Private Limited Company vs LLP structure for startups

Krrishan Gopal Singhania is a practicing corporate lawyer with over 20 years of experience in the field of arbitration. He runs his own law firm, Singhania & Co. Krrishan has extensive exposure to the international legal arena, he has been instrumental in securing IPRs such as Trademark, Patent and Copyrights, for foreign companies.

Krrishan Singhania: Many Entrepreneurs starting a new business are curious about the comparison between a Private Limited Company vs. LLP. Both entities offer many similar features required to run a small to large sized business, while also differing starkly on certain aspects. This article compares Private Limited Company and LLP from the viewpoint of an Entrepreneur starting a new business.

• LLP and Private Limited Company are both transferable, though a Private Limited Company offers more flexibility when it comes to transferring or sharing of ownership. LLP and Private Limited Company both have perennial life, unless and otherwise closed by the promoters or a competent authority

• Private Limited Company offers more flexibility for the promoters when it comes to ownership and ownership sharing. The ownership of a Private Limited Company is determined by its shareholding and a Private Limited company can have upto 200 shareholders. Further, since the shareholders do not directly participate in the management of the company, there is a clear distinction in a Private Limited company between the owners of share and the management. Hence, Private Limited Company is advantageous when it comes to ownership and management features.

In a LLP, there is not a clear distinction between the owners and management. In a LLP, the LLP Partners hold ownership of the LLP and also hold powers to manage the LLP. Therefore, a Partner in a LLP will be both a owner and a manager, whereas in a Private Limited Company, the shareholders (owners) do not necessarily have to have management powers.

A Private Limited company is recommended for any business that is considering FDI or Employee Stock Options or Equity funding or Venture Capital funding. 

• Private Limited companies have been in existence for longer than LLPs and enjoys widespread recognition in India and the world. Therefore, there are well established processes and procedures for Private Limited Companies. LLPs on the other hand is a recently introduced entity in India. Therefore, some of the rules, regulations and procedures are continuing to evolve. LLPs are also not as recognized in India as a Private Limited company, since it is a relatively new concept.

• Private Limited Company offers its promoters a better image or standing than that of a LLP. Private Limited Company also enjoys better access to funding from banks and foreign direct investment.

• The penalty for non-compliance or late filing of documents with the Ministry of Corporate Affairs are most of the times higher for a LLP as a flat fee of Rs.100 per day is levied when the non-compliance continues with no cap on the liability. Therefore, LLPs could incur larger penalty or fines from MCA due to non-compliance.

• As per FDI Policy, FDI in LLP is allowed only through Government route, FDI in LLP under automatic route is not permissible. Further FDI in LLP through Government route is allowed to only those sectors where 100% FDI is allowed under automatic route under the FDI policy. Foreign company or individual can invest in LLP in India but it requires prior government approval.

In Private Limited companies, under the automatic route, no prior permission of the Foreign Investment Promotion Board (FIPB) or Reserve Bank of India (RBI) is required for FDI in a Private Limited Company. The Company must only file certain filings relating to the FDI with the Reserve Bank of India after receipt of the share subscription money from the foreign or non-resident investor and issuance of shares. Further, under the automatic route, the investment cannot be made in a company which required an industrial license under the Industries Act, 1951 or for acquisition of another Indian company existing shares or for financing an expansion.

• LLP is not allowed to raise External Commercial Borrowing (“ECB”). Thus LLP cannot take commercial loans from its foreign partners, FII’s (Foreign Institutional Investors), banks from outside India, any financial institution outside India or any other entity outside India. A public and Private Limited company can take loan from other company and body corporate in and outside India.