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  7. Difference between LLP and Company - Which is Better for Taxation

LLP Vs Pvt Ltd: Which is Better for Income Tax Returns (ITR)?

Updated on: 24 May, 2024 06:24 PM

When starting a business, the first thing to do is choose the right legal structure as per your requirements. Two popular options are Limited Liability Partnership (LLP) and company. Both structures have their advantages and disadvantages. To choose the right structure, you must first understand the difference between an LLP and a company. This article will help you distinguish between both and make an informed decision.

Contents

What is LLP?

A minimum of 2 members can form LLP or a Limited Liability Partnership and does not require any minimum capital. The member’s liability is limited to the contributions made to the LLP.

Advantages

  • It is easy to manage due to fewer formalities.
  • Lower registration costs
  • It is a separate legal entity
  • It has a perpetual succession
  • It can be started with less amount of capital.
  • Partners have limited liability.

Disadvantages

  • There is a heavy penalty for non-compliance
  • LLP gets dissolved automatically if the number of partners goes below 2.
  • Venture capitalists and angel investors cannot be the shareholders.

What is a Private Limited Company?

At least 2 and at most 200 members can form a private limited company. You don’t need any minimum capital to form a private limited company. Also, you need only 2 directors in a private company. The member’s liability is limited to the extent of shares held.

Advantages

  • No requirement for minimum paid-up capital
  • Limited liability of members(limited upto shares held by them)
  • Separate legal entity
  • Perpetual Succession
  • Its easier to raise funds

Disadvantages

  • The maximum number of members is 200
  • Members cannot transfer shares
  • A company cannot issue a prospectus inviting applications from the public.

How are LLP and Pvt. Ltd. Companies Different?

Limited Liability Partnership (LLP) and Private Limited (Pvt. Ltd.) companies are distinct business structures with varying features:

Basis LLP Private Company
Registration Process It is registered with the MCA under LLP Act, 2008. Designated Partners of LLP get a Designated Partner Identification Number (DPIN). Registered with MCA under the Companies Act 2013. Directors of Private companies have to get a Director Identification Number (DIN).
Ownership Partners of an LLP are both the managers and the owners. The shareholders of a company are owners but do not directly participate in company management.
Membership and Directors You need a minimum of 2 partners to form an LLP, and there is no maximum limit to the number of partners. An LLP doesn’t have any directors. A company needs a minimum of 2 and a maximum of 200 members. Moreover, it also needs at least 2 and at most 15 directors.
Compliance LLP is not required to conduct board meetings or AGMs and does not require a statutory audit for a turnover below 40 lakhs. AGM within 6 months from the end of FY and 4 annual board meetings are mandatory. Companies must conduct a statutory audit.
Funding LLPs cannot raise funds from angel investors and venture capitalists. LLPs can obtain FDI upon approval. Companies can raise funds from VCs and angel investors. A company can obtain direct FDI.
Taxation LLP is taxed at 30% up to an income of 1 crore and a 12% surcharge if the total income exceeds 1 crore. Companies must pay tax at 25% if turnover is up to 400 crores otherwise 30% is applicable.

What Factors to Consider While Choosing Between LLP and Company?

Now that you know about the features, advantages, and disadvantages of companies and LLPs, the next question is, which option is better if you want to file Income Tax Returns and save taxes? You should consider the below-mentioned factors before registering as an LLP or a company.

  • Nature and Size of Business - If you have a small business and a limited number of employees, it is better to register as an LLP, as the compliance requirements for an LLP are less than that for a company. However, if your business is large, with many employees and capital requirements, you must register a company as it offers more flexibility in raising capital.
  • Fund-raising Requirements - You must also consider your fund-raising requirements before choosing. If you want to raise funds through equity, you must choose a company structure. However, if your requirements are simpler, you should choose the LLP structure.
  • Tax Rates - Consider the tax rates applicable to the company and LLP structures. There is a significant difference between LLP and company structure tax rates. You can choose the structure that most benefit you based on your total income or turnover.
  • Personal liability protection - Personal liability protection is another important aspect to consider when choosing between LLP and a company. While LLP offers limited liability protection, the company structure considers the company as a separate legal entity, thereby protecting the shareholders' personal assets.

Choosing a company structure or an LLP structure depends on your business's nature, size, and capital requirements. Now that you know the difference between LLP and a company, you can choose the best one as per your needs. You can also take assistance from an eCA to get better insights and make the best decision.

Frequently Asked Questions

Q- What are the benefits of being an LLP in Income Tax?

While both LLPs and companies are subject to a tax rate of 30%, LLPs do not have to pay a surcharge over the tax. This is one of the primary benefits of choosing an LLP over a company.

Q- How is a company better than LLP?

If your business is large and has significant funds requirements, it is better to choose a company. Fundraising can be done from different sources and is easier than an LLP.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.