When an entrepreneur wants to start a new business, the first question is which type of business entity suits his business. There are many different options of business entities available in India viz., Proprietorship, Partnership, One Person Company, Limited Liability Partnership, Public Limited Company etc. However the major contemplation is between a Limited Liability Partnership and Private Limited Company. Proprietorships and Partnerships are not preferred now days because of Unlimited Liability and One Person Companies because of their limited membership.

To start, one must know what a Private Limited Company is and what a Limited Liability Partnership is.

What is a Private Limited Company?

A private limited company is a business entity which is owned by a small group of people who are called members or shareholders of the Private Limited Company. Shares of Private Limited companies are not traded on the stock exchanges and there are restrictions on transfer of those shares. The liability of the shareholders of a Private Limited is limited to the extent of the shares held by them.

What is a Limited Liability Partnership?

A limited liability partnership is an alternative corporate business which gives benefits of limited liability to its partners with flexibility of partnership. Liability of its partners is limited to the extent of their agreed contributions in the LLP. No partner is liable for independent or un-authorised actions of other partners. Partners are shielded from joint liability created because of misconduct or wrongful or un-authorised acts of another partner. A limited liability partnership is a separate legal entity and can enter into contracts and hold properties.

Here are some advantages of incorporating a Private Limited Company over a Limited Liability Partnership.

Preferred by Investors

The venture capitalists and other investors prefer Private Limited Company over Limited Liability Partnership because of easy investment opportunities. The investors are not comfortable when it comes to investing in a Limited Liability Partnership, in fact they insist that the startup they consider is a Private Limited Company, despite significant benefits of the LLP in case of many business models.

Business Credibility

The investors, banks, vendors, customers and associates look at the credibility of the business before they start dealing with them. Getting the basic information like date of incorporation, registered office address, names of the Directors, number companies in which one Director is engaged,  loans taken by company, status of the company etc is very easy in case of a Private Limited Company as all these information is publically searchable on mca.gov.in. The other information like balance sheet, change of directors, change of registered office address etc is easily available on payment of a small fee.

Attract Funding

Business entities like Proprietorship, Partnership, One Person Company and Limited Liability Partnership cannot issue shares and are thereby unable to attract equity funding.

Exit Plan

Transfer of Shares of a Private Limited Company is easier in a Private Limited Company, without any hassles, while the business remains a going concern. Therefore a Private Limited Company provides an edge over other entities in executing the exit plan.

Multiple Opportunities

Many entrepreneurs venture into different types of business opportunities being serial entrepreneurs. Having a Proprietorship or a Partnership Firm restricts their vision as they are not considered separate legal entities. A private limited company other the other hand would allow the entrepreneur to pursue multiple business opportunities while keeping all the businesses separate.

When we discuss about the advantages of a Private Limited Company, it is imperative to list out the advantages of a Limited Liability Partnership, so that an entrepreneur can take a fair call on which type of entity suits him. Here are some advantages of a Limited Liability Partnership.

No limit on Partners

While both, Limited Liability Partnership and Private Limited Company needs 2 partners / shareholders to start, there is no upper limit on having number of partners in a Limited Liability Partnership. A Private Limited Company, however, can have maximum 200 shareholders.

Minimum Capital Requirement

A Limited Liability Partnership does not require minimum capital. It can be incorporated with the least possible capital also. However, in case of a Private Limited Company also there is no minimum paid up capital requirement.

Lower compliance burden

Limited Liability Partnership has lesser compliance burden as compared to a Private Limited Company. For example a Limited Liability Partnership does not have to maintain the minutes books or statutory registers which is a must for a Private Limited Company.

Audit Requirements

As against a Private Limited Company, which requires statutory audit, even if there is no turnover during the financial year, a Limited Liability Partnership needs statutory audit only if it’s turnover exceeds Rs. 40 lacs in a financial year or its contribution is more than Rs. 25 lacs.

Taxation

Limited Liability Partnership is treated at par with the Partnership Firm for the income tax purpose. The profits after payment of income tax are tax free in the hands of the partners as against dividends which are taxable by way of dividend distribution tax. Provisions of deemed dividend also does not apply to the Limited Liability Partnership.

Conclusion

While deciding about which type of entity to incorporate for your startup, you need to think about your vision. For example, if you want to run a small business with a few partners, a Limited Liability Partnership is a better option for you. However if you are thinking of raising funds by diluting your equity, a Private Limited Company is a way to go.

For more information on Limited Liability Partnership and Private Limited Company Registration, you can contact us on +91 9136509060 or write to us on bd@ofinlegal.com.