Whether you want to start as an LLP or private limited company depends upon the objective, scope and capital and sale of the business entity. LLP is recommended when the capital amount is less than 25 lacs and sales turnover is more than 40 lacs. In such cases, LLP is not required to audit their statements and other compliance obligation and thus reduce cost. If LLP crosses the sales turnover of Rs.40 lakhs or capital contribution of Rs. 25 lacs, then it is advisable to opt for Private Limited Company as the compliance requirement of LLP will be same as that of a company. In addition, LLP won’t be able to raise equity capital as currently there is no procedure for LLP conversion into Private Company. Hence, if the entrepreneur wants to expand business and infuse equity capital from private equity investors, venture capitalist or angel investors than a Pvt limited company is the best choice.
Reasons for LLP Registration
- Increase in awareness among small business regarding the concept of LLP.
- It is easy to start and manage.
- It provides the benefit of limited liability as well as flexibility to organize their firm internally.
- The audit is not required except if annual sale more than Rs.40 lakhs and or capital contribution is less than Rs.25 lakhs. Auditing is mandatory in Private Limited Company irrespective of sales turnover and capital contribution.
- LLP does not have to pay dividend distribution tax (DDT) which is 15%( surcharge & educational cess) for Private Limited Company.
- LLP does not have to organize Board meeting or annual meeting, unlike private Limited company.
- The government fee for registration of LLP is significantly lower than the incorporation of the private limited company. LegalRaasta offers Private Limited Company at Rs. 13999/- all inclusive. Whereas, LLP Registration fee is Rs. 7999/- all inclusive.
- Fewer documents and less burdensome is the process for registration of LLP as compared to Private Limited Company.
The above reasons have led to a strong growth in the number of LLPs registered in India.
For detailed discussion read Advantages of LLP and If LLP is the right choice for you.
Reason for Private Limited Company Registration
In spite of all the benefits that LLP avail, there are some bottlenecks that business entities preferred Private Limited Company (Read Advantages of Private Limited Company in detail). The reasons are as follow:
- There is no concept of shareholders in case of LLP. All the owners of an LLP are a Partner in the LLP making it unsuitable for investors such as Venture Capitalists and Private Equity Investors who do not intend to actively participate in the management of the Company. Hence, for investors, Private Limited Company is the viable choice. Therefore, if the business entity has the scope for expansion of business, then it must be registered as a private limited company.
- With growing interest among investor in increasing their foothold in the second largest market, Foreign Direct Investment (FDI) is gaining popularity. However, Foreign Direct Investment (FDI) in a private limited company is under the automatic route whereas government approval is necessary for FDI in LLP conversion making it undesirable for investors. Therefore, businesses that have NRI or foreign promoters must prefer incorporation of a private limited company.
With the increasing awareness and simplicity in incorporating LLP, the LLP growth rate is increasing steadily. In the financial year 2014 -15, LLP registration increase by 55%. Most of the small business entrepreneurs are opting for LLP as it is easy to start with a minimum capital, customized LLP agreement, tax benefit and minimum compliance. As the LLP grows, the requirement of equity capital arises. Hence, many entrepreneurs feel the emergent need the LLP conversion into a company for the sake of growth and expansion of business by raising capital through equity funds.
With the growth in business, need for expansion, equity capital requirement, etc., LLPs want to be converted into Private Limited Company. Although, the conversion is not currently possible as both LLP Act, 2008 and Companies Act, 2013 are still on the subject matter. Many businesses started as LLP may now want to convert to a private limited company due to growth in business or for infusion of equity capital. However, the LLP conversion into Private Limited Company is currently not possible in India, as both are silent about the matter.
As per the Ministry of Corporate Affairs:
“LLP conversion into the private limited company would not be allowed under LLP Act, 2008. However, enabling provisions would be required to be made under the Companies Act for such conversion. Necessary action in this regard would be taken when Companies Act would be revised.”
As per Companies Act, 2013:
“COMPANIES CAPABLE OF BEING REGISTERED (SECTION 366):
For the purpose of this Part the “company” includes any partnership firm, limited liability partnership, cooperative society, society or any other business entity formed under any other law for the time being in force which applied for registration under this Part.”
The LLP Act, 2008 does not have any provision for converting LLP into a private limited company. However, the Ministry of Corporate Affairs website defines that an enabling provision would be made when Companies Act is revised. In the newly introduced Companies Act, 2013, LLP is mentioned among business entities that can be registered and become a Company. However, no clarification regarding the procedure for conversion of LLP into Private Limited Company is stated which leaves the hoping LLP into waiting for queue. Therefore, currently, a LLP cannot be converted into a Pvt limited company. But in near future, as more LLP grows, the chance of introduction and of the procedure is bright.