Introduction
Undoubtedly, there is a striking difference between being aware of the existence of a subject matter and being exhaustively informed of the same. However, a borderline difference sometimes could considerably vary in different aspects, making two different concepts distinct in their own way. Albeit, in discussing the differences between LLP and Company, there are many diverse heads, which makes the operability, administration, monitoring and regulation of the two concepts distinct. Similarly, the concept of LLP and company resonates in various heads too. Therefore, to study the differences between LLP and company, it is foremost necessary to ascertain their respective features.[1]
What is a Company?
A company is a juristic and artificial legal person constituted by a person or a group of persons together to carry on a business or trade through an industrial enterprise. Section (2)20 of the Companies Act 2013 defines a company as an association of persons or a company that has been incorporated under this Act or under any previous company law. In common law, a company is a separate legal entity, separate from and capable of surviving beyond the lives of its members.
Companies are an essential contributor to the health of an economy as they employ individuals and attract disposable income to spur growth. A company is termed as a legal entity that is formed by a group of individuals with an aim to engage in and operate a business enterprise in a commercial or industrial capacity. A company’s mode of conducting a business depends on its structure, ranging from a proprietorship to partnership. Companies are either public or private; the public company issues equity to shareholders on an exchange, while the private companies are privately-owned and not regulated. A company is generally organized to earn a profit from business activities.
What is an LLP?
LLP (Limited Liability Partnership), a form of partnership where the partners are individually not liable for the actions of other partners in the company. Such a concept of limited liability is meant to do away with the malpractices in the company and to protect and separate the liability of the innocent partners from the negligent acts of the other partners. LLP’s are commonly labelled in medical practices and law firms. The Limited Liability Partnership provisions are governed by the Limited Liability Partnership Act, 2008. Section 2(n) of the Act defines limited liability partnership as any partnership formed and registered under this Act. LLPs offer a partnership concept wherein each partner’s liabilities remain limited to the amount they invest into the business, which means that in the event of a partnership’s failure, the creditors of such partnership firm cannot encroach into any partner’s assets and income.[2]
Difference Between LLP and Company
In order to opt for any particular concept of business organization, it is essential to hold a vivid idea about different systems of conducting, monitoring and administering a business.[3] The similarities and dissimilarities between the Company and LLP shall be determined based on the merits, demerits and public acceptance of the various concepts.
1. Registration of a Company is conducted with the Registrar of Companies (ROC). Registration of an LLP is conducted with the Registrar of LLP.
2. The rights and duties of the directors of a company are governed by the Article of Association (AOA) and Memorandum of Association (MOA). The LLP Agreements govern the rights, duties and obligations of the LLP.
3. For a Company to start, the minimum capital requirement is Rs. 1 lakh. However, there is no minimum capital required to start an LLP.
4. For a Company, it is obligatory to have a minimum of 2 directors and a maximum of 15 directors. However, an LLP requires a minimum of 2 designated partners, but there are no capped numbers for maximum designated partners.
5. For a Company, there is a requirement of a minimum of 4 board meetings during a financial year, thereby holding 120 days gap between 2 meetings wherein the general meeting of shareholders has to be conducted once a year mandatorily. However, in the case of LLP, there are no mandatory requirements for partners meetings.
6. Statutory audit is mandatory for a company. However, in the case of LLP, a statutory audit is not required unless partner’s contribution exceeds 25 lakhs and annual turnover exceeds 40 lakhs.
7. In a Company, the liability of the members is limited to the unpaid amount of shares taken in the company. However, the liability of the partners in an LLP are Limited to the agreed contribution, excluding the liabilities in the cases of intentional fraud or wrongful act of omission or commission by the partner.
8. A company can buy back the shares subject to the Companies Act. In a Company, once paid up, capital cannot be withdrawn by shareholders without court approval. However, partners can withdraw capital subject to an LLP agreement in an LLP. Moreover, a partner can reduce his contribution liabilities after serving notice to its creditors.
9. A Company cannot provide interest on capital to shareholders. However, LLP can provide interest on capital without any approval subject to LLP Agreement.
10. In a Company, a shareholder (member) can terminate membership by transferring the shares in his name to any person subject to conditions in the company’s Articles. A shareholder cannot resign from the company. However, in an LLP, a partner continues as a partner in the LLP even after transferring all his rights in the LLP unless anything contrary is expressly provided in the LLP agreement. A partner is at liberty to resign from the partnership.[4]
11. In a Company, it is not possible to remove a shareholder from the company by others. However, the shares of one shareholder can be transferred to another person. Nevertheless, it is possible to remove a partner from the LLP subject to the LLP Agreement.
12. In a Company, shares can be transferred easily. The Article of Association can only restrict it. In an LLP, shares can be transferred by executing an agreement before a notary public.[5]
13. In a Company, the management is vested with a Board of Directors elected by shareholders. However, partners manage LLP as per the LLP agreement. Partners are at liberty to delegate management power to a management team or a single partner.
14. A company must maintain many Registers, Records and retain minutes of both General and Board meetings duly of every time irrespective of doing business. However, LLP is not required to maintain any Registers, Records and Minutes unless mandated explicitly by LLP agreement. Partners are at liberty to decide the requirements.
15. The company is taxable at 22% on net profit, and the Effective IT Rate, which includes the sum total of IT, Surcharge and Cess and therefore shall be 25.52%. LLP is taxable at firm tax at the rate of 34.80% on the net profit of the LLP.
16. If distributed as a Dividend, Company Profit will attract a Dividend Distribution Tax at the rate of 20.36% on the dividend. In the case of an LLP, profit incurred after tax will be credited to partners’ accounts, and the same shall not be taxable in the hands of the partners again.
17. A dividend from a domestic company up to rupees 10 lakhs is exempted in the hands of a shareholder. A dividend above 10 lakhs shall be taxable at the rate of 10% in the case of a resident individual/ HUF (Hindu Undivided Family)/ Firm. However, profit distributed by an LLP is completely exempted in the hands of a partner of an LLP.[6]
18. Only a private/public limited company can issue Employee Stock Options Plans for attracting Employees. However, Employee Stock Options Plans for attracting Employees are not possible for an LLP.
19. The Statutory minimum fee for incorporation of the Company is Relatively High. The cost of the formation of LLP and its statutory filing fees is comparatively lesser than the cost of the formation of the Company.
20. In the event of the occurrence of death of a member of a Company, shares are transmitted to the legal heirs. For an LLP, in case of the death of a partner, the legal heirs of the deceased partner shall have the right to get the refund of the capital contribution in addition to the share in accumulated profits, if any. However, the legal heirs will not become partners.
21. A person is at liberty to become a company member by buying its shares. However, an individual can be admitted as a partner as per the LLP Agreement.[7]
22. A member/shareholder of a Company can cease to be a member or shareholder by selling his respective shares. However, an individual can end a partnership as per the LLP Agreement or in the absence of an LLP Agreement, a partnership could be terminated by giving 30 days prior notice to the LLP.
23. In a Company, the voting rights of the members are determined in accordance with the total number of shares held by each member. In an LLP, the voting rights are decided as per the terms of the LLP Agreement.
24. A Company can pay remuneration to its Directors as per the prescribed legal provisions for the same. However, in an LLP, remuneration to a partner shall depend upon LLP Agreement.
25. In a Company, there are certain restrictions imposed on Board regarding some specified contracts into which the directors are interested. For an LLP, partners are free to enter into any contract.
26. For a Company, the share certificates are proof of ownership of shares held by the members of the Company. LLP Agreement evidences the ownership of the partners in the firm.
27. In a Company, there are provisions that provide a remedy against oppression and mismanagement. For an LLP, there is no provision relating to redressal in case of oppression and mismanagement.[8]
28. In the event of having stringent compliances & disclosures under various laws, the Companies hold considerable creditworthiness. However, LLP shall enjoy comparatively higher creditworthiness due to a rigid regulatory framework but lesser than a company.
29. For a Company, the board of directors/shareholders meeting proceedings are required to be recorded in minutes. An LLP by agreement may decide to record the proceedings of meetings of the partners/designated partners.[9]
30. Any whistleblowing provisions are not provided under the Companies Act, 2013 for the Companies. However, for an LLP, provision has been made to protect employees & partners, thereby providing helpful information to guide them during an investigation or convicting any firm partner.[10]
LLP And Company – Which One is Advantageous Form of Business?
Well, hassle-free business yielding maximum profit is often the universal aim of any company or firm. However, it is always the subject matter of doubt when choosing the most suitable form of business that could resonate with the aim a business must achieve. Albeit, an entrepreneur, could opt for a plethora of business forms. However, LLP has consistently been credited as the most suitable and preferable form of business to the extent that it provides both the benefit of a partnership firm and a private limited company. Limited liability is known to shield the partner’s assets from the business’s liabilities. LLP is a separate legal entity, possesses a perpetual succession. LLP setup often provides flexible management of the business by facilitating the operation of the partnership and distribution of profits through a written agreement between the partners.
The cost of registering an LLP is comparatively lesser than registering a Company. Moreover, LLP comes with fewer formalities, and it is comparatively easier to commence and manage. It bears comparatively less legal compliance than a company and possesses no cap for a minimum capital requirement. Furthermore, an LLP does not require to pay any Dividend to its partners. Therefore, the Dividend Distribution Tax is not applicable for an LLP.
However, in a company setup, there is a lack of secrecy to the extent that in order to comply with the legal provisions, a company is required to make various statements and data available to the Registrar of the Companies (ROC) and other financial institutions; wherein the secrecy of a business gets compromised. It is further breached when the company provides its annual report to the shareholders as the competitors also find out the details of all financial data. These are the cases wherein LLP shares an advantageous position of maintaining a minimum level of secrecy. Furthermore, the corporations also have disadvantages compared to proprietorships and partnerships in regard to the taxation formalities. Since the corporation and the stockholders of such a corporation are considered two different legal entities, they often face the problem of double taxation, which means that the owners are taxed twice. However, opting for LLP could necessarily mitigate the problem of double taxation. Therefore, the LLPs hold the most advantageous position as a form of business considering the aforesaid benefits when compared to a Company.
[1] J.W. Callison and M.A. Sullivan, Limited Liability Companies: A State-by-State Guide to Law and Practice (1994).
[2] STANDING COMMITTEE ON FINANCE (2007-2008), FOURTEENTH LOK SABHA, MINISTRY OF CORPORATE AFFAIRS, The Limited Liability Partnership Bill, 2006 – Fifty-Eighth Report 124 (Nov. 27, 2007).
[3] J.J. IRANI COMM. REPORT ON COMPANY LAW 19 (May 2005), available at http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf (listing the following regulated professionals as examples: “Company Secretaries, Chartered Accountants, Cost Accountants, Lawyers, Architects, Engineers, Doctors, etc.”).
[4] MINISTRY OF CORPORATE AFFAIRS, GOVERNMENT OF INDIA (November 2005), Concept Paper on Limited Liability Partnerships, available at http://www.taxindiaonline.com/RC2/pdfdocs/Concept_Paper_LLP.pdf.
[5] PRESS INFORMATION BUREAU, GOVERNMENT OF INDIA (Dec. 15, 2006), Limited Liability Partnership Bill Introduced, available at pib.nic.in/archieve/others/2006/dec06/r2006121530.pdf.
[6] MINISTRY OF CORPORATE AFFAIRS, GOVERNMENT OF INDIA (2007), Annual Report 2006-2007, available at http://www.mca.gov.in/Ministry/annual_reports/annualreport2007/Eng/CHAPTER1.pdf.
[7] STANDING COMMITTEE ON FINANCE ON THE LIMITED LIABILITY PARTNERSHIP BILL, 2006 (NOV. 27, 2007), FOURTEENTH LOK SABHA, FIFTY-EIGHTH REPORT 2.
[8] Sangeeta Singh, Limited Liability Partnership Bill Introduced in Parliament, LIVEMINT (Oct. 21, 2008), http://www.livemint.com/Politics/NB8fTh11JaPbZGyW5LDHOK/Limited-LiabilityPartnership-Bill-introduced-in-Parliament.html.
[9] Rajiv K. Luthra, LLP a New Buzzword in the Corporate World, THE ECONOMIC TIMES (Oct. 10, 2010), available at http://articles.economictimes.indiatimes.com/2010-10- 10/news/27627116_1_limited-liability-partnership-business-structure-llp.
[10] RESERVE BANK OF INDIA, Foreign Direct Investment in Limited Liability Partnership (Apr. 16, 2014), available at http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8844&Mode=0.
