Private Limited Company vs. Limited Liability Partnerships

MARCH 15, 2024
Private Limited Company vs. Limited Liability Partnerships

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.

  • Limited Liability: The liability of Shareholders is limited. Personal assets are generally protected from business debts.
  • 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.
  • Ownership: Owned by shareholders who hold shares in the company. Transfer of ownership is facilitated through the buying and selling of shares.
  • 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.
  • Number of Shareholders: Requires a minimum of two shareholders and can have a maximum of 200 shareholders.
  • 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.
  • Investment and Funding: 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.

Register your Private Limited Company in just 1,499 + Govt. Fee

Register your business

* 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: Similar to a private limited company, partners in an LLP have limited liability.
  • 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.
  • Ownership: Owned by partners, and the ownership structure is defined by the LLP agreement. Transfer of ownership usually requires the consent of other partners.
  • 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.
  • Number of Partners: Requires a minimum of two partners, and there is no maximum limit on the number of partners in an LLP.
  • 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.
  • 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

    Register your Limited Liability Partnership in just 1,499 + Govt. Fee

    Register your business

    * 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.

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    Private Limited Company
    (Pvt. Ltd.)

    1,499 + Govt. Fee
    BEST SUITED FOR
    • Service-based businesses
    • Businesses looking to issue shares
    • Businesses seeking investment through equity-based funding


    Limited Liability Partnership
    (LLP)

    1,499 + Govt. Fee
    BEST SUITED FOR
    • Professional services 
    • Firms seeking any capital contribution from Partners
    • Firms sharing resources with limited liability 

    Private Limited Company
    (Pvt. Ltd.)

    1,499 + Govt. Fee
    BEST SUITED FOR
    • Service-based businesses
    • Businesses looking to issue shares
    • Businesses seeking investment through equity-based funding


    Limited Liability Partnership
    (LLP)

    1,499 + Govt. Fee
    BEST SUITED FOR
    • 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."

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    Smooth onboarding, seamless incorporation and a wonderful community. Thanks to the #razorpayrize team! #rizeincorporation
    Dhaval Trivedi
    Basanth Verma
    shopeg.in
    Exciting news! Incorporation of our company, FoxSell, with Razorpay Rize was extremely smooth and straightforward. We highly recommend them. Thank you Razorpay Rize for making it easy to set up our business in India.
    @foxsellapp
    #razorpayrize #rizeincorporation
    Dhaval Trivedi
    Prakhar Shrivastava
    foxsell.app
    We would recommend Razorpay Rize incorporation services to any founder without a second doubt. The process was beyond efficient and show's razorpay founder's commitment and vision to truly help entrepreneur's and early stage startups to get them incorporated with ease. If you wanna get incorporated, pick them. Thanks for the help Razorpay.

    #entrepreneur #tbsmagazine #rize #razorpay #feedback
    Dhaval Trivedi
    TBS Magazine
    Hey, Guys!
    We just got incorporated yesterday.
    Thanks to Rize team for all the Support.
    It was a wonderful experience.
    CHEERS 🥂
    #entrepreneur #tbsmagazine #rize #razorpay #feedback
    Dhaval Trivedi
    Nayan Mishra
    https://zillout.com/