When choosing a business setup for your startup in India, both limited liability partnerships (LLPs) and private limited companies (Ltd.) are common options. However, LLPs have various benefits that make them an extremely interesting alternative for many businesses, particularly those in their initial stages, like small businesses. Let’s discuss both types in detail in this blog.
Factors to consider while setting up a business
Before registering your business, it is necessary to keep in mind and consider various factors, such as those listed below.
Type and size of a company/business:
If your business has very few employees, it is better to register your small business under an LLP. This is due to the fact that the compliance requirements are lower for an LLP than those of a Pvt.Ltd. company. On the contrary, you must form a private corporation since it allows greater flexibility in obtaining cash, especially if your firm is huge, requires a lot of capital, and employs a large number of employees.
Tax rates:
Take into account the tax rates that apply to both company and limited liability partnership types. The tax rates for companies and limited liability companies (LLPs) fluctuate greatly. Depending on your overall revenue or turnover, you may select the structure that suits you the best.
Fund-raising requirements:
Before making a decision, take into account your fund-raising requirements. You have to decide on a business structure if you wish to raise money through equity. If your needs are more straightforward, the LLP structure can be a better option.
What is an LLP?
Limited Liability Partnership (LLP) is one of the most common types of businesses found in India. An LLP is defined as any organisation or business established and registered under the Limited Liability Partnership Act, 2008.
Pros of LLP registration
Let’s look at some of the few benefits of an LLP.
Liability Protection: One of the primary advantages of an LLP is that its partners are not personally liable. Similar to any company or firm, partners’ personal assets, such as apartments, vehicles, and other properties, can be safeguarded from creditors if your business encounters financial difficulties. This protection gives business owners piece of mind, knowing that personal assets will not be liable for corporate obligations.
Suitable for Professionals: LLPs are a great option for companies that employ professionals as partners, such as accountants, healthcare professionals, or attorneys. They are kept out of being held personally accountable for the carelessness or misconduct of other partners. For example, in an LLP, the personal assets of the other partners would not be in danger in the event of a mistake by one professional. This lets professionals share the benefits, responsibilities, and challenges of operating a company jointly while protecting their individual funds.
Cost-Effective:
Lesser startup costs:
LLP registration charges are often lower than those of Pvt. Ltd. companies. This can be a major advantage for self-funded firms with relatively little initial funding. You can reach out to us here to know about the cost of registering your company as an LLP with us.
No Minimum Capital Requirement: Unlike Pvt. Ltd. corporations, which require a minimum paid-up capital, there is no such requirement when setting up an LLP. This enables you to establish your business without requiring a huge initial expenditure, making it easier to get your business off the ground.
Flexibility in Ownership and Management: LLPs offer greater flexibility in terms of profit-sharing, management, and ownership agreements than companies with strict share patterns. The partners can negotiate experience, share of profits, hours spent, and individual competence by creating an LLP agreement that meets all their needs. This adaptability enables a more personalised strategy that highlights the distinct contributions of each partner and promotes teamwork.
What is a private limited company?
A private limited company, or Pvt.Ltd. company, is a type of privately held business organisation that has few shareholders and a minimum of 2 directors to operate.
Eligibility for Pvt. Ltd. company
The eligibility to start a private company is listed below:
- must have minimum 2 shareholders
- minimum 1 director
- size of the company (around a maximum of 200 employees)
Differences between LLP and Pvt. Ltd. company:
| Below is a table that summarises the vital differences between the features of an LLP and a Pvt. Ltd. company. | |||||||||||||||||||||||||||||||||||
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Final Thoughts
We have seen the major differences between an LLP and a Pvt. Ltd. company in this blog. Both types of companies come with their own pros and cons. While registering your business, you must keep in mind various factors, like financial requirements and long-term goals, and the number of employees of your company. We recommend you talk with an experienced lawyer or tax professional who can guide you by providing helpful advice according to your business needs.
Frequently Asked Questions (FAQs)
1. Is an LLP or Pvt company better for small businesses?
Any small business can be better off with an LLP registration, as it provides greater flexibility and less paperwork. In this way, you can rest assured that your business will start within a shorter time period. Nevertheless, before making a choice, the unique requirements of the business have to be taken into account.
2. How is an LLP taxed?
1. Income Tax Rate
Flat Tax Rate: LLPs are taxed at a flat rate of 30% on their total income.
Surcharge: A surcharge of 12% is applicable if the total income exceeds ₹1 crore.
Health and Education Cess: A cess of 4% on the income tax plus surcharge is applicable.
2. Alternate Minimum Tax (AMT)
LLPs are subject to Alternate Minimum Tax (AMT) at the rate of 18.5% (plus surcharge and cess) on the adjusted total income.
Adjusted total income is calculated by adding back certain deductions to the total income.
3. How much capital is required to start a private company?
According to the Company Amendment Act 2013, a minimum capital of 1,00,000 INR is required as a prerequisite to register your business as a private company.
4. How much time is required to register a business under an LLP or Pvt. Ltd. company?
The time taken to process any business registration with us is between 7 and 20 days.
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