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What is Better for a Startup – LLP or Pvt Ltd

What is Better for a Startup – LLP or Pvt Ltd

by Sanjeev Archak

The first legal step towards starting a new startup venture is choosing the right entity for registering their business. Be it a Private Limited Company or a Limited Liability Partnership (LLP). Founders often find themselves stuck at making this kind of decisions as the right choice would determine the nature of the ownership and the management process. It would further set the tone of the various compliances that needs to be followed, be it LLP or Pvt Ltd.

Private Limited Company

It’s the most common and also the most successful entity choice for startup founders in India. As per the Companies Act 2013, a private limited company is defined as follows –

“private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in the case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that —

(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company.

Limited Liability Partnership

Introduced in India under the Limited Liability Partnership Act, 2008, LLP displays the elements of both partnership and a corporation. It is defined as –

A corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in a flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership.

What is the Objective of the Startup?

The decision of choosing a Pvt Ltd or an LLP for registration should be in line with the long-term goals of the startup. Founders need to ask themselves where they see the company heading in the next five years.

LLP would be ideal for a startup aiming for a small scale business at a particular niche. For a startup with long term goals, they would require the inclusion of investors, stakeholders and other professionals in their company. Registering under a Pvt Ltd entity would be the ideal case scenario for these companies.

Basic Comparision between a Pvt Ltd and an LLP

Factors for Comparison

Private Limited Company

Limited Liability Partnership

Ideal for Entrepreneurs wanting to raise Seed or Venture Capital Professionals, Micro and Small businesses that are family owned or closely-held
Minimum Capital Requirement No minimum requirement
(As per the Amended Companies Act, 2015)
No minimum requirement
Minimum Requirement for Formation Members – 2 Directors – 2 Designated Partners – 2
Time Taken to Form 15 – 20 Days 15 – 20 Days
Requirements for Compliance Annual Return Filing Board Meetings & General Meetings Annual Return Filing
Regulator Registrar of Companies Registrar of Companies
Audit Mandatory If Contribution > Rs 25lacs or, Turnover > Rs. 40lacs
Income Tax 25% if Turnover does not exceed 50 Cr,
30% if it exceeds 50 cr
Taxed at 30%
Dividend Distribution Tax 20.36% Nil
Limited Liability Yes Yes
Perpetual Succession Yes No
Investor Preference High Medium
Company Conversion Can be changed into an LLP Cannot be directly transformed into a Private Limited Company
Procedure Obtain DSC (Digital Signature Certificate) MoA & AoA, INC-32 Incorporation Filing PAN, TAN Applications Obtain Digital Signature Certificate(DSC) Obtain Designated Partner Identification Number (DPIN) Name Approval Filing for Incorporation File LLP Agreement PAN and TAN Applications
Registration under Startup India Yes Yes

Advantages of Choosing a Pvt Ltd company over LLP

1) Startup Funding – Any business with a long-term plan needs to be funded for starting the business, maintaining it’s day to day activities and growing the business over a period of time. Registering the company under an LLP entity would harm the funding prospects as they cannot issue shares, unlike a Pvt Ltd company.

2) Business confidence and credibility – A Pvt Ltd company enjoy better confidence and credibility from partners, investors, and stakeholders as compared to LLP due to strict adherence of various compliances under the Companies Act, Tax laws and other necessary legislation needed to run the company legally in India. With a Pvt Ltd company, all the required information such as the company name, date of incorporation, registered address, company status and other relevant details are readily available in a searchable public database. Thus increasing the authenticity of the business.

3) Limits of Remuneration to Partners – There is a ceiling on the salary paid to partners of an LLP.  The Income Tax Act prescribes the ceiling limit up to which any payment of salary, bonus, commission or remuneration will be allowed as a deduction for income of LLP, the limits of remuneration are outlined below:

On First Rs 3,00,000 of book-profit or in case of loss Rs 1,50,000 or at the rate of 90% of the book-profit, whichever is more
On the balance of book-profit at the rate of 60%

4) Exit Plan – As long as your business is a going concern, shares of the company can be easily sold or transferred in part or whole to another entity quickly without any further hassles. This way a Pvt Ltd entity provides the best way to plan and execute an exit strategy.

Advantages of LLP over Pvt Ltd

1. No restriction on the number of owners – A minimum of two partners are needed to form an LLP. There is no restriction on the maximum numbers of partners unlike that of a Pvt Ltd company wherein not more than 200 members with ownership rights can be present within a single company.

2. An audit is not compulsory – Any company, be it public or private are required to audit their accounts irrespective of the share capital involved. In the case of an LLP, an audit is not compulsory. An LLP is mandated to get audited only when its contributions exceed Rs 25lacs or, the turnover of the company exceeds Rs. 40lacs annually.

3. No dividend distribution tax payable – With regards to the income tax, an LLP is treated at par with a partnership firm. The LLP is accountable for the payment of income tax, but the shares of its partners are not taxable. Thus an LLP entity is free from the deemed dividend provision under the income tax law.

4. Ease of Compliances – A Pvt Ltd company is required to follow a minimum of eight to ten compliances per annum whereas an LLP is deemed to file the Annual Return only.

Which is Better – LLP or Pvt Ltd ?

There are no hard and fast rules that define one entity better than the other. The decision should purely be made on the case-specific along with the consideration of other factors like the objectives of the startup, ownership and management control of the founders and other people involved, funding requirements of the startup, and various compliances that need to be followed in the smooth running of the business.

Still reluctant to take a decision between LLP or Pvt Ltd? Let us make help you in taking the right one. Talk to our specialists at IntegraBooks.

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