LLP or Partnership Firm or Private Limited Company

LLP or Partnership Firm or Private Limited Company

Welcome to our guide on choosing the right type of business entity for your enterprise. At present, three of the most popular types of business entities in India are Limited Liability Partnership (LLP), Partnership Firm, and Private Limited Company. Here, we will help you understand the key differences between these entities, and how to choose the one that is best suited for your business.

LLP vs Partnership Firm vs Private Limited Company: Key Differences

Ownership: In a Partnership Firm, the business is owned and managed by two or more partners. The partners share the profits, losses, and liabilities of the business. In an LLP, the business is owned and managed by designated partners, who have limited liability, and the liability of other partners is also limited. In a Private Limited Company, the business is owned by shareholders, who have limited liability, and the company is managed by directors.

Liability: In a Partnership Firm, the liability of the partners is unlimited, which means that the personal assets of the partners can be used to pay off the debts of the business. In an LLP, the liability of the designated partners is limited to their contribution, and the liability of other partners is limited to the extent of their investment. In a Private Limited Company, the liability of the shareholders is limited to the amount of their shares.

Compliance: Partnership Firms are less regulated than LLPs or Private Limited Companies. LLPs and Private Limited Companies are required to comply with legal formalities like registration, annual filings, audits, and taxes.

Taxes: Partnership Firms are not taxed as separate legal entities, and the profits or losses are taxed at the individual level. LLPs and Private Limited Companies are taxed as separate legal entities, and the tax rate is higher for Private Limited Companies.

Choosing between LLP, Partnership Firm, and Private Limited Company

If you are looking for a simple business structure with lower compliance requirements and do not require external funding, then a Partnership Firm may be the right choice for you. Partnership Firms are suitable for small businesses with few partners who want to share profits and losses.

On the other hand, if you are looking for a more structured business entity with greater access to funding and investment, then LLP or Private Limited Company may be the better choice. LLP and Private Limited Companies are suitable for businesses that plan to raise capital, expand operations, or go public in the future.

Conclusion

Choosing between LLP, Partnership Firm, and Private Limited Company depends on your business goals, structure, ownership, liability, taxes, and compliance requirements. We hope that this guide has helped you understand the key differences between the three entities and make an informed decision. If you need further assistance, please contact us, and we will be happy to help.

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Comparison Between Business Structures

Sole Proprietorship Vs Partnership Firm Vs OPC Vs LLP Vs Private Limited Company

Parameter

Sole Proprietorship

Partnership

One Person Company (OPC)

Limited Liability Partnership (LLP)

Private Limited Company

Statute

Common Law

Common Law – unregistered

Indian Partnership Act, 1932- registered

Companies Act, 2013

Limited Liability Partnership Act, 2008

Companies Act, 2013

Ownership

The Proprietor- an individual

Minimum 2 partners (a company can be a partner)

Division of Labour-

O/ship- Promoter (only one)

Daily working- Board of Director(s) (OPC may have more than 1 director)

Division of Labour-

O/ship- All partners

Daily working- Designated Partners

Division of Labour-

O/ship- Promoters and shareholders

Daily working- Board of Directors (at least 2 directors)

Legal identity & Liability

No distinct PAN.

No separate legal entity. Proprietor to bear all liabilities.

 

Distinct PAN.

No separate legal entity from its partners. Private assets of the partners can be used to meet the liabilities of the firm in case firm's assets are not adequate to meet its liabilities.

Distinct PAN

Separate legal entity

Limited Liability. Personal property does not get attached

 

Distinct PAN

Separate legal entity

Limited Liability. Personal property does not get attached

 

Distinct PAN

Separate legal entity

Limited Liability. Personal property does not get attached

 

Funding

Owned funds. Difficult for bank loans. Collateral of personal assets.

Owned funds. Difficult for bank loans. Collateral of personal assets.

Owned funds or debt. Cannot raise or offer equity

Owned funds. Debt funds can be managed.

For startups, Investors do not like to invest in this type of business entity

Best option if looking for business expansion I long run. Both Debt and Equity permitted. 

Costs:

  

Incorporation

NIL

Very minimal.

If registered, then cost for registration. May go upto 10000/-

Presently greatly reduced. CG charges- NIL upto 15 Lakhs

Stamp Duty payable to State Governments ranging from 200/- to 10000/-

Very minimal.

Presently greatly reduced. CG charges- NIL upto 15 Lakhs

Stamp Duty payable to State Governments ranging from 200/- to 10000/-

Recurring

Trade license

Trade License

Tax Audit depending on Turnover

Filing of Forms

Auditor Fees

ITR filing fees

Other business registrations

Filing of Forms

Auditor Fees- if Turnover exceeds 40 Lakhs

ITR filing fees

Filing of Forms

Auditor Fees

ITR filing fees

Other business registrations

Taxation

Depends on personal tax slabs

Taxed at 30%. Remuneration

paid to partners can be

claimed as deduction,

restricted to the limits

speci‑ed (under the IT Act).

MAT does not apply.

No general advantages

(industry specific advantages are available). Tax to be paid at flat rate of 30% on profits, Dividend taxable in hand of receiver.

Minimum

Alternate Tax (MAT) applicable

No general advantages

(industry specific advantages are available). Tax to be paid at flat rate of 30% on profits. MAT is applicable.

Taxes on Income The following rates are applicable to the domestic companies for AY 2020-21 based on their turnover (excluding cess & surcharge): 

 

Sections

Tax rate

Surcharge

Section 115BA (Applicable Manufacturing Domestic Companies

25%

7%/12%*

Section 115BAA (applicable domestic companies)

22%

10%

Section 115BAB (manufacturing)

15%

10%

Any other case

30%

7%/12%*

Dividend taxable in hand of receiver. Minimum

Alternate Tax (MAT) applicable

Going Concern

Not survive if proprietor departs

Departure of any partner brings it to an end

Nominee is mandatory to be appointed. It will continue

It will continue even if a partner departs

It will continue as it has perpetual succession.