Should I register my Start-up as LLP or Private Limited Company?

Is it more complicated registration process for private Limited compared to LLP?

• To register an LLP, a minimum of two designated partners (individuals and at least one of them should be a resident in India) will be required. There is currently no maximum limit of partners an LLP can have.
• Similarly for Private Limited a minimum of 2 Directors (at least one of them should be resident in India) and 2 Shareholders are required and a maximum of 15 directors and 200 shareholders are allowed.

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Is LLP taxed differently from Private Limited?

This is the key difference to be considered for choosing LLP over Private limited, to explain further

For a Private Limited Company:

1. For the company,
• The current income tax rate for domestic companies is a minimum of 25%* and an additional Surcharge and Health and Education Cess.
2. For the Shareholders/Directors,
• Additionally, in case of dividend distributed, shares are held as an investment then income arising in nature of dividend shall be taxable under “Income from other sources”
• Remuneration paid to Director is taxable under the head “Income from Salary”
• Further, Loan cannot be given to Director as mentioned under Section 185 of the Companies Act, 2013

For a Limited Liability Partnership:

1. For the LLP,
• Income is taxed at flat 30% + surcharge of 12% (where taxable income including capital gain exceeds Rs. 1 crore) + Health and Education Cess of 4% (on the amount of income tax and surcharge).
• Any interest paid by Partner on Loan given will be taxed and should be shown as Interest income
2. For Partners,
• Remuneration received will be taxable under the head “Income from Salaries”
• Interest on capital contribution of a partner is exempt upto 12% of the capital contribution made. Over and above 12% is taxed as “Profits or Gains from Business or Profession”
• Profit Distribution is tax free: An income received as Share of Profit is exempt under section 10(2A) of the Income tax Act,1961 to avoid double taxation.

Why are Investors keener to fund Private Limited compared to LLP?

• A Private Limited company differentiates between ownership and management, i.e., Ownership is different from management. Owners need not necessarily be the managing the company, it can appoint a team of directors to manage the company, and this creates a shield for owners or shareholders from any misdoings of the management.
• However, in an LLP, it is compulsory for contributors to be partners of the LLP. Hence, LLP does not have a layer of directors to create that differentiation between ownership and management.

Is it costly to operate and maintain a private limited whereas LLP is simple?

Both LLPs and private limited companies from the date of registration should maintain proper books of accounts either on cash or accrual basis. However, an LLP is required to have its accounts audited by a practicing Chartered Accountant, if its annual turnover, in any financial year exceeds Rs.40 lakhs or its contribution exceeds Rs.25 lakhs. However, all Private Limited companies compulsorily needs to get their books audits annually.
Annual Filings
LLP-

• Annual filings are mandatory as per the MCA for all LLPs irrespective of turnover. An annual return (Form 11) needs to be filed by May 31st every year, i.e., within 60 days of close of financial year.
• An additional Statement of Accounts and Solvency of LLP (Form 8), a declaration by the designated partners regarding information related to statement of assets and liabilities and statement of income and expenditure of the LLP to be filed within 30 days from the end of six months of close of financial year, i.e., to be filed by 30th October of each financial year.
• If LLP fails to comply with annual compliance requirements penalty of INR 100 per day per form late filing fees in shall be levied.

Private Limited

• All Private Limited Companies must ensure all compliances concerning Companies Act, 2013 like annual filings which include MCA Form AOC-4 (filed within 30 days from date of AGM) and MCA Form MGT-7 (filed within 60 days from date of AGM) discloses details of its shareholders, directors, etc., and details of the annual accounts and returns to the companies' registrar.
• If company fails to comply with Annual compliance requirements, late filing fees as per the period delayed. This fee is comparatively lower to LLP late filing fees.