India is turning into one of the biggest economies in the world. The need for entrepreneurship amongst the youth is increasing with the passing days. The first step towards this entrepreneurial journey is choosing the most appropriate business structure for your needs. The structure you choose will play a very important role in the development of your business. The two most appropriate business structures for a startup are LLPs and PLCs. Both are suitable when specific needs are met. This article shines a light on the reasons to choose Limited Liability Partnership Registration over Private Limited Company Registration.
What is a Limited Liability Partnership?
A Limited Liability Partnership or an LLP is a unique business structure, chosen by most professional service providers in India. It is a relatively new business structure, because it’s regulating Act “Limited Liability Partnership Act” was introduced in 2008. It has the best features of two other structures, ie., a traditional partnership firm and a private limited company. Its unique features contain limited liability, separate legal existence, cheaper costs, free transferability, etc.
LLP Registration v/s Private limited company
Now that we are aware of what an LLP means, let’s look at how it is a better option than incorporating a PLC in India:
LLP: This is one of the biggest USPs of LLPs. Having a limited liability means that the partners will never be liable in their capacity. The liability is of a partner is only up to the figures mentioned in the subscriber’s sheet.
PLC: Not all PLCs have limited liability, some are limited by shares, but others are limited either by guarantee or have unlimited liability.
Number of Members
LLP: The minimum number of members required to start an LLP is 2. Whereas, there is no upper limit on the number of partners in an LLP in India.
PLC: In a pvt. ltd. company, there must be a minimum of 2 shareholders. The maximum number of shareholders in a private Ltd company, however, is 200.
Hence, if you are unsure of how many members will be a part of your business, LLPs are a better option. Since there is no upper limit on partners/designated partners in an LLP.
LLP: The compliance requirements of an LLP are way less than when compared to Private Limited Companies. In an LLP the legal and statutory compliance requirements are minimal. The audit requirements are less stringent. This allows the members of an LLP to focus on its actual growth rather than worrying about compliances.
PLC: Compared to all other business structures, Private Limited Companies have the most stringent and complex compliance requirements. Audits, Corporate Social Responsibilities, Labour Law compliance, maintaining books of accounts, etc. are all mandatory requirements for private companies.
Management and Decision Making
LLP: All the roles and responsibilities of each partner are set as per the terms of the LLP Agreement. Hence, when it comes to control, there are no chances of any disputes. Further, since there is no concept of a Board of Directors, the designated partners are the key managerial persons. This saves a lot of time and effort in the decision-making.
PLC: In private limited companies there is a structured management system. The Board of Directors governs the managerial personnel. As a result of this, there are chances that decision-making takes longer than expected. The charter documents of a PLC are the Memorandum of Association and Articles of Association. Any action of the company or its representatives that does not fall within the ambit of the charter documents, is ultra vires and invalid.
No Share capital requirement
LLP: To register an LLP and start business operations under its name, there is no minimum share capital requirement. So, you can start a business as an LLP with the bare minimum that you will need to start your operations.
PLC: The capital in a private limited company is divided into shares. Until the 2015 amendment to the companies act, there was a minimum paid-up capital requirement of INR 1 Lakhs, to proceed with company incorporation.
LLP: When considering the modes of taxation, LLPs go through a kind of pass-through system. This means that the income of LLP is not taxed. However, the income of all the partners of an LLP is taxed separately. Further, even the tax rate for partners is lower as compared to a PLC. This results in a lot of tax savings benefits.
PLC: In Pvt ltd companies, the dividend distribution tax system was followed until recently. Under this system, tax is imposed on domestic companies which provide dividends to their investors. Even though this system is now abolished, the tax rates on PLCs are much higher than the limited liability partnerships.
Freedom to choose the business activities
LLP: There are no restrictions on the business activities that an LLP is wishful of conducting. This allows an LLP to engage in a wide range of services without having to make changes on the MCA portal time and again.
PLC: Based on the object clause of the company, it might have certain restrictions on business activities. When a PLC wants to choose differing business activities, they have to modify their charters, and also the information available on the MCA portal.
As you can see from the points mentioned above, both types of businesses have their pros and cons. The most suitable to your needs is the best structure to move ahead with. Today, business experts also help in choosing the best structure based on your specific requirements. Get your LLP registration online by contacting certified service providers!