LLP or Private Limited Company? It is the first and foremost question anyone will have while planning to start a new venture. Definitely, it is good to plan everything properly to avoid any hassles in the future. Deciding and choosing a good option before incorporating will not only save you from unnecessary mental agony and also a heap of money.
There are several advantages and disadvantages in both the forms. Let me list out those advantages and disadvantages, so that you can choose the best for you.
Advantages of LLP:
- No of Partners: Minimum 2 Partners required. There is no maximum number of partners. It is the best vehicle for a law firm as two lawyers can start small and grow it to a huge firm with hundreds of partners.
- Cost of incorporation: LLP formation is relatively cheaper than incorporating a private limited company. So it is suitable for start-ups with less capital.
- Compliance requirements: Compliance is very simple with LLP and you don’t even have to hire an auditor to file returns if your turnover is less than Rs.40 Lakhs and your capital is less than Rs.25 Lakhs. Hence, forming an LLP will save you a lot in recurring expenses.
- Limited Liability, Juristic Person: As like a Private Limited Company, LLP has perpetual existence, limited liability and is a separate juristic person and hence an LLP can own property in India.
- Transfer of ownership: Ownership of LLP can be transferred easily by adding the transferee as a partner.
Disadvantages of LLP:
- Lack of Recognition: LLP is a new form of entity in India, although it is existing for a long time worldwide, hence there is a lack of recognition of LLP in India.
- Difficulty in raising funds: It is little difficult for LLP to raise funds as Private Equity and Venture Capital investors are not preferring to invest in LLP. It is because there is no provision for shareholders and dividends.
Advantages of Private Limited Company:
- A well-recognised form of business: It is a well-recognised form of business in India which is the first choice of entrepreneurs for several decades.
- Raising of Funds: It is easy to raise funds by issuing shares and Venture Capitalists prefer to invest in Private Limited Company than an LLP.
- Limited Liability, Juristic Person: Private Limited Company has perpetual existence, limited liability and is a separate juristic person and hence can own property in India.
- Transfer of ownership: It is easy to transfer ownership or part of the holdings by a person.
Disadvantages of Private Limited Company:
- Number of Persons: Maximum number of members in Private Limited Company is restricted to 50.
- The Cost of Incorporation: Cost of incorporation is on the higher end for a Private Limited Company.
- Compliance Requirements: Private Limited Company has to file audited returns every year. It has more compliance requirements than an LLP. Hence a Private Limited Company will have high recurring expenses than an LLP.
You should choose a form of business based on your individual requirements. For example, if you are starting a law firm and wish to grow it huge with more than 50 partners, you should obviously choose LLP. If you are a start-up and need to raise funds in the future, you should prefer a Private Limited Company which is well-recognised and endeared the venture capitalists.
If you are a family business and wants less initial set-up cost, fewer compliance requirements and less recurring expenses, you may choose to form an LLP.
In my opinion, if you are not looking to raise funds, you may straight away choose to form an LLP without looking into anything further. Because LLP has more advantages than a Private Limited Company in all other aspects except fundraising.