Running a business is one of the best ways to achieve financial independence and carve your path on your terms. But a lot of effort goes into setting up a business. For starters, you need to formulate a business plan. The plan usually involves naming the company, arranging the funds, and planning the operations. As anaspiring entrepreneur, you need to also decide whether you should register your business as an LLP or Pvt Ltd entity.
LLP Vs Pvt Ltd – An overview
A Limited Liability Partnership (LLP) is a business entity that comes with the benefits of a private limited firm and a partnership firm. Regardless of the number of partners in an LLP, all partners have limited liability towards the company. The liability is limited to the contribution they themselves have made. One partner is not held responsible for the other partners’ liabilities. LLP follows guidelines laid down by the Limited Liability Partnership Act, 2008.
In a Private Limited (Pvt Ltd) company, private investors hold shares, and the public cannot trade those shares on the stock exchange. In a Pvt Ltd company, shareholders may differ from the company owners. Therefore, profits and liabilities are typically shared among the company owners, per the Companies Act 2013.
Differences between Pvt Ltd and LLP
Let us understand the key differences between Pvt Ltd and LLP firms.
Number of members and partners
LLPs must have a minimum of two partners/members. However, there is no limit to the maximum number of partners/members. A minimum of two members are required to incorporate a Pvt Ltd company; the maximum number can be two hundred. A Pvt Ltd company must have minimum two directors and maximum fifteen directors.
Board meetings
Private Limited companies must hold at least four board meetings with a 120-day gap between two sessions. These meetings must be conducted every financial year. Furthermore, all shareholders must attend a mandatory meeting once a year. In the case of LLP firms, such board meetings are not mandatory.
Foreign investment
Foreign investors can invest in both LLP and Pvt Ltd companies. A Foreign Direct Investment (FDI) is permitted via the automatic route, i.e., government approval is not necessary. However, in the case of Pvt Ltd companies, sectors such as petroleum, defence, print media, postal and courier, etc., are not covered under the automatic route. Companies from such sectors require prior approval from the Foreign Investment Promotional Board (FIPB).
Tax compliances and audits
A Pvt Ltd company must conduct a statutory audit without fail. An audit is not mandatory for LLPs unless the annual turnover or partner contribution exceeds ₹40 Lakh or ₹20 Lakh, respectively. Both companies must file their financial statements along with supporting forms with the Registrar of Companies (RoC) every year. The required forms include LLP forms 8 and 11 for LLPs and AOC 4 and MGT 7 for Pvt Ltd.
Share transferability
Transfer of shares in a Pvt Ltd company may be limited by the Articles of Association (AoA). Partners can transfer shares in LLPs by passing a resolution with agreement from existing partners.
LLP Vs Private Limited – The verdict
LLPs and Pvt Limited are similar in some ways. Both have limited liabilities; they do not require minimum share capital, and both must be registered with the Ministry of Corporate Affairs (MCA). Hence, it would be best if you determined the better option based on the business structure that best suits your financial operations and management.
Pvt Ltd companies must undergo the auditing process regardless of the turnover, and they need private investors. Therefore, businesses with high turnover that need to raise money from equity funding can opt for a Private Limited company.
LLPs offer flexible business operations and lower compliance, making them ideal for small businesses or start-ups requiring lower capital costs.
Business Solutions with HDFC Bank
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Read more about how to open a company here.
*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.