Private Limited Company v/s Limited Liability Partnership (LLP)

In India, there are many business structures from which an entrepreneur can choose to establish a business or company. Private limited companies and Limited Liability Partnerships (LLPs) are two such business structures.

Both LLPs and Pvt Ltd Companies offer unique advantages and are suitable for different types of businesses. The LLP is registered with the Ministry of Corporate Affairs (MCA) as per the Limited Liability Partnership Act, 2008. The Pvt Ltd companies registered with the MCA under the Companies Act, 2013. The government fee for LLP incorporation is significantly low compared to the government fee for Pvt Ltd company incorporation. The documents that must be notarized and printed on nonjudicial stamp paper are less for an LLP registration when compared to a Pvt Ltd company registration. There is no clear distinction between the management and owners in an LLP. In a Pvt Ltd company, the management is different from the owners. The board of directors manage the company business. Choosing the right business structure can have a significant impact on the success of a business.

Let’s see the key differences between LLP and Private Limited:

Feature​	LLP	Pvt Ltd Company
Ease of starting and managing	Easier with fewer formalities	More formalities and documentation
Cost of registration and time duration for formation	Lesser	Higher
Minimum capital requirement	No minimum requirement	No minimum requirement
Flexibility in Management	Partners enjoy the flexibility in management and decision making	Directors are participating in management and day-to-day decision making
Tax Rate	An LLP should pay a 30% fixed rate tax on its total income. When its total income exceeds Rs.1 crore, the income tax amount is increased by a surcharge of 12%.	When a Pvt Ltd company earns less than Rs.400 crores, it should pay a tax of 25%. When the company’s annual revenue exceeds Rs.400 crores, it must pay a 30% tax. Pvt Ltd companies can also choose between the new rates of 22% (for existing companies) and 15% (for new companies)
Raising funds/capital from Venture Capitalists (VC), equity funding or angel investors	Difficult as they can’t be the shareholders of the LLP	Easier
Penalty for non-compliance	Relatively Less	Heavy
Suitable for	Startups, traders, and small to medium-sized businesses that do not require much external funding	Businesses that have a significant turnover and need external funding
Audit requirements	Statutory audit is mandatory when annual turnover exceeds Rs.40 lakhs or capital contribution exceeds Rs.25 lakhs.	A Private Limited Company is required to conduct a statutory audit of its accounts every financial year.

Tax payable on Remuneration of a Partner and Directors of Private Limited Company:

Private companies don’t have a limit for director’s pay. But they must deduct tax when they pay. The Income Tax Act allows a firm to claim a deduction for the remuneration paid to its partners up to a certain limit. If a partner receives more than the limit said in Income Tax, only the amount above the limit is exempt from the tax in the partner’s hand. The partner will have to pay tax on the amount that the firm claimed as an expense.

Let’s understand the concept with examples:

1) Ram is a partner in a firm and receives ₹10 lakhs as remuneration. The firm claims this amount as an expense within the limit allowed by the Income Tax Act. In this case, Ram will have to pay tax on entire amount of ₹10 lakhs he received.

2)Sham is a partner in a firm. He received remuneration of ₹20 lakhs. Income tax act allowed ₹12 lakhs as allowable expenses. Then, firm pay the tax on remaining amount of ₹8 lakhs. On other hand, Sham will pay the tax on ₹12 lakhs and remaining ₹8 lakhs will be exempted.