Introduction
Selecting an appropriate business type to form is among the top ten decisions that every startup will face when starting its new venture. The two most popular forms of businesses that most of the new start-ups will choose include Limited Liability Partnership (LLP) and Private Limited Company (Pvt Ltd).
Both LLPs and Pvt Ltds offer the same to the business in terms of limited liability of their owners as well as legal identity, but they differ from each other in the given aspects of legal and accounting requirements and compliance standards, taxation under applicable laws, power to attract funds by soliciting investors or lenders (i.e., investors) and scalability.
You can then consider this information as a way of identifying what kind of entity would best suit your mission and vision should you choose to start your new venture in 2026.
What is an LLP?
An LLP is a type of legal business entity that falls within the guidelines of the Limited Liability Partnership Act (2008), and combines the ways in which law treats partnerships with the benefits offered to businesses by limited liability.
Limited Liability Partnerships are typically used by professional practices, service providers, or smaller companies.
Here are some of the key characteristics of a Limited Liability Partnership:
Independent legal entity
Limited liability of the partners
Flexible internal organisation and operational structure
Fewer compliance requirements than companies
Minimum capital contribution not required
What is a Private Limited Company?
A Private Limited Company is a form of corporate entity under the Companies Act (2013) that is suitable for companies looking for fast growth, access to outside funding/money via investors and increasing the number of users or customers (scalability).
Here are some key characteristics of a Private Limited Company:
Independent legal entity
Limited liability of the shareholders
The company will continue to exist regardless of whether the shareholders are alive or not, known as perpetual succession
The ability to raise additional funds through equity
Compliance with and audit of laws and regulations is mandatory
LLP vs Pvt Ltd Company: Detailed Comparison
Next, we will compare both of these business forms with respect to important startup criteria.
1. Legal Status/Liability
Both Private Limited Companies and Limited Liability Partnerships are independent legal entities. This means that the company is legally distinct from its owners.
In either case, the owners of the businesses will be protected from the liabilities of the business by way of limited liability.
Conclusion: Both structures provide excellent liability protection.
2. The registration and setup process for both LLPs and Private Limited Companies takes place online via the Ministry of Corporate Affairs (MCA). However:
LLP registration is simpler than Private Limited registration as there is less documentation and formalities involved (such as having a Memorandum of Association, Articles of Association, and share structure).
In conclusion, setting up an LLP is easier and will likely take slightly less time than a Private Limited Company.
3. Compliance requirements differ substantially between the two types of entities
Compliance for LLPs includes:
Annual return
Statement of accounts and solvency
Audit only if turnover exceeds the prescribed limits
Private Limited compliance includes:
Board meetings
Annual general meeting (AGM)
Annual return filing
Filing financial statements
Mandatory audit (irrespective of level of turnover)
Therefore, the compliance burden on LLPs is less than that of Private Limited Companies.
4. Taxation also has major differences between LLPs and Private Limited Companies.
LLP taxation:
Flat tax rate of 30%
No dividend distribution tax (DDT) on profit distributions to partners
Shareholders are not taxed again on profit distributions to them.
Private limited company taxation:
Corporate tax rate (can be as low as 22% under certain schemes)
Shareholders will pay taxes on any dividends received
Greater flexibility in terms of structuring tax planning.
In summary, while LLPs may provide easier taxation, Private Limited Companies may provide greater flexibility for planning.
5. Lastly, one of the primary areas for startups is the ability to raise money.
LLPs are unable to issue shares, making it significantly more difficult for them to raise venture capital and therefore typically not favoured by angel investors.
On the other hand, Private Limited Companies may issue shares, making it possible to attract angel investors and venture capital, as well as use ESOPs (Employee Share Ownership Plans) as a way to compensate employees.
Verdict: A Private Limited Company is better for fundraising.
6. Ownership and Transferability
In Limited Liability Partnerships (LLPs):
Transfer of ownership can be a complex process.
It will require an amendment to the LLP agreement.
In Private Limited Companies:
Ownership can be transferred by way of transfer of shares (delegated to partners), subject to purchase restrictions in terms of transferability.
Transfer of ownership can be accomplished much more easily than in an LLP.
Overall, a Private Limited Company has a much smoother process for transitioning ownership of the company.
7. Scalability and Growth Potential
Consider this:
If your starting company wants to expand its business to all of India, raise money, go public in the future, or issue ESOPs (Employee Stock Ownership Plan).
A Private Limited Company is usually the best option in this situation.
An LLP is more suitable for small service businesses, professional service businesses, family-owned businesses, and consulting businesses.
When Should a Startup Consider an LLP?
An LLP may be appropriate for your start-up if:
If you start and operate a small- or medium-sized service company
If you want to have very little compliance responsibility
If you do NOT wish to raise money through venture capital
If you wish to share profits differently from LLC owners
If you want a simpler organisational structure
When Should a Startup Consider a Private Limited Company?
A Private Limited Company is better for start-ups interested in:
Raising money from investors
Establishing a scalable company
Issuing ESOPs to employees
Creating a high-value/high-growth startup
Establishing a strong brand identity for a business
The Private Limited structure is preferred by most funded and technology-related start-ups in India.
Cost Comparisons (approx) for LLP vs Private Limited Company
LLP
Less costly to register a Limited Liability Partnership (LLP)
Less costly to have annual regulatory compliance than to register and maintain regulatory compliance with a Private Limited Company
Private Limited Company
Higher costs to register a Private Limited Company than to register an LLP; however, the annual compliance and auditing expense of a Private Limited Company is higher than that of an LLP.
Final Verdict: Which is Better for Startups?
There is no one best structure to choose from.
If you intend to keep things as simple as possible and to operate with the least amount of regulations with as little money invested as possible, then an LLP may be the best choice for you.
In contrast, if you plan on getting funding, expanding beyond your current location into new markets, and significantly growing your company’s value, then a private limited company would likely be the best structure.
When attempting to capture investor interest, creating a recognisable brand and rapidly expanding, private limited companies tend to be the preferred legal structure for startups in India.
Conclusion
When choosing between an LLP or a private limited company, you must take into account your startup’s long term vision as well as your startup’s fundraising goals, ability to comply with regulation and desire to grow.
Before registering your business, you should evaluate:
Business type
Funding requirements
Tax consequences
Ability to grow
Seeking guidance from a reputable legal or regulatory advisor can help you determine which option may be best suited for you according to your specific business objectives.
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