While starting a business, an important decision that entrepreneurs need to make is to decide the form of business entity they want their start-up to be. Choosing the right business entity is important because it decides the future ‘glitch-free’ functioning of the business.

The type of business an entrepreneur chooses is significant as it makes an impact on the business, including the key areas of the business such as taxation, legal liability and the control you have over your business. Some of the factors to consider when choosing a business entity for your business includes-

  • Protection of liability
  • Ease of formation
  • Ease of taxation
  • Ability to raise capital
  • Control over the business
  • Flexibility of functioning
  • Future of the business

There are a number of business types to choose from such as sole proprietorship, partnership, private limited company and limited liability partnership. Often the confusion that entrepreneurs face is whether to choose a limited liability partnership or a private limited company, as both have certain similarities and their own share of positives and negatives. A comparison between the two will help decide which one is more suitable for your business.

Comparison between LLP and Private Limited Company

Registration Process and Documents Required

Entrepreneurs would definitely need to know the registration cost of both the processes as for a start-up, thus making the registration cost as well as the LLP registration procedure and registration process for a private limited company a deciding factor between the two entities.

  LLP Private Limited Company
Registration Fees- LLP comparatively costs less as the Government fee for registration is less. The Government fee for registration of a private limited company is comparatively more than for LLP.
Registration Process Registration of LLP is executed as per the Limited Liability Partnership Act, 2008 and it is registered under the Registrar of LLP. Registration of a private limited company is executed as per the Companies Act, 2013 and it is registered with the Registrar of Companies.
Documents for Registration and Procedure LLP registration has the following procedure for registration along with documents- Digital Signature Certificate (DSC) for the proposed PartnersDirector Identification Number (DIN) / Designated Partner Identification Number (DPIN)  for the proposed PartnersName approval from MCA Filing for incorporation Private Limited Company registration process and documents include- Digital Signature Certificate (DSC) for the proposed DirectorsDirector Identification Number (DIN) for the proposed DirectorsName approval from MCA Filing for incorporation

Liability

The liability of both business entities is an important comparison factor.

  LLP Private Limited Company
Liability It has limited liabilityLiability of members is limited to shares and also to the amount that has been invested in the firm in any form It has limited liabilityLiability of members is limited to shares the possess

Features

In terms of features, there is not much difference between the two business entities, but the entrepreneur can consider his business objectives when looking at the features.

  LLP Private Limited Company
Features Features of LLP are- It is a separate legal entityThere are partners in an LLPLLP needs a minimum of 2 partners and 2 designated partners; there is no upper limit on the number of partnersWhile naming, the term LLP needs to be used at the end of the name of the companyThe assets and liabilities are separate from that of the promotersIt is transferable but the process is not as flexible as that of a private limited companyIt is perennial, unless closed by promoters or competent authorityClosure of LLP is relatively more simpler as compared to for private limited companyWhistleblowing partners or members are provided protection if they provide useful information Features of Private Limited Company are- It is a separate legal entityThere are members in a private limited companyPrivate limited company needs a minimum of two members, two shareholders and two directors for the incorporation and a maximum of fifteen directors and the upper limit is two hundred While naming the company the term ‘private limited company’ needs to be used at the endThe assets and liabilities are separate from that of the promotersThere is greater flexibility for transferring or sharing the company ownershipIt is perennial, unless closed by promoters or competent authorityClosure of private limited company is more challenging technically, as well as, time-consumingThere is no protection or provision for members in case of whistleblowing

Taxation Structure

The taxation structure is also a significant deciding factor that helps compare and distinguish between the two types of business entities.

  LLP Private Limited Company
Tax Structure They are liable to pay only 2 types of taxes-income tax and alternate minimum taxThe tax structure is simpler for LLP They are liable to pay tax on the earnings (income) of the companyThey also have to pay dividend distribution tax and an alternate minimum tax

Voting Rights of the Business Entity

The voting rights for the members of the business entity are to be considered as well.

  LLP Private Limited Company
Voting Rights Voting rights are decided as mentioned in the LLP agreement It is decided on the basis of the number of shares a shareholder holds

Audits

The audits and other compliance factors make an impact on the functioning of the business entity too and need to be taken into account.

  LLP Private Limited Company
Audits LLP does not have to audit its account if its annual turnover is less than Rs forty lakhs A private limited company has to audit its account annually and file the same with the Ministry of Corporate Affairs (MCA)

Limited Liability Partnership and Private Limited Company each have their own set of benefits, the former is more flexible though relatively newer while the latter is more established and tried and tested successfully over the years.

The decision for the entrepreneur must be made depending on his business needs and goals.