Are you looking to start a new venture?
Most likely you are thinking of creating a company. But before you do that, have you considered an LLP structure?
Confused?
While a private company is the most popular legal structure for businesses and startups, of late, LLP is emerging as an alternative corporate business vehicle.
Both forms have a separate identity which is separate from its directors or partners.
A Pvt Company as well as an LLP need to be registered with the Ministry of Corporate Affairs (MCA).
But which one to go for?
In this article, we have tried to demystify the features of both the entities and help you decide your preferred option.
What is a Private Company?
It is a legal structure which has the concept of management and ownership. The directors of the company manage the business of the company and the shareholders own the company. The liability of the shareholders is limited to the extent of the contribution made or the capital provided by them.
In most cases, a private company will have the same directors as well as the owners. But they can be different too.
The private company is governed by its Memorandum and Articles of Association, commonly known as MoA and AoA.
MoA has details about the business activities a company is allowed to carry on whereas AOAs set the rules and regulations a company needs to follow to carry on its business.
An important point to note here is that in a private company, the right of shareholders to transfer the ownership (shares) is restricted and subject to the approval of the directors.
What is a Limited Liability Partnership (LLP)?
The concept of LLP was introduced in 2008.
As the name suggests, LLP is a combination of a partnership firm and a company.
What I mean is that in LLP, partners enjoy the advantage of limited liability like a company. Also, the structure is similar to a partnership firm. So, LLP does not have the concept of management and ownership. The partners are the managers as well as the owners.
LLP allows its partners the flexibility of organizing their internal structure as a partnership based on mutually terms mentioned in the LLP agreement.
Here is a comparison between the two on the basis of various features.
Keeping this in mind, it can be tough to take a one-sided stance favoring either of the corporate entities. It will depend on your priorities of the business when it comes to choosing between a private limited company or a LLP.
While a private limited company gives a wide scope to procure investment, an LLP gives more control and flexibility.
Small businesses not looking for any external funding can go for LLP registration. However, a private company is a favorable option for anyone who is looking to build a scalable business and have aggressive growth prospects.
So, carefully weigh the pros and cons and decide which corporate entity would suit the business better.
This post is contributed by CS Swati Nerurkar and Co.