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DETERMINING THE BETTER FORM OF ORGANISATION FOR STARTUPS: LLP OR PRIVATE LIMITED COMPANY

This article explores the decision-making process for entrepreneurs choosing between a Limited Liability Partnership (LLP) and a Private Limited Company for their startups. It analyzes their respective advantages and disadvantages in terms of registration, ownership, funding, compliance, taxation, and penalties.

Every business in India must navigate specific rules and regulations that govern its operations and growth trajectory. When starting a new venture, entrepreneurs face crucial decisions, including the choice of business structure that best suits their needs. While the Private Limited Company remains the most familiar choice, the Limited Liability Partnership (LLP) has gained popularity, particularly among budget-conscious startups.

LIMITED LIABILITY PARTNERSHIP AND ITS CHARACTERISTICS

A Limited Liability Partnership (LLP) is a business entity where partners' liabilities are limited, shielding them from each other's actions. It enjoys perpetual succession and requires no minimum capital for formation, making it ideal for smaller enterprises and traders.

PRIVATE LIMITED COMPANY AND ITS CHARACTERISTICS

A Private Limited Company is owned by shareholders, with liability limited to their shareholding. It offers perpetual succession and is a separate legal entity capable of suing or being sued in its own name. It is suitable for businesses needing substantial capital infusion.

MERITS AND DEMERITS OF LIMITED LIABILITY PARTNERSHIP

Merits:

1. Easy incorporation and fewer formalities.
2. Lower registration costs.
3. Separate legal existence and perpetual succession.
4. No minimum capital requirement.
5. Limited liability of partners.

Demerits:

1. Automatic dissolution if partners fall below two.
2. High penalties for non-compliance.
3. Difficulty in raising external funds.

MERITS AND DEMERITS OF PRIVATE LIMITED COMPANY

Merits:

1. No specified minimum capital requirement.
2. Perpetual succession and separate legal identity.
3. Limited liability for shareholders.
4. Ability to raise funds through share issuance.

Demerits:

1. Restricted to 200 members.
2. Limited transferability of shares.
3. Cannot issue a prospectus to the public.

DIFFERENCE BETWEEN A LIMITED LIABILITY PARTNERSHIP AND A PRIVATE LIMITED COMPANY

Ownership:
LLP: Partners manage and own the business.
Private Limited Company: Shareholders own the business; directors manage it.

Registration Process:
LLP: Registered under the LLP Act, 2008.
Private Limited Company: Registered under the Companies Act, 2013.

Compliance:
LLP: Fewer compliance requirements; no mandatory board meetings.
Private Limited Company: More compliance; mandatory board and shareholder meetings.

Taxation:
LLP: Fixed 30% tax rate; surcharge if income exceeds specified limits.
Private Limited Company: 25% tax rate, with higher rates for higher incomes.