In the vast landscape of business entities, two commonly utilized structures stand out: companies and limited liability partnerships (LLPs). While both serve as vehicles for entrepreneurial endeavours, they possess distinct characteristics that can significantly impact operations, liability, and governance. In this article, we delve into the nuances that set these structures apart.

1. Legal Framework:

The operational framework of an LLP adheres to the regulatory framework outlined in the Limited Liability Partnership Act of 2008. It provides a more flexible framework. The LLP Act was created to give Limited Liability Partnerships (LLPs) a mix of flexibility from partnerships and protection from unlimited liability. It lays out the things LLPs are allowed to do, what they must do, and the rules they have to follow.  The rights and responsibilities shared among partners in an LLP are determined by an agreement made either between the partners themselves or between the partners and the LLP, depending on the situation.

In contrast, a Private Limited (Pvt Ltd) company is regulated by The Companies Act 2013. The management-ownership distinction is inherent in a company.  Consequently, the distribution of profits and liabilities among the company’s owners is typically determined in accordance with the provisions outlined in the Companies Act of 2013.  They typically operate with a clear hierarchical structure, comprising shareholders, directors, and officers, each with defined roles and responsibilities.

2. Liability Protection:

A Limited Liability Partnership (LLP) combines the advantages of both a private limited and a partnership firm. Irrespective of the number of partners involved, an LLP ensures that each partner enjoys limited liability concerning the LLP obligations. This limited liability extends only to the extent of their individual contributions, absolving one partner from bearing responsibility for the liabilities incurred by others.  Moreover, individual partners are not held responsible for the independent or unauthorized actions of other partners. This shields each partner from being held liable for any joint liabilities arising from another partner’s wrongful business decisions or misconduct.

In the case of a company limited by shares, the shareholder’s obligation to contribute is determined by the nominal value of the shares they possess. Once they or a previous shareholder have paid this nominal value along with any agreed premium upon share issuance, they are relieved of further contribution obligations. One key benefit of a limited company is that its members are liable to contribute only to a limited extent towards settling its debts. Directors and officers are typically not personally liable for the company’s debts unless they engage in fraudulent or unlawful activities.

3. Ownership and Management:

The separation between management and ownership found in a company does not exist within a limited liability partnership.  In an LLP, the partnership possesses both ownership rights and managerial authority. Consequently, partners in an LLP have the potential to serve as both owners and managers. At least two partners are necessary to establish an LLP. There is no maximum limit on the number of partners. A body corporate can be a partner to an LLP

In a company, a distinct division exists between ownership and management, yet this arrangement often gives rise to agency issues. Typically, the company’s ownership is heavily concentrated among its promoter members. A company comprises members, yet it maintains its own distinct identity apart from them. The individuals currently constituting the company serve as its corporate entity. However, as an artificial entity, a company cannot act independently. Therefore, it communicates its intentions and makes decisions through resolutions passed at duly convened meetings.  The authority to make decisions within a company lies with its Members and Directors, who exercise their powers through resolutions they pass.

4. Regulatory Compliance:

LLPs have relatively fewer regulatory compliance requirements compared to companies. For example, there is no requirement for annual general meetings (AGMs) or board meetings. As distinct legal entities, Limited Liability Partnerships (LLPs) entrust their elected partners with the responsibility of maintaining accurate accounting records and submitting an annual return to the Ministry of Corporate Affairs (MCA) each year. LLPs are exempt from auditing their accounts unless their annual turnover exceeds Rs. 40 lakhs or their contribution surpasses Rs. 25 lakhs. Therefore, if an LLP meets these criteria, it is not obligated to undergo auditing.

After their incorporation, Private Limited companies must adhere to numerous legal and regulatory obligations, including fulfilling annual compliances as stipulated by the Companies Act, 2013. These obligations are compulsory and must be fulfilled within their designated deadlines. Annual compliance obligations for Private Limited Companies encompass submitting various e-forms to the Registrar of Companies (ROC), including annual returns (MGT-7), annual financial statements (AOC-4), notification of auditor’s appointment (ADT-1), and annual Income Tax Return (ITR). Additionally, internal compliance tasks such as conducting shareholder general meetings, board meetings of directors, and maintaining updated statutory registers are required. The deadlines for these compliances differ based on regulatory mandates. Failure to comply or delays can lead to penalties, impacting business operations and increasing compliance costs.

5. Taxation:

The Tax on Limited Liability Partnerships (LLPs) in a manner akin to general partnerships under the Indian Partnership Act, 1932. This entails taxation at the entity level with partners being exempt from tax on their respective shares. The taxation for LLP stands at 30% on earnings up to 1 crore, with an additional 12% surcharge applicable when the total income surpasses 1 crore.

Companies registered under the Indian Company Law are required to pay tax on the net profits generated from their business activities. This tax is levied at a specific rate set by the Income Tax Act, with potential adjustments made annually by the Income Tax department. Currently, if a company’s turnover is up to 400 crores, it must pay tax at a rate of 25%; otherwise, the rate of 30% applies.

6. Funding:

While limited liability partnerships (LLPs) face restrictions in obtaining financial support from angel investors and venture capitalists as the concept of valuation cannot be made applicable to LLP.

Companies have the opportunity to secure funding from venture capitalists (VCs) and angel investors.

7. Going Public:

Going Public entails adhering to a multitude of regulatory mandates and reporting duties to uphold transparency and safeguard investor interests. However, due to its non-corporate structure and absence of stock issuance, an LLP lacks the capability to undergo the process of going public.

8. Resident Director/Partner:

For the purpose of LLP resident in India means an individual who has resided in India for at least one hundred and twenty days during the financial year.

Resident Director for a company is an individual who has been present in India for a cumulative period of at least 182 days during the financial year.

Although LLPs and Companies offer limited liability protection to their members, they vary in ownership structure, management, regulatory adherence, taxation, and more. The decision between an LLP and a Company structure depends upon on three crucial factors:

1. Whether the business aims to secure funding from investors or banks.
2. If the business is intended for eventual sale.
3. Tax considerations. BCL can assist in analysing the most suitable structure for your business and facilitate the establishment of either a Company or LLP accordingly.