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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.
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.
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.
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. |
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.
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.
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.
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.
