In this blog post, Rounak Biswas, a fourth-year law student at Symbiosis Law School, Pune, and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the advantages of an LLP over a Private Limited Company. 

Introduction

Limited Liability Partnership (LLP) and Private Limited Companies are recent developments in the field of corporate law in India. LLP was introduced in India through LLP Act, 2008 whereas Private Limited Company is an old vehicle having its rules modified in 2013 by the Companies Act, 2013. Nowadays one can see that these two have become the most widely used vehicles in doing business. Here in this blog, I have intended to put up the differences between the two, and how LLP is better than Private Limited Company.

Definition – LLP and Private Limited Company (LLC)

LLP can be defined as a hybrid of a company and partnership incorporating the good points of both so as to facilitate the business. The LLP structure is not restricted to be used by a certain class of professionals but by anyone who wants to do business. In a simple kind of partnership, all the partners are jointly and severally liable for their actions, which is not true for an LLP. A partner is liable only for his act and only to the extent of his contribution of its capital. In a word, LLP has distinct legal identity compared to its partners[1]. LLP needs at least two designated partners while incorporation. However, there is no limitation as to the maximum number of partners in an LLP. LLP has perpetual succession.

A Private Limited Company is defined as a voluntary association of at least two members and not more than two hundred members. Like LLP they have a perpetual succession and have limited liability. However, the shares held by the members are not freely transferable, and if a transfer is allowed, that should be between the existing members of the company.

LLP and Private Limited Company – Key Points

Limited Liability Partnership (LLP) and the Private Limited Company has certain differences which are entirely understandable in the definition only. Both LLP and Private Limited Company have certain similarities when it comes to the incorporation. For example – at least two persons/ members are required for setting up an LLP and Private Limited Company. The only difference here being an LLP does not have any maximum limit as to the upper limit of the membership whereas LLC has an upper limit of two hundred when it comes to the shareholders.

When it comes to the incorporation of LLP, one needs to apply for the Designated Partner Identification Number (DPIN) for the two designated partners of the partnership and digital signatures should be obtained for at least one of them who will be authorised to work in case of the legal, taxation and compliance matters. This is followed by an application for the name availability and obtaining a name for the LLP to be incorporated. This is followed by making of an LLP agreement and filing of incorporation document available with the registrar of companies and on successful filing certificate of registration is being given. In the case of LLC, the first and foremost task is to select the name of the company followed by the application for Director Identification Number (DIN) and digital signatures. This is followed by the drafting of Article of Association (AoA) and Memorandum of Association (MoA). The AoA, MoA, and other documents (if mentioned) on being filed successfully, Certificate of Incorporation of the LLC is being given. This charts out how the LLP and LLC are being formed.

Now coming to the point where they differ, the same can be understood in a better and detailed way in the below umentioned tabular form –

Advantages of LLP over Private Limited Company – Conclusion

Thus barring a few condition, and the disinterest of Venture Capitalists and Angel Investors due to more or less risky nature of investments LLP is far more advantageous then LLC as on one hand the compliance cost is less and on the other hand taxation is less too in case of LLP. The simplicity in carrying business under LLP places it in a far more advantageous position than the LLC. It does not mean that everyone should start following the LLP model of business. But it can be said that the way LLP helps in facilitating the business is almost unrivalled, and the LLC are placed in a little bit disadvantageous position due to this, as we all know the human tendency is always to do something which involves lesser costs.

References:

[1] http://www.charteredclub.com/what-is-a-limited-liability-partnership-llp/