Choosing an LLP over a Private Limited Company? Not such a no-brainer, really

Many people speak to us today asking us to start their LLPs – it’s much easier, far less compliance, easier to manage etc. etc. We’ve heard these and other reasons for choosing the LLP route over the private limited route.

However, although it does have its advantages, the compliance checklist for an LLP is by no means significantly shorter than it is for a Private Limited Company.

Remember that both are incorporated entities – and you as a member enjoy the privilege of limited liability – both are new institutions created with a life and existence of their own. This is unlike a proprietorship firm or a partnership, which are both just loose groupings of individuals.

Just to start with the facts, the compliance checklist for an LLP is as follows:

1. Filing of annual returns: Within sixty days of close of financial year

2. Filing of notice with the Registrar within thirty days in case of a new partner or removal of a partner

3. Filing of notice with the Registrar within thirty days in case of change in the name or address of a partner.

4. Decisions taken by partners are to be recorded in minutes within thirty days of taking such decisions.

5. Auditors (CA) to be appointed, for the first financial year – at any time prior to close of financial year and in all other cases 30 days prior to the close of the financial year.

6. Filing of form within thirty days with the Registrar for changes in the LLP Agreement.

The only exception, and where an LLP scores above a Private Limited Company, is that audited financial statements need not be filed in case the revenue of the LLP is less than Rs. 40 lakhs per annum.

But is this a real advantage?

I must state here that the advantage which an LLP gives you is not so significant, and is in fact more than countered by some of the disadvantages – for instance, issuing ESOPS to your employees is logically impossible, getting investors into your Company is relatively more difficult and diluting or liquidating your stake on the secondary markets is not possible either.

So am I suggesting that you should not form an LLP at all? Not really. There are cases in which an LLP may in fact make sense. When the vision of the entrepreneur is to build a business which will be funded by accruals and internally driven, an LLP makes sense.

But the moment the goal is to build a scalable start-up which can draw in investors from the outside, and you forsee bringing in external capital, an LLP begins to make lesser sense. The Company mode of doing business has been around for 60 odd years now, as opposed to the 3 years that LLPs have been around. So the law around bringing in capital, diluting and liquidating stake and secondary market transactions is very evolved for Companies.

Also, while an LLP gives you a single option – bringing in a person as a Partner, a Company gives you multiple options. You can even have a person in your Company as just a shareholder, with no position on the board of the Company.

It’s no wonder then that practically every large enterprise, or every enterprise with large aspirations, chooses the company mode of doing business.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

- More resources on company incorporation in India.