When a layman wants to start business, it is commonly doubtful to choose the most suitable business form for new business entity. There are many business forms which an entrepreneur may choose, but the most commonly chosen business forms are private limited company and LLP. These are the common pillars for an entrepreneur to build his empire, this article discusses the options that an entrepreneur should consider while forming an enterprise:
Private Limited Company:
Private limited company is a most popular form of business entity. There is no minimum capital requirement, only 2 directors and members are required to incorporate private limited company. It protects members from unlimited liability at the time of loss or closure of company. MCA has implemented changes in registration process and made it easy to incorporate.
SEPARATE LEGAL ENTITIES: – private limited company is treated as an individual in the eyes of law. Company is capable to own funds and other properties in its name.
LIMITED LIABILITY: liability of shareholders in case of private limited company are limited up to the amount of shareholding.
PERPETUAL SUCCESSION: – private limited company has perpetual succession and independent identity, it means co will not lose its identity even after death of its owners or shareholders. Change in shareholding will not affect the company.
EASY FORMATION: – incorporation of private limited company is easier. MCA has implemented changes in registration process.
CAPITAL REQUIREMENT: – no minimum capital is required for incorporation of private limited company, now company can be incorporated with any amount.
Limited Liability Partnership (LLP) is a body corporate formed and incorporated under LLP ACT 2008. LLP is a preferable form of organization as it provides benefits of both the private limited and partnership firm. LLP is a legal entity separated from its partners. All the partners have limited liability up to the contribution made by them and no partner is responsible for the act of another partner. Every partner shall be responsible for their own act.
EASY FORMATION: By having fewer formalities it is easier to start and manage a LLP. Formation of LLP has less legal compliances and requires less time and effort.
MINIMUM CAPITAL REQUIREMENT: – LLP can be incorporated with any amount of capital, there is no minimum capital requirement for the incorporation of LLP.
SEPARATE LEGAL ENTITIES: LLP is like a corporate body having its existence other than its partners. It has its own existence in the eyes of law.
Private Limited Company vs Limited Liability Partnership
DIVIDEND DISTRIBUTION TAX: – LLP are not required to pay dividend to its partners so Dividend Distribution Tax is not applicable on llp.
COMPARISON BETWEEN LLP AND PRIVATE LIMITED COMPANY: –
|Registered under||Companies Act 2013||Limited Liability partnership Act 2008|
|Directors required||Minimum -2|
|Minimum designated partner-2 Maximum designated partner – not applicable|
|Members required||Minimum -2|
|Minimum capital required||No minimum share capital required.||No minimum share capital required.|
|Meetings||Minimum 4 board meetings required during financial year having 120 days gap between 2 meetings.|
General meeting of shareholders to be conducted once in a year
|No requirement of partners meeting in llp.|
|Abiding||Abiding by the aoa / moa of company.||Abiding by the llp agreement.|
|Statutory audit||Mandatory||Not required unless partners contribution exceeds 25 lakhs and annual turnover exceeds 40 lakhs.|
|Compliances||High legal compliances||Less legal compliances|
|Tax structure||More complicated (dividend distribution tax has to be paid by company)||much easier (no dividend distribution tax)|
|Reliability||more confidential||Less reliable|
|investment||Companies has to go through with sections 73 and any other provisions and rules made their under.||There is no cap or criteria for the investment by any third party.|
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