Key Advantages of an LLP Over a Company
CS Rantu Das
CS Rantu Das is the Founder and Managing Partner of M/s. Rantu Das & Associates, a firm established in 2010. As a Fellow Member of ICSI and a law graduate (LL.B., LL.M.), with an M.Com from Calcutta University, he has over 13 years of expertise in corporate laws, SEBI matters, FEMA, RBI regulations, and compliance audits. He regularly represents cases before NCLT and NCLAT under the Companies Act, 2013, and IBC, 2016.
A. Key Advantages of an LLP Over a Company
Both houses of Parliament have passed the Limited Liability Partnership Act of 2008. It is a hybrid of a Partnership and a Limited Company. It incorporates the key benefits of a company, such as limited liability, perpetual existence, and no restrictions regarding the number of partners. The Ministry of Corporate Affairs is the regulatory body responsible for the registration of LLPs. In 2009, a Limited Liability Partnership (LLP) began offering several advantages over a company, making it a preferred choice for many businesses.
Some of these benefits include:
Statutory Audit Requirements
One of the key advantages of an LLP is its relaxed audit requirements. A statutory audit is mandatory for an LLP only if its annual turnover exceeds Rs 40 lakhs. In contrast, companies are required to undergo an audit regardless of their turnover or business activity. This makes LLPs a cost-effective and compliance-friendly option for smaller businesses.
Reduced Compliance Burden
LLPs are not subject to many of the compliance requirements that companies must adhere to. Forms such as MSME, DPT, and INC 22A do not apply to LLPs, thereby reducing the administrative burden and operational complexities.
Exemptions from Loan-Related Provisions
Sections 185 and 186 of the Companies Act, 2013, which regulate loan transactions with related parties, do not apply to LLPs. This gives LLPs greater flexibility in financial transactions and intra-group funding without stringent restrictions.
Ease of Partner Admission Without DIN Requirement
Unlike companies, where directors must obtain a Director Identification Number (DIN), LLPs allow individuals to become partners without holding one. This simplifies the onboarding process for new partners and reduces regulatory hurdles.
B. Key Advantages of a Company Over an LLP
While LLPs provide significant benefits, companies also offer distinct advantages that may make them a better choice in certain scenarios. Some of the key benefits of companies over LLPs include:
Lower Tax Rates
LLPs are taxed at a flat rate of 30%, while companies benefit from comparatively lower tax rates, which start at 22% and increase based on income slabs. This difference in taxation can be a significant advantage for businesses looking to optimize their tax liabilities.
Issuance of Shares and ESOPs
Companies have the flexibility to issue various financial instruments, including Employee Stock Ownership Plans (ESOPs), bonus shares, and rights issues. These mechanisms allow businesses to attract and retain talent, raise capital, and expand operations efficiently. In contrast, LLPs do not have the provision to issue shares or ESOPs, limiting their ability to offer equity-based incentives.
Simplified Addition and Removal of Stakeholders
The process of adding or removing partners in an LLP is relatively cumbersome compared to that in companies. In companies, changes in shareholding or directorship can be executed with fewer procedural requirements, providing more flexibility in management and ownership structure.
Listing on Equity Markets
One of the most significant advantages of a company is its ability to get listed on stock exchanges and raise funds from public investors. However, LLPs cannot go public or trade on equity markets, which limits their ability to raise substantial capital through public investment.
Conclusion
Both LLPs and companies have their advantages and disadvantages, and the choice between the two depends on the specific needs of the business. LLPs are ideal for businesses seeking minimal compliance, tax efficiency regarding Dividend Distribution Tax (DDT), and flexibility in financial transactions. On the other hand, companies offer benefits like lower tax rates, access to equity markets, and ease of ownership transfer. Businesses must carefully evaluate their long-term objectives, regulatory requirements, and financial goals before choosing the appropriate structure.
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