-12). Presented papers at various forums. He is also partner at M/s. N C S Raghavan & Co. He can be contacted at venkatesh@vbaca.co.in
