Why choosing an LLP over a private limited company may be a better option for start-ups?
When Sana started her farm-to-fork café about a year ago, she didn’t imagine the enormous success her café would achieve.
Since the café was going well, she thought of giving it a legal existence – getting it registered under a suitable law. She researched about various forms of legal entities and the associated pros and cons for each. Establishing a private limited company (PLC) seemed to be a better option to her since she wouldn’t be personally liable for her café’s loans and actions.
“Arjun, I want my café to be registered as a private limited company. Can you please tell me how to go about registering one?”, she asked Arjun, her good friend and a business consultant.
“Why are you going for higher compliances and expensive costs, Sana? Instead, register as a Limited Liability Partnership, oran LLP as its called, because it provides similar benefits as a company, but with lesser complications and cost”, Arjun replied.
She was amazed to hear that and wanted to know more about LLPs and how an LLP is a better option over a company.
“For benefitting under the “Startup India Scheme”, a start-up must be incorporated as either a partnership firm, an LLP or a private limited company.
A partnership firm is much cheaper in terms of incorporation and compliance costs, but the partners are personally liable for all the acts and contracts of a partnership firm.
LLP and private companies are separate legal entities and hence partners or directors respectively are not personally liable for the acts of the entity.”
What are the similarities between LLPs and Private Limited Companies?
Both LLP firms and private limited companies are registered with Ministry of Corporate Affairs (MCA). While an LLP is incorporated under the LLP Act, 2008, a private limited company is registered under the Companies Act, 2013.
Both require a minimum of two members (two partners in case of an LLP and two directors in case of PLCs) to incorporate. In both the entities, annual accounts must be maintained. Also, annual compliances must be fulfilled by submitting annual accounts and other prescribed documents to the MCA.
Why is LLP then preferred over Private Limited Companies?
Lesser costs and compliances – Cost incurred in setting up an LLP firm is marginally lesser when compared to incorporating a private limited company. Again, with annual compliances, given lesser compliances, lower cost is incurred for an LLP firm, while a private limited company must comply with more MCA regulations and hence higher cost.
Minimum threshold limit for audits – In case of LLPs, annual audit is required only if the turnover of an LLP is INR 40 lakhs or more, or the contribution of its partners is INR 25 lakhs or more in a financial year. On the other hand, private limited companies must get their accounts audited every financial year irrespective of the size of business or capital invested. In addition to higher cost of compliance, an audit also requires management time which is otherwise critical to the business.
No minimum requirement of board or annual general meetings – Unlike a private company, where four board meetings or an annual general meeting (AGM) are required to be held in a year, LLP firms are not bound by law to hold any such meetings.
Partners can specify the frequency of their meetings in the Partnership Agreement/Deed. They can meet and discuss the business issues in those meetings.
Conclusion – With lesser compliances required and lower costs incurred, LLPs are an easier route to set up a business in India as against a private limited company. Unless a start-up is required by their prospective investors or customers to take form of a company, it might be prudent to opt for an LLP to begin with and at a later point convert into a company.
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