Tuesday 12 August 2014

Limited liability partnership Vs Private Limited Company

Limited Liability Partnership Vs Private limited Company

Limited Liability Partnership (LLP) is a corporate business vehicle that provides both the benefits of a company and flexibility of a partnership firm i.e. limited liability and allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement.
Considering the compliances required to be made by the Private Limited Companies as laid down in The companies Act, 2013, the LLP form of organization is now a very convenient form for starting of any business.
Benefits of LLP over limited company:

1.   No limit on owners of business
LLP requires minimum 2 partners. There is no limit on maximum partners unlike a private limited company wherein there is a restriction of not having more than 200 members.

2.   No requirement of minimum contribution
       As against company there is no minimum capital requirement in LLP. An LLP can be formed with least possible capital.
Minimum Capital contribution

Private Company - 1,00,000
Public Company -5,00,000
No such mandatory requirement

Moreover, the contribution of a partner may consist of tangible, movable or immovable or intangible property or other benefit to the LLP.

3.   Lower cost of Formation
The cost of registering LLP is low as compared to cost of incorporating a private limited or a public limited company. An illustration can show the approximate cost involved in formation of private limited company and an LLP.
Legal Cost to incorporate (having capital of Rs. 1 Lakh)

Rs. 10000/-
Rs. 2000/-
Legal Cost to incorporate (having capital of Rs. 5 Lakhs)

Rs. 26000/-
Rs. 4000/-

4.   No requirement of compulsory Audit
All the companies, whether private or public, irrespective of their share capital, are required to get their accounts audited. But in case of LLP, there is no such mandatory requirement. A Limited Liability Partnership is required to get the audit done only if:-
a.    If the contributions of the LLP exceeds Rs. 25 Lakhs, or
b.    If the annual turnover of the LLP exceeds Rs. 40 Lakhs

5.   Lower compliance burden resulting in savings
Approximately at least 8 to10 compliances per annum are required to be made by a private limited company whereas a Limited Liability Partnership is required to file only the Annual Return & a Statement of Accounts & Solvency

6.   Taxation Aspect on LLP
For income tax purpose, LLP is treated at par with partnership firms. Thus, LLP is liable for payment of income tax and share of its partners in LLP is not liable to tax. Thus no dividend distribution tax is payable. Provision of 'deemed dividend' under income tax law, is not applicable to LLP.
Section 40(b): Interest to partners, any payment of salary, bonus, commission or remuneration allowed as deduction in the hands of Limited Liability Partnership

7.   Dividend Distribution Tax (DDT) not applicable
In the case of a company, if the owners to withdraw profits from company, an additional tax liability in the form of DDT @ 15% (plus surcharge & education cess) is payable by company. However no such tax is payable in the case of LLP and profits of a LLP can be easily withdrawn by the partners.

8.               Converting from Partnership to LLP
LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions , the provision of capital gain will apply.

9.               Converting from company to LLP
Conversion from company is possible. The capital gain on conversion of company in to LLP is exempt if the conditions of section 47(xiiib) are followed.

10.               Demerits of LLP
LLP as well have some limitations within. Some of them can be summarized as below.
a)   Any act of the partner without the other partner, may bind the LLP
b)   LLP Cannot raise money from public

Contributed by
CA Nidhi Chatwani 

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