In India, all the petty retailers, traders, small scale entrepreneurs, etc. register themselves as Sole Proprietor of their firm as they solely want to own their firm without distributing profits...
Under the Indian Company Law, entrepreneurs have multiple options of business entities when commencing a business venture. They can choose the entity of their choice depending upon the amount of capital that they want to invest, the burden of liabilities, number of shareholders, etc. Private Limited Company has become a very popular choice among the business ever since the enactment of Companies Act, 2013. It is also being chosen over Limited Liability Partnerships. To understand the advantages of Private Limited Company over a Limited Liability partnership, let’s begin with understanding the meaning of both individually.
Recently, the Ministry of Corporate Affairs (MCA) has brought major changes in the incorporation of private limited companies. With the introduction of Companies (Registration Office and Fees) Amendment Rules, 2018, MCA has removed the fee charges at various stages of incorporation. The whole process of incorporation has become faster and smooth, even though stamp duty is still levied. The concept of “zero fees” has implemented for all companies with authorized capital up to INR 10 Lakhs.
What is a Private Limited Company?
Section 2(68) of the Companies Act, 2013, defines a Private Company. A private company under the Indian Laws means a company which via its articles-
- puts restrictions on the transfer of its shares; and
- can have up to a maximum of 200 members (except in the case of a One Person Company).
The minimum paid-up share capital for a private limited company is INR 1 lakh.
If two members of the company hold a share jointly, they will be treated as a single member.
The following shall, however, not be treated as the members of the company:
- individuals in the employment of the company;
- individuals who were members of the company while being in the employment of the company and continued being members once their employment with the company ceased.
What is a Limited Liability Partnership?
A Limited Liability Partnership can be termed as a hybrid of a company and a partnership. Section 3 of the Limited Liability Partnership Act, 2008, defines it as – “a body corporate formed and incorporated under the Act. It carries a separate legal entity from its partners.”
Salient Features of an LLP
- Perpetual Succession: Like a company, the existence of LLP is not subject to the existence of its members and it continues to exist even after their death, retirement, insolvency, etc.
- Separate Legal Entity: Just like a company, an LLP is a separate legal entity from its members. The liability of the member is limited only to the amount that they have contributed. Therefore, the partners are not liable towards the creditors of the LLP.
- Common Seal: The partners can decide to have a common seal for the LLP, although it’s not mandatory.
- Minimum/Maximum number of Partners: An LLP is required to have a minimum of two partners and two designated partners. There is no limit on the maximum number of partners that the LLP can have.
- Management: The partners of the LLP manage its business while the designated partners are responsible for legal compliances.
What are the Advantages of Private Limited Company Over an LLP?
The following are the advantages of Private Limited Company Over an LLP:
Easy Arrangement of Funds
A Private Limited Company is governed by the Companies Law and has to comply with a lot of regulations. As a result of this, there is a high level of transparency in the activities of a private limited company due to which investors place a lot of trust in them. Also, the Indian law allows foreign direct investment in Private Limited Companies. Hence, there are varieties of investors that are available for investment into a Private Limited Company. Procuring funds from external sources is easier for Private Limited Companies as compared with LLPs.
A Private Limited Company holds a high reputation in the eyes of third parties as compared to LLP. Even though an LLP is a separate legal entity from its partners, its reputation is not as high as a Private Limited Company. This is why it is easier for a Private Limited Company to procure funds. The credibility of Private Limited Companies is also higher in comparison to LLPs due to high corporate governance that exists in them.
Liability of Members
This is one of the core advantages of a Private Limited Company. As a Private Limited Company exists as a separate entity from its members, its liabilities would be separate from that of its members. The responsibility of the debts taken by the company would be of the company and not of the members.
An LLP is also a separate legal entity from its members. However, in the case of Oppression and Mismanagement, the liability of its members is unlimited when it comes to the aspects of liquidity and debt-equity.
Stringent Compliances of LLPs
The compliances for Private Limited Company and LLPs are very different. Like, the standards of Accounting and Auditing are applicable to private limited companies and not the LLPs. In case of non-compliance of a mandatory provision, there are certain reliefs that might be available in case of a private company. However, in the case of LLPs, the compounding and penalties are very stringent incase any non-compliance takes place. The designated partner can even get expelled in case of non-compliance.
As the concept of ‘zero fees’ for Private Limited Companies has now been introduced by the Government. This hardly leaves any difference in the costing aspect of incorporation of LLPs and Private Limited Companies. The procedural aspects of incorporation of Private Limited Companies have also been made easier. Besides, there are other additional benefits of private companies such as the ease with which business can be done in comparison to an LLP.
When a company is registered as a Private Limited Company, it gets permission to get foreign investment without any government approval. Foreign companies and investors can easily invest in Private Limited Companies. Direct Foreign Investment opens doors for companies to take their business overseas, thereby giving tremendous opportunities for growth, even beyond national boundaries. The option of foreign direct investment in case of LLPs is available subject to certain conditions, is more complicated and regulated.
The business in case of Private Limited Companies can be easily diversified as there are no strict regulations governing the same. However, diversification in case of an LLP is a complicated process since the business of LLP is bound by its agreement. The LLP agreement would need modification in case business has to be diversified, which is a long and tedious task as it would require compliance with a lot of statutory provisions.
Option of ESOP for employees
A Private Limited Company can offer its employees the option of ESOPs, which is highly valued amongst the employees as they get a shareholding in the company. This option is not available in case of LLPs.
Sale Value is more
In case the business owners decide to sell off the business, a private limited company would be valued more than an LLP as it has a higher market value and reputation. Hence, entrepreneurs are more inclined towards the option of a Private Limited company, when starting a new business.
It is apparent from the above points that private limited companies have an edge over the LLPs, even though LLPs are separate legal entities like the private companies. The reason for the same is that private companies are well-regulated and have better opportunities in terms of investors and doing business. Hence, a lot of entrepreneurs are now choosing private limited companies over LLPs. Furthermore, we expect that you have now understood the advantages of private limited company over LLP. And now that you can choose better depending on your requirements.
For more information on private limited companies, LLPs or any procedural aspect relating to the incorporation of both of these, contact us at www.swaritadvisors.com.