The first question that comes to mind before starting any business is ‘Which is the best suitable form of enterprise?
There are many options open to entrepreneurs for setting up their business.
The most popular forms being ‘Limited Liability partnership’ and ‘Private Limited Company’.
A Private Limited Company is a body corporate incorporated under the Companies Act, 2013, whereas, A Limited Liability partnerships a body corporate incorporated under the Limited Liability partnership Act, 2008.
Both Private Limited Company and Limited Liability Partnership are required to be registered with the Ministry of Corporate Affairs.
All Private Limited Companies and Limited Liability partnerships incorporated in India and registered with the Ministry of Corporate Affairs are regulated and governed by the Ministry through the offices of the Registrar in whose jurisdiction the registered office of such enterprise is located.
Private Limited Company and Limited Liability partnership both have their merits and demerits.
Entrepreneurs have to consider all the factors while deciding which setup is most suitable to their business.
This article aims at throwing light on the distinguishing factors of a Private Limited Company from that of Limited Liability partnership.
Governing Laws :
Both Limited Liability partnership and Private Limited Company incorporated in India are required to abide by the laws of land.
In addition to the laws of land, Private Limited Company is required to adhere to the Companies Act, 2013 and all rules made there under. Likewise, Limited Liability partnership is required to adhere to the Limited Liability partnership Act, 2008 and Rules made there under.
Private Limited Company can function only within the ambit of its Memorandum of Association and Articles of Association.
Limited Liability partnership are required to strictly act within the ambit of the Limited Liability Partnership Agreement.
However, in no case can the Memorandum of Association, Articles of Association and the Limited Liability Partnership Agreement override the Companies Act, 2013 and Limited Liability partnership Act, 2008 respectively.
Parties Involved :
A Private Limited Company requires minimum 2 directors and maximum 15 directors along with minimum 2 maximum 200 members
A Limited Liability Partnership requires Minimum 2 Designated Partners. However, there is no restriction on the maximum partners
The ownership of Private Limited Company lies with the shareholders of the company where as the management and administration of the business is done by the Directors and Key Managerial Personnel of the company.
Ownership can be transferred by merely undertaking transfer of shares.
The ownership of Limited Liability Partnership lies with the Partners of the company and management and administration is done by the designated partners of the company.
Ownership can be transferred by executing Supplementary agreement and registering them with the Ministry of Corporate Affairs.
The Members of the Private Limited Company are liable only to the extent of the unpaid amount of share capital/ Guarantee as subscribed/ accepted by them at the time of incorporation.
The liability of members of Limited Liability Partnership is limited upto the extent to the amount of capital contribution agreed to in the Limited Liability Partnership Agreement.
A Private Limited Company can accept funding from its member directors and related parties. It cannot accept funding from Public at large.
A Limited Liability Partnership can accept contribution from its partners
Both Limited Liability Partnership and Private Limited Companies can accept funding in form of loans and borrowings.
Registration/ Incorporation process :
Post Incorporation Compliances :
The post incorporation compliances of Private Limited Company is more as compared to that of Limited Liability Partnership.
The Post incorporation compliances of Private Limited Company are:
- Conduction first Board meeting within 30 days of Incorporation.
- Disclosure of Interest by directors
- Printing of Letter head
- Printing and Issue of Share Certificate
- Appointment of First Auditor
- Opening of Bank Account
- Filing Declaration of Commencement of Business
- Obtaining licenses and registrations (as applicable)
The Post incorporation compliances of Limited Liability Partnership are:
- Opening of Bank Account
- Filing of Initial Partnership deed
A Private Limited Company is mandatorily required to conduct minimum 4 board meetings in a year with a gap of not more than 120 days between two board meetings.
An Annual General meeting of the members of the company is mandatorily required to be conducted.
No such requirement is applicable to Limited Liability Partnership.
Compliance and cost of compliance :
The Annual and Event Based compliances for Private Limited Company are more than that of Limited Liability Partnership.
Similarly, the cost of compliance i.e., government fees is higher than that of Limited Liability Partnership.
Both Limited Liability Partnership and Private Limited Company are subject to penalties for non-compliance and contravention of provisions of laws applicable to them. However, Private Limited Company incurs heavier penalties for violations than Limited Liability Partnership.
Only upon considering all the above factors can one decide the correct form of enterprise suitable to the business and the entrepreneurs.