What are the pros and cons of a Limited Liability Partnership (LLP) registration versus a Private Limited registration for Indian startups?
- LLP registration is cheaper. My new startup is an LLP and for a 1.5 lakh starting capital we're paying about 7.5K to get it registered. In an earlier Pvt. Ltd. incorporation fees were higher.
- LLP regulations are less onerous. You do need to file annual returns, but there's no board meeting requirement, board constitution, director details and so on that apply to pvt. ltd. cos.
- LLP partners can withdraw part of their share of the company (provided it is post tax) Their share of the business = their percentage of the networth. This is not possible for private limited companies - if you own 25% of a ltd co and want out, the way to get out is for you to sell your shares to someone else; if the company needs to buy back your shares, by regulation it has to go through a "buy-back" process which has to be offered to ALL shareholders, and can only be done once in two years.
- LLPs can be structured to give higher rights to some partners over others. There is no one-share-one-vote or "special resolution" structures that apply to pvt. ltd. companies, where one shareholder owning 26% can control what the company can do (to different degrees) Even at 10%, pvt. ltd. company shareholders have rights that an LLP structure doesn't have.
This can be both an advantage or a disadvantage. A minority owner of an LLP may give himself greater rights through the partnership agreement, or he may be inconvenienced if he has a disagreement with the majority owners. The partnership agreement needs to lay out what happens; the LLP structure leaves it very open.
- LLP - for point 3 above - is a great structure to use for a hedge fund. For Pooled investing and to let members exit and enter at different times, pvt. ltd. company regulations suck.
- Some taxation differences - the LLP is taxed just as it were a pvt. ltd. co. But for any profits that are distributed after tax - for LLPs there is no "dividend distribution tax" (15% currently for Pvt. Ltd) and no Minimum Alternate Tax (as was proposed in the new Direct Tax Code).
- No upper limit on partners - when you go past 50 shareholders in India in a Pvt. Ltd. it becomes what is called a "deemed public" company. That comes with more regulation. No such thing for an LLP.
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