When an ordinary person wants to start a business, it is frequently uncertain whether the business structure is best for the new business entity. There are numerous different business structures an entrepreneur can use, but the private limited company and the LLP are the most popular.
These are the common pillars on which an entrepreneur can build his empire, and this article explains the choices they should make when starting a business: -
Benefits of LLP or drawbacks of Pvt. Ltd.
1) Unlike Private Ltd., the owners, and management of LLP are the same. In Pvt. Ltd. Owners of the company, or shareholders, do not have management authority.
2) There are fewer annual compliances, making it more economical to operate an LLP than a Pvt Ltd., which must comply with numerous additional requirements each year.
3) LLP is permitted to borrow money from individuals, whereas Pvt Ltd is not permitted to do so.
Benefits of Pvt. Ltd. or drawbacks of LLP
1) The income tax rate for LLPs is substantially higher and begins at 30%, whereas the rate for private limited companies begins at 22%.
2) In contrast to private limited companies, LLPs find it difficult to attract outside cash and investments.
3) LLP cannot distribute its ownership (equity, preference shares) to important individuals, such as employees, although private limited companies can easily do so through ESOP, advisor's equity, etc.
Penalties- Pvt.Ltd.v/s LLP
Numerous private limited corporations disregard MCA rules, which results in high fines of up to 1 lakh each year. With an LLP, it's doubtful that you wouldn't be able to comply because the maintenance fees are cheap. It is more affordable because you can avoid severe fines and penalties altogether as a result.
As a result, you want to think about using the LLP business structure if you intend to launch a company that won't require you to obtain capital or recruit staff through ESOPs. They'll lower your maintenance expenditures and also make it simpler for you to maintain and adhere to rules.
Tax compliance requirements are the same for LLPs and private limited companies. LLP, however, has a number of advantages when it comes to compliance with the Ministry of Corporate Affairs. If an LLP's yearly revenue is less than Rs. 40 lakhs and its capital investment is less than Rs. 25 lakhs, it is not required to have its accounts audited. However, an LLP would need to submit LLP Form 8 and LLP Form 11.
On the other hand, a private limited corporation would need to submit yearly reports and audited financial statements to the Ministry of Corporate Affairs every year.
Registration Cost-Pvt.Ltd v/s LLP
When compared to the government fee for incorporating a Private Limited Company, the government fee for incorporating an LLP is much less. Since LLPs were created to serve the needs of small enterprises, they pay a lower government incorporation charge. In addition, there are fewer documents required for LLP registration than for Private Limited Company registration to be printed on Non-Judicial Stamp Paper and notarized.
Other Factors-Pvt.Ltd v/s LLP
Compared to LLPs, private limited companies have been around for longer and are well-known both in India and outside. As a result, Private Limited Companies have well-established systems and procedures. On the other hand, LLPs are a relatively new entity in India. As a result, some of the laws, ordinances, and practices are still changing. Given that they are a relatively new idea, LLPs are also not as well known in India as a private limited company.
Compared to an LLP, a private limited company gives its promoters a stronger reputation or status. Additionally, private limited companies have easier access to bank financing and foreign FDI.
Your firm will be more efficient if you use the money, time, and effort you save on more crucial aspects of your operations. However, be careful while making such choices because they may have a big effect on your company.
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