Pros and Cons of A LLP as well as A Private Company

Advantages of A LLP

The benefits of LLP registration in India are as follows:

1. Unlimited Members

The minimum number of people required to start an LLP is 2, but there is no limit as to the maximum number of partners in a Limited Liability Partnership. Unlike a Private Limited Company, which can only have a maximum of 200 members, an LLP can have as many members as it wants.

2. No Minimum Investment

A Limited Liability Partnership registration can be done with only a small amount of capital as there is no requirement of minimum capital investment. The partners’ investment may also not be in monetary form and they can invest in the LLP their movable, immovable, tangible or intangible property.

3. Easier ROC Annual Compliances

The ROC annual compliances of an LLP are simple and do not mandatorily require an audit of accounts. A Limited Liability Partnership is required to get a Tax Audit only the following cases:

1. The annual turnover of the LLP is more than INR 40 lakhs
2. The total contribution of the Limited Liability Partnership is more than INR 25 lakhs.    

4. Easy and Affordable LLP Registration

The LLP registration process is easier as compared to a company incorporation process as the formalities are straightforward and can be completed in 10-15 days. Limited Liability Partnership registration also needs less investment as the registration costs are lower than a company registration.

In addition to these LLP benefits, there are various disadvantages that come with Limited Liability Partnership registration as well. 

Disadvantages of LLP Registration

The disadvantages of Limited Liability Partnership registration are as follows:

1. Severe Penalty for Non-Filing of ROC Returns

A Limited Liability Partnership must file its Annual ROC returns and ITR return even if it is NIL for a financial year. Non-filing of the Annual Returns can lead to a daily penalty of INR 100 per day for each form not filed. There is no limit to the amount of penalty that the authorities can impose on an LLP. Non-filing of the ROC returns can also lead to striking-off of the name of Limited Liability Partnership from MCA database.

2. Status of Limited Partners

Limited liability is one of the best features for   partners in limited liability partnership but he does not have much to do in major decisions and day-to-day business activities. His participation in routine activities may lead him to lose the status of limited partner and become a general partner like others.

3. Tax Burden

Fixed rate is imposed on limited liability partnership.

4. Audit and Financial Disclosure

It is mandatory for a limited liability partnership to get its accounts audited annually and to prepare its balance sheet and profit and loss account as per prescribed guidelines. Also these documents are made available for public inspection.

5. Transfer of Interest

Various formalities need to be complied with in accordance with terms and conditions mentioned in the LLP agreement in order to transfer the interest in LLP.

6. Restriction in ECB

LLP cannot raise External Commercial Borrowings i.e. commercial loans from its foreign partners (if any), banks or financial institutions outside India etc. if the Foreign Direct Investment permission is not taken.

7. Huge penalties on non compliance

The cost of non-compliance of procedural matters such as late filing of e-forms is very high which would lead to huge sum of penalties owing to Rs.100/- for every day till the time the offence of late filing continues. There is no bar on the amount of maximum fine. 

8. Unable to raise Venture Capital funds

As every shareholder must be a partner in a Limited Liability Partnership, the Venture Capitals show less interest to invest in an LLP because if they invest funds, they are answerable to certain responsibilities towards the LLP for which they are least interested.

Private Company

A private limited liability company is a company which states in its memorandum of association to be a private liability company. The company shall restrict the transfer of its shares and the total number of its members shall not be more than 50 (fifty) persons.

Employees of a company shall not be included in computing the number of members of a private company. If 2 (two) or more persons hold one or more shares in a company jointly, they are treated as a single member. Unless authorized by law, a private company shall not invite the public to subscribe for its shares or debentures or deposit money for fixed periods payable at call whether or not it bears interests.

Advantages of private company limited by shares

1. Limited Liability

The main advantage of a private company limited by shares is the limited liability of its shareholders. During the recent recession, many businesses experienced financial constraints which affected their performance and solvency. One advantage of private limited companies during the period is that the financial liability of the shareholders of such companies was limited to the number of shares they hold in the company. Therefore, if a private limited company is in financial trouble and had to wind up, shareholders would not risk losing their personal assets.

2. Restricted Trade of Shares

This is an advantage to some shareholders because shareholders who want to sell their shares cannot sell them to outside buyers. Shareholders must also agree to the sale or transfer of shares. The risk of hostile takeovers is low.

3. Separate Personality

Once a private company is incorporated, it becomes an independent legal entity which is able to sue and be sued and own assets separate from that of the company’s owners.

4. Continued Existence

Another advantage of a private limited company is its continued existence, even after the owners die or leave the company. A private limited company differs from a sole proprietorship in that the latter is owned by a single individual who is personally responsible for the business debts and essential to its continued existence.

Disadvantages of private company limited by shares

1. Registration Process

Registration of private company limited by shares takes a longer period and involves a process and cost which are not applicable to sole proprietorship and business names. However, once registered, private limited company enjoys a wide variety of powers and rights.

2. Compliance Formalities

A private limited company requires a range of compliance post incorporation. It is required to hold board meetings, general meetings, get the accounts audited, maintain statutory register and file annual return with the Companies Registry each year. In addition to the corporate compliance formalities, a company would also have to maintain compliance with tax and labour laws, which are applicable.

3. Restricted Trade of Shares

This may be a disadvantage because the restriction placed on the sale of shares limits the options in which shareholders have to liquidate their shares to raise capital for other endeavours that they may be interested in. 

4. Restriction on Public Participation

A private company is prevented from raising capital for its business by inviting the public to subscribe for its shares. This may be a limitation to the prospects and growth of the company.