If you are looking to start your own venture, it is important that you chose a suitable business model. There are quite a few options to select the best business model, yet the choice is usually between a Limited Liability Partnership (LLP) formed under the Limited Liability Partnership Act, 2008, and a Private Limited Company (PLC) formed under the Companies Act, 2013.
Both choices offer similarities and some distinctive features required to run a small-sized to large-sized Business. We are decoding the two models from the viewpoint of an Entrepreneur starting a new business venture.
Registration Process and Legal Compliances
A private limited company is governed by the Companies Act, 2013 and it is privately held for small business owners. The liability of the members of a PLC is limited to the number of shares respectively held by them. Shares of PLC cannot be publicly traded.
LLP is governed by the Limited Liability Partnership Act, 2008 and the liability of the members of an LLP is also limited. In LLP there is a minimum of two partners required, and there is no limit on the maximum number of partners. On the other hand, every PLC must have a minimum of two members and two directors at all times. Also, the maximum limit allowed for members is 200 and directors is 15 in the case of a PLC.
In both PLC & LLP, obtaining a digital signature certificate and Director identification number for proposed directors/ partners is a must. The registration cost is cheaper relatively in LLP than PLC, and both entities require approximately 5-10 days for registration. There is no requirement of minimum share capital in the case of LLP. However, every PLC involves an introduction of Rs 1 lakh as the basic capital.
There is no requirement of the minimum board meeting for LLP, whereas a minimum of four meetings in a financial year are required with not more than 120 days gap in two board meetings for PLC.
Taxation
Income earned by the LLP’s are taxed at a flat rate of 30%, and the said tax rate would be further increased by a surcharge rate of 12%, if the total income of an LLP exceeds Rs 1 crores. However, in case of a PLC, there are four different tax rates prescribed under the Income-tax laws -- 15%, 22%, 25% & 30%.
For a private limited company, if the total turnover or gross receipts for the financial year 2019-20 does not exceed Rs 400 crore, then the applicable tax rate is 25%, or else 30%. There is an additional surcharge of 7% or 12% if the total income exceeds `1 crore. If the total income exceeds `1 crore but less than `10 crore, the surcharge is 7%, otherwise, the surcharge is 12%.
The reduced tax rate of 15% or 22% (plus 10% surcharge) will be applicable only in case of a ‘New Domestic Manufacturing Company’ or ‘Other Domestic Companies’ subject to the satisfaction of various specified conditions prescribed under the Income Tax Act.
In addition to the above tax rates, both PLCs and LLPs are required to ascertain the tax liability as per Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT), respectively, each year. If the reduced tax rates of either 15% or 22%, as discussed above, are applicable to the PLC in that case the provisions of MAT are not applicable on the PLC.
A comparative chart reflecting the prescribed conditions for different tax rates in the case of LLP & PLC are narrated as follows:
Other Key differentiators
LLP is generally suitable for Start-ups and manufacturers and PLC for businesses having high turnover or required external funding or FDI. LLPs per se is not required to get their accounts audited annually, whereas for every PLC annual audits are mandatory.
LLP generally faces more significant challenges with legally acquiring permission to do business in other states, but PLCs, on the other hand, can easily operate their businesses in other states subject to the formalities of legally filing foreign business registration papers in such states. Forming LLP or PLC by business owners depends on the structure and type of Business.
The author is CEO of AMRG & Associates
