PVT LTD or LLP or Partnership
Comparison Chart for Various business entities in India
Till the introduction of the Limited Liability Partnership Act, 2008 (“LLP Act”), entrepreneurs’ running business on small/ medium scale had only two options as form of organization i.e. Partnership Firm or Private Limited Company. Now, with the introduction of the LLP Act third option is open for small scale business. But, we will really have to check whether there is any space for Limited Liability Partnership (“LLP”) in India. In order to address this question, we need to compare existing options available to entrepreneurs running business on small/medium scale basis. We also need to examine whether entrepreneurs running business on small/medium scale basis will opt for LLP.
Let us look at following comparison.
| Sr. No. | Particulars | Partnership | LLP | Company | ||||
| 1 | Liability | Every Partner is liable jointly with all other partners and also severally for all acts of the firm done while he is a partner | A liability of partner is Limited to the extent of his contribution. A Partner is personally liable for his own wrongful act i.e. act which is not authorized by LLP or for fraud on his part. | Liability of shareholder is limited to the extent of his shareholding in the company. | ||||
| 2 | Taxation | Alternate Minimum Taxation is applicable (19.24% approx. of book profit). | Minimum alternate tax is applicable (19.24% approx. of book profit). | |||||
| Income Tax (30% flat + 4 Cess) | Tax rate is 25% if turnover or gross receipt of the company does not exceed Rs. 250 crore. | |||||||
| Profits will be taxed in the hands of Partnership Firm and not in the hands of Partners. There is no double taxation. | There is double taxation as Dividend Distribution Tax Applicable (17.65% approx). | |||||||
| Remuneration to Partners will be taxed as “Income from Business or Profession” | Directors remuneration is taxable under the head “Salary” | |||||||
| 3 | Perpetual Succession | It does not have perpetual succession as it depends on The will of the partner. Death of one partner Dissolves partnership. | It has perpetual succession. It means LLP has existence, no matter how many changes occur in membership. | It has perpetual succession. It means Company has existence, no matter how many changes occur in Membership. | ||||
| 4 | Investment | Partnership firm is not allowed to invest in shares of other Company in Firm’s name. | LLP can invest in shares of other Company its name. | Company can invest in shares of other Company in its name. | ||||
| 5 | Legal Proceedings | Only registered Partnership firm can sue Third Party or it can be sued and registration takes minimum 4 years | LLP is a legal entity Which can sue or can be sued. | Company is a legal entity Which can sue or can be sued | ||||
| 6 | Bank Finance | Bankers do not have Sufficient protection. | Bankers do not have Sufficient protection. | Bankers enjoy sufficient protection and prefers Private Limited Company. | ||||
| 7 | Compliances | There are minimum compliances required to be complied with under Partnership Act. Minimum Cost for Nil Compliance also Rs 3000 | There are minimum compliance required to complied with under LLP Act (4 RoC Form,) . Minimum Cost for Nil Compliance also Rs 5000 | There are lot many compliances required to be complied with under Companies Act. (Approx 10 RoC Form Filing . Annual Company Audit) Minimum Cost for Nil Compliance also Rs 20000 | ||||
| 8 | Information available on Public Domain | Financial Statements i.e Balance Sheet as at year end and profit and loss account for the year end is not required to be filed with Registrar of Firms. Hence this information is not available at public domain. | Statement of Account and Solvency for the financial year is required to be filed with ROC within 30 days from the end of 6 months of each financial year. In addition Annual Return is required to be filed with ROC within 60 days from the end of Financial Year. And this information is available at Public Domain.
Also anyone can search company details by director name also on Google | The Company is required to file its Financial Statements as at the financial year and for the financial year along with Auditors, directors report etc.. Plus there are many documents required to be filed with ROC. Majority of information is available at public Domain. Also anyone can search company details by director name also on Google | ||||
| 9 | Related Party transactions | There is no restriction for entering into contracts with Related parties. | There is no restriction for entering into contracts With related parties. | There are restrictions for entering into contracts with Directors of the company or related Parties. | ||||
| 10 | Liquidation | Simple process | Complex process | Complex process | ||||
| 11 | Investment attraction by Investors and IPO | Venture Capitalist / PE partners does not prefer and cannot go for IPO | Venture Capitalist / PE partners does not prefer and cannot go for IPO | Venture Capitalist / PE partners does Always prefer and can go for IPO | ||||
| 12 | MSME Reporting | No reporting to MSME / ROC in case of late payment to MSME registered holder | No reporting to MSME / ROC in case of late payment to MSME registered holder | New norms introduced for reporting to MSME / ROC in case of late payment (45 days) to MSME registered holder | ||||
| 14 | Registration Process | Simple process | Complex process | Complex process | ||||
| 15 | Start-up Recognition | Cannot be registered as Start up as registration of deed itself takes 4 years | Can be registered as Start up | Can be registered as Start up | ||||
| 16 | Loan from Directors / outsiders | No restrictions on any loan to be taken from partners / relatives | No restrictions on any loan to be taken from partners / relatives | Some restrictions have been kept on loan to be taken from Directors / relatives | ||||
| 17 | Loan to Directors / relatives | No restrictions on any loan to be given to partners / relatives | No restrictions on any loan to be given to partners / relatives | restrictions have been there on loan to be given to Directors / relatives | ||||
| 18 | Salary to Directors / partners | M Maximum Allowable remuneration
Fs Effectively we can show 60% as Salary and 40% as Net Profit in Firm on which we have to Pay 31.2% Tax so effectively tax is 12.48% of Profit e. | No limit prescribed under Companies Act There is no fix compulsion to show 40% Profit, all profit can be taken as salary also | |||||
| 19 | Meetings of Board / Members | No need to have any meeting of partners | No need to have any meeting of partners | Various compliances and provisions implemented for meetings and documentation | ||||
| 20 | Various disclosures and compliance | Not required | Not required | Various disclosures and compliance involved | ||||
| 21 | Disqualification of Director | No such provision | No such provision | Strict provisions are there | ||||
| 22 | DPT-3 (Return of Deposit or Particulars of transaction not considered as Deposit) | No such provision | No such provision | New Norms Introduced for Company having Outstanding Loan from 01st April, 2014 shall file one time Return within 90 Days from the date of notification i.e 22nd January, 2019 | ||||
| 23 | BEN-1 (Declaration by the beneficial holder) | No such provision | No such provision | Every Individual who is beneficial owner shall file a declaration in Form BEN-1 within 90 days from the date of commencement i.e. 08/02/2019 | ||||
| 24
| DIR-3 KYC (Director’s KYC) | No such provision | Every Designated Partner Holding DPIN | Every Director Holding DIN (Including Disqualified Directors) | ||||
If we look at the above comparison, Private Limited Company has an edge over LLP with respect to Bank Finance. Where business is largely dependent on Bank Finance then Private Limited Company is the best option for running small and medium scale business. But the compliance and cost of running the company is high as compared to LLP. Small scale businesses which can be carried on with own funding can think of converting into LLP.
All existing partnership firms can convert themselves into LLP. LLP has an advantage over partnership firm. [The only point of concern is financial information of LLP is available at public domain and liquidation would be a complex process.] Maintenance cost is almost same for Partnership and LLP. The main advantages are
- limited liability of partners;
- LLP can invest in shares of other company in its own name; and
- perpetual succession. These three advantages over Partnership Firm can induce sincere entrepreneurs to convert into LLP or form LLP than forming traditional partnership firm.
Further, Association of Persons (“AOP”) or any other un-registered entity can also go for LLP due to above advantages.
Joint Venture Companies
In the recent judgment, Bombay High Court has put a question mark on enforceability of restrictive provisions of shareholders agreement in the Company form of organization. There can be provisions in shareholders’ agreement viz. transfer of shares, decision making process of shareholders and board etc. which can become matter of litigation. However there are no such restrictions in LLP act and hence it can be considered as suitable for joint venture [JV] entities/Special Purpose Vehicles [SPV]. However, the protection of minority provided in section 397 and 398 of the Companies Act is absent in LLP.
Entities barred from LLP
LLP is formed for carrying any business or trade with a view to profit. Hence LLP cannot be formed with Non-profit making objective. There is no provision under LLP Act for such kind of registration under it.
Entities on Boundary Line of LLP
As on today following business/ entities cannot get registered as LLP
- Non-banking financial business
- Entities having foreign direct investment or making Overseas Direct Investment.
- Multi-disciplinary firms of professionals like Chartered Accountants, Company Secretaries, Cost Accountants
To allow the above business/ entities to form LLP suitable amendments are required in following Acts, Rules, Guidelines etc..
- Reserve Bank of India Act, 1934 (“RBI Act”)
- Foreign Exchange Management Act, 1999 (“FEMA Act”)
- The Chartered Accountant Act, 1949, The Cost and Works Accountants Act, 1959, The Company Secretaries Act, 1980, the Code of Conduct/ Ethics, Guidelines under the entire Act.
Conclusion
Hence, we can conclude that, LLP has a space by converting existing sincere partnership firms into LLP OR new entities can go for LLP rather than Partnership Firm. AOPs can also think of forming LLP instead of unregistered form of organization. Misfit Private limited Companies [who also do not have bank finance] can convert themselves into LLP. LLP can be convenient mode of business for JV/ SPV entities.
Further if
- RBI Act is amended, LLP can be formed with finance and investment object;
- If FEMA provisions are amended FDI/ ODI/ ECB can be allowed in LLP;
- If ICAI, ICSI and ICWAI acts are amended and if these institutes amend their code of
Conduct/ ethics, professionals like Chartered Accountants, Companies Secretaries and Cost Accountants can tie-up hands for providing services at one point contact under umbrella of LLP.
Based on this discussion it appears that, there is certainly a space for LLP in India and this space can be extended to cover the uncovered areas of business e.g. multi-disciplinary professional firms.
