Starting a business in India? Fantastic! Now, let's tackle the first big decision – registering your business. So, how do you choose the appropriate legal structure for your business?
Private Limited Companies and Limited Liability Partnerships (LLPs) emerge as the two most prevalent options. In this blog, we are highlighting the distinctions between these legal structures, providing insights that can empower you to make an informed decision.
Difference between Private Limited and Limited Liability Partnerships
Private Limited Companies and LLPs are two distinct forms of business structures, each with its own set of characteristics, advantages, and disadvantages. Here's a brief comparison between the two:
Private Limited Company
Limited Liability Partnership
Governing Act
Governed by the Companies Act
Governed by the Limited Liability Partnerships Act
Suitable For
Financial Services, Tech Startups, Medium Enterprises
Consultancy firms, Professional Services
Shareholders/ Partners
Minimum- 2
Maximum- 200
Minimum- 2
Maximum- Unlimited
Minimum Capital Requirement
No minimum capital requirement, but it is often advised to set the authorized capital at ₹1,00,000 (One Lakh) INR
No minimum capital requirement, but it is often advisable to consider an initial capital of ₹10,000 INR
Tax Rates
The basic tax rate, excluding Surcharge and Cess-25%
The standard fixed rate- 30% on their generated earnings.
Fundraising
Easier to raise funds from Investors
Raising funds can be challenging
Transfer of Shares
Shares can be easily transferred by amending AOA
Transfer of partnership rights may require the consent of other partners and is generally more complex
ESOPs
Can issue ESOPs to the Employees
Unable to issue ESOPs to the Employees
Agreements
Duties, Responsibilities, and other basic clauses outlined in MOA and AOA
Duties, Responsibilities, and other basic clauses outlined in MOA and AOA
Compliances
• More compliance costs
• Mandatory 4 Board Meetings
• Mandatory Statutory Audits
• Mandatory filings include Annual financial statements in form AOC-4 and annual returns in Form MGT-7, etc.
• More compliance costs
• Mandatory 4 Board Meetings
• Mandatory Statutory Audits
• Mandatory filings include Annual financial statements in form AOC-4 and annual returns in Form MGT-7, etc.
Dissolution
More complex
Can be initiated by filing STK-2 form
Less Complex
Can be initiated by filing the Form 24.
While the differences between LLPs and Private Limited Companies are numerous, they share similarities in key aspects:
- Limited Liability
- Separate Legal Identity
- Registration Process with the MCA
- Perpetual Succession
Let’s understand the key features and registration process in detail for both Private limited companies and LLPs.
What is a Private Limited Company?
A Private Limited Company is a type of business structure that is characterized by limited liability and a separate legal entity. Listing down some key features of a Private Limited Company below:
1. Limited Liability
The liability of Shareholders is limited. Personal assets are generally protected from business debts.
2. Separate Legal Entity
A Private Limited Company is considered a distinct legal entity from its owners (shareholders). It can enter into contracts, own property, and sue or be sued in its own name.
3. Ownership
Owned by shareholders who hold shares in the company. Transfer of ownership is facilitated through the buying and selling of shares.
4. Management
Managed by directors who are appointed by the shareholders. The day-to-day operations are overseen by the management team, while major decisions are often subject to shareholder approval.
5. Number of Shareholders
Requires a minimum of two shareholders and can have a maximum of 200 shareholders.
6. Regulation and Compliance
Governed by the Companies Act and regulated by the Ministry of Corporate Affairs in India. Compliance includes filing annual financial statements, conducting annual general meetings, and maintaining statutory records.
7. Regulation and Compliance
Easier to attract investment and funding compared to other business structures due to the well-defined ownership structure and limited liability.
Private Limited Company Registration
The Ministry of Corporate Affairs (MCA) has introduced a streamlined process for incorporating companies called Simplified Proforma for Incorporating Company Electronically Plus (SPICe+), consisting of two parts: Part A and Part B.
1. Step 1: Acquire a Digital Signature Certificate (DSC)
• A Digital Signature Certificate (DSC) is a digital method of verifying or attesting documents.
• It is typically issued with one or two-year validity and is mandatory for all witnesses in the Memorandum of Association (MOA) and Articles of Association (AOA).
• Class 2 or 3 DSCs can be obtained through listed Government Certifying Agencies (CAs).
2. Step 2: Apply for Name Approval using SPICe+ Part A
• Part A facilitates 'Name Reservation' with two proposed names and one re-submission (RSUB).
• In case of name rejection due to various reasons, a re-filing with the specified fee is required.
Note: Simultaneous application for name approval (Part A) and Incorporation (Part B) through SPICe+ is possible, but only one name can be reserved.
3. Step 3: Apply for Company Registration using SPICe+ Part B
After name approval, Part B completes the registration process, including:
- • Application for allotment of Director Identification Number (DIN)
• Incorporation of the new company
• Submission of e-MoA (INC-33) and e-AoA (INC-34)
• Application for PAN and TAN (mandatory)
• Application for EPFO registration (mandatory)
• Application for ESIC registration (mandatory)
• Application for Professional tax registration (only for Maharashtra)
The entered information in SPICe+ Parts A and B is automatically transferred to associated forms like AGILE-PRO, eAoA, eMoA, URC1, and INC-9, as applicable.
4. Step 4: Open a Bank Account
Open a current account for your company to facilitate seamless financial transactions and business operations, handling various aspects such as receiving payments, making supplier payments, and managing payroll.
5. Step 5: File for the Commencement of Business Certificate
The Commencement of Business Certificate, filed through Form INC-20A within 180 days of incorporation, is a declaration by the Director of the Company submitted to the Registrar of Companies.
* Effective 15th July, 2024, DSC charges have increased by ₹ 1,000 per DSC, by the Government. This will be chargeable over and above the given prices.
After the SPICe+ Form receives approval, the Registrar of Companies (ROC) issues the Certificate of Incorporation, confirming the successful registration of your company.
This certificate includes vital information such as the Company's name, registration number (CIN), date of incorporation, registered office address, and so on.
Example of CIN: U72200KA2013PTC097389
Read more about what each letter in a CIN signifies here.
What is a Limited Liability Partnership?
A Limited Liability Partnership (LLP) is a business structure that combines features of both a traditional partnership and a limited company. Limited Liability Partnerships are often chosen by professional services firms, small businesses, and ventures where the partners want the flexibility of a partnership along with the protection of limited liability.
Some key characteristics of a Limited Liability Partnership are:
1. Limited Liability
Similar to a private limited company, partners in an LLP have limited liability.
2. Separate Legal Entity
An LLP is a distinct legal entity from its partners. It can own property, enter into contracts, and sue or be sued in its own name.
3. Ownership
Owned by partners, and the ownership structure is defined by the LLP agreement. Transfer of ownership usually requires the consent of other partners.
4. Management
Managed by partners or a designated management team, as specified in the LLP agreement. Each partner typically has an equal say in the management decisions, making it a more collaborative structure.
5. Number of Partners
Requires a minimum of two partners, and there is no maximum limit on the number of partners in an LLP.
6. Regulation and Compliance
Governed by the Limited Liability Partnership Act in India, with less stringent regulatory requirements compared to a private limited company. Compliance involves filing annual returns and maintaining statutory records.
7. Flexibility
Offers greater flexibility in terms of internal management and decision-making processes compared to a private limited company.
Limited Liability Partnerships Registration
Here's a simplified guide on the steps for Limited Liability Partnership (LLP) registration:
1. Step 1: Apply for DSC
- Obtain a Digital Signature Certificate (DSC) from Government Certifying Agencies with one or two-year validity.
2. Step 2: Name Reservation
- Reserve the LLP's name using the LLP-RUN form.
3. Step 3: Apply for Registration through FiLLiP
- Complete the FiLLiP (Form for Incorporation of Limited Liability Partnership) and submit it to the Registrar. Alongside FiLLiP, submit the Subscriber sheet and Partner's consent (Form 9) as additional documentation.
4. Step 4: File LLP Agreement
- File the LLP Agreement using Form 3 on the MCA portal within 30 days of LLP registration.
After the FiLLiP Form receives approval, the Registrar of Companies (ROC) issues the Certificate of Incorporation, a crucial legal document confirming the successful registration of your company.
This certificate includes vital information such as the LLP's name, registration number (LLPIN), date of incorporation, registered office address, and more.
Example of LLPIN: AAA-1234
* Effective 15th July, 2024, DSC charges have increased by ₹ 1,000 per DSC, by the Government. This will be chargeable over and above the given prices.
Company Registration with Razorpay Rize
Experience a hassle-free, 100% online business registration process with Razorpay Rize, featuring the lowest professional fees and absolutely no hidden charges. Explore the diverse range of services tailored to suit the needs of both startups and established businesses.
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
(LLP)
- Professional services
- Firms seeking any capital contribution from Partners
- Firms sharing resources with limited liability
* Effective 15th July, 2024, DSC charges have increased by ₹ 1,000 per DSC, by the Government. This will be chargeable over and above the given prices.
Our package includes:
- Company Name Registration
- 2 Digital Signature Certificates (DSCs)
- 2 Directors’ Identification Numbers (DINs)
- Certificate of Incorporation(COI)
- MoA & AoA [Applicable for Private Limited Companies and OPCs]
- LLP Agreement [Applicable for LLPs]
- Company PAN & TAN
*Prices and documents can differ based on the company type.
Which company type should you register your business with?
Before proceeding with the registration of either an LLP or a company, it is crucial to evaluate the following factors carefully.
• Consider the nature and size of your business
- If you operate a small business with a limited workforce, opting for LLP registration might be more favorable, given the relatively lighter compliance requirements compared to a company. On the other hand, for larger businesses with substantial employee numbers and capital needs, registering as a company provides greater flexibility in raising capital.
• Fundraising requirements
- If your goal is to raise funds through equity, choosing a company structure is imperative. However, if your fundraising needs are more straightforward, the LLP structure may be a more suitable option.
• Tax rates
- It's essential to compare the tax rates applicable to both company and LLP structures, as there can be significant differences. Opt for the structure that aligns with your financial goals based on total income or turnover.
• Personal liability protection
- While an LLP offers limited liability protection, a company structure treats the company as a distinct legal entity, safeguarding shareholders' personal assets.
Ultimately, the choice between a company structure and an LLP structure hinges on the unique characteristics of your business, including its nature, size, and capital requirements.
Find Your Ideal Company Type
If you still need more help deciding which company type to register with, don't worry! We’ve got you covered with our latest tool - "Know Your Company Type."
Know Your Company Type
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