Choosing between a private limited company and an LLP
Both give you limited liability. The right choice depends on whether you will raise money, how much compliance you can carry, and how you want to take profits.
If you are starting a business with partners, the choice usually comes down to two structures: a private limited company or a limited liability partnership (LLP). Both protect your personal assets if the business runs into debt. They differ in how they raise money, how much paperwork they need and how profits are taxed.
The short answer
- Choose a private limited company if you plan to raise money from investors, give shares to employees, or grow into a larger business.
- Choose an LLP if you are a group of professionals or partners who will fund the business yourselves and want lighter compliance.
The rest of this article explains why.
Raising money
This is usually the deciding factor. Investors, including angel investors and venture funds, buy shares, and only a company has shares. A company can also set up an employee stock option plan (ESOP) to reward key staff.
An LLP has partners, not shareholders. Bringing in an investor means making them a partner, which most investors will not accept. If there is any chance you will raise outside money in the next few years, a company saves you a conversion later.
Compliance and running costs
A private limited company carries more compliance:
- its accounts must be audited every year, whatever the turnover
- it holds board meetings and an annual general meeting, and keeps minutes
- it files annual returns and financial statements with the Registrar of Companies
An LLP files an annual return and a statement of accounts, and its accounts need an audit only above a turnover or contribution limit. For a small partnership this can mean noticeably lower professional fees each year.
Both pay penalties for late filing, and the LLP penalties are charged per day of delay, so lighter compliance is not the same as no compliance.
Tax
The tax picture depends on your profits and how you take money out.
| Private limited company | LLP | |
|---|---|---|
| Tax on profits | About 25% under the concessional regime | 30% plus cess and any surcharge |
| Taking profits out | Dividends, taxed again in the shareholder’s hands | Partners’ share of profit is not taxed again |
| Paying the owners | Salary to directors, taxed as salary | Remuneration and interest to partners, within limits |
Because company profits can be taxed twice, an LLP can work out cheaper when the partners plan to take most of the profit out each year. A company can work out cheaper when profits are kept in the business to grow it. The right answer depends on your numbers, which is why we model both before you decide.
Flexibility and control
In a company, ownership and management are separate. Shareholders own it, directors run it, and shares can be transferred. This makes it easier to bring in new owners or sell part of the business.
An LLP is run under an LLP agreement that the partners write themselves. That gives a lot of freedom to decide how profits are shared and who decides what, but changing partners means amending the agreement and filing the change.
Can you switch later?
Yes. An LLP can convert into a company and a company can convert into an LLP, but both take time, fees and paperwork. It is much easier to choose well at the start.
What we recommend
Before you register, write down three things: who will put money in, whether you will ever want outside investors, and how much profit you expect to take out each year. With those answers, the choice is usually clear.
We register companies and LLPs in Bengaluru and help founders choose between them. Bring us your plan and we will compare both structures using your own figures.
This article is general information, correct to the best of our knowledge on the date shown. Tax rules change often and depend on your circumstances, so please talk to us before acting on it.