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The Limited Liability Partnership Act 2008

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LLP or Private Limited Company? This is one of the most asked questions by new and old entrepreneurs. What’s the most suitable structure to start his/her business? A simple google search would yield thousands of results and tens of good articles on the subject. I would share some of the good ones with these entrepreneurs but nevertheless, a few questions remain unanswered in those articles. So, I thought of compiling a simple table, although not exhaustive, (with the least amount of legal and financial jargon) to address such unanswered questions.

LLP is the newest kid on the block. LLP structure was introduced with the passing of The Limited Liability Partnership Act, 2008, which came into effect in early 2009. This structure has been in the west for many decades. The traditional partnership businesses burdened the partners with unlimited liability, many times this burden induced by other partners with the “principle of agency” at play. One partner’s actions leading to a massive loss became all partners’ burden. It had the potential to bankrupt the partners of the firm. LLP structure addresses this point primarily by borrowing the concept of “limited liability” from the corporate structure. On the other side, a typical corporate structure would entail a long list of compliance costs which can be prohibitive to many businesses. The fusion of traditional partnerships and corporates is LLP.

Hope the readers find the table useful. If any doubt still persists, please feel free to write to me or leave your query in the comment section. We shall be happy to get back.

Income Tax

  S No  Particulars  Private Limited Company  LLP
  1  Rate of Tax  Tax Rate 25%   (If Turnover is less than Rs.400 Crore. However, the Companies can choose to pay taxes @ 22%, without any deductions)   Tax Rate @ 30 % (If Turnover exceeds 400 Crore)   Surcharge; Income 1 Crore to 10 Crores -7%              more than 10 Crores -12%   Health & Education Cess : 4 %      Tax Rate @ 30 %                   Surcharge; Income Exceeds 1 Crore – 12%     Health & Education Cess : 4 %  
  2MAT   (Minimum alternate tax)MAT -15%   On Book profitNot Applicable   AMT (Alternate Minimum Tax) 18.5% in special cases where there is deduction u/s 10AA/80IB etc.,
3Profit DistributionTaxable in the hands of Shareholders based on their tax slab  Profit distributed post tax is exempt from tax  
4Salary/Remuneration  to Directors/PartnersNo Restriction/Cap on payments to DirectorsAggregate of   90 % of the first Rs.300,000/-  Plus60 % of the Balance Profit In the case of loss maximum salary allowed as expense for tax purpose will be Rs.1,50,000/-  

Companies Act vs LLP Act

S No.ParticularsPrivate Limited CompanyLLP
 1Governing LawCompanies Act, 2013Limited Liability Partnership Act, 2008
 2NameMust contain suffix ‘Ltd’ or ‘Pvt Ltd’Must contain suffix ‘LLP’
 3Organizational StructureRigid & governed by Companies ActFlexible & governed by LLP Agreement
 4Loans & borrowings (Other than from Banks & Financial Institutions)Directors cannot borrow and lend money to CompanyThere is a Cap on shareholders lending to CompanyNo Restrictions. Governed by LLP Agreement
5Convening of MeetingsBoard Meetings are mandatoryAnnual General Meetings is Mandatory    No Mandatory requirement.   But however, the partners may decide to have periodical meetings and the same will be governed by LLP Agreement
6Intimating ROC regarding Creation of Charge Mandatory when a charge is created on assets of the CompanyNot Mandatory
   7  Maintenance of Statutory RecordsMany Registers are required to be maintained like Shareholders/Members Register, Directors RegisterNo such requirement  
    8Increase in CapitalRequire to Pass Ordinary resolution in General Meeting and file form SH-7.Only require to amend LLP Agreement and File e-form Form-3.
    9Annually form filling requirementThere are many E-forms  like AOC-4, Form –MGT-7  and E – form-ADT-1Only Two annual form E-form- 8, E-form-11
   10Disclosure of InterestRequire to Take disclosure from director under Section-184(1)No such requirement
   11Audit of AccountsAudit is Compulsory.Require only if Turn over above 40 lacs or Contribution more than 25 lacs.
   12Related Party TransactionsTransaction to be at arm’s length price only and as per provisions of Secton-188 of Companies Act-2013.No Restrictions. Governed by LLP Agreement
13Reporting Requirements- FDI-FEMASingle Master Form (SMF) has to be filed with RBI within 30 days from the date of allotment.   FLA Return – Annually before 15th JulySingle Master Form (SMF) has to be filed with RBI within 30 days from the date of receiving of Capital Contribution from Partner   FLA Return – Annually before 15th July

Other Statutes

S No.ParticularsPrivate Limited CompanyLLP
1Provident Fund On Salaries to Directors/PartnersDirector Remuneration is covered for the purpose of Provident FundDesignated Partner’s Remuneration is not covered for Provident Fund
2Labour LawsAs per labour laws a Whole Time Director is a employee and eligible for GratuityLeave encashmentLeave as per statuteDesignated Partners are not Employees and hence provisions of labour laws are not applicable

Others

S No.ParticularsPrivate Limited CompanyLLP
1Investment by Angel Investors/PEs/VCsPreferredNot preferred

The write-up is for general understanding. We suggest the readers to discuss with their consultants before deciding on choosing either of the structures.