Advantages of LLP Over Private Limited Company
The advantages of LLP over private limited company vary depending on the goals and size of a business.3 min read
The advantages of LLP over private limited company vary depending on the goals and size of a business. Different business structures are right for different ventures; it's not a one-size-fits-all scenario. The best way to decide the right fit for your company is to learn about the ins and outs of the various types.
What Is a Private Limited Company?
Private limited companies are voluntary associations of two or more members, with the membership amount not going beyond 200. Private limited companies (PLCs) benefit from limited liability, and they transfer shares to members only. A PLC is not a public company, which means that sales of shares are not allowed to be opened to the public market.
Businesses registered as PLCs enjoy existence as independent legal entities. This means that they can own property, be sued, and pursue legal action, just as an individual can. PLCs can remain small, as they are only required to have two or more shareholders and two or more directors. Owners of PLCs enjoy protection for their personal assets thanks to the limited liability nature of the business.
Once shares are allotted to the members or owners of the PLC, those members cannot freely transfer shares between one another. This protects share distribution practices. A PLC may have a continuous existence if the members choose to do so. Just like an LLC (limited liability company), the articles of association of a PLC allow for other requirements and regulations to be put in place as the members see fit.
What Is an LLP?
A limited liability partnership (LLP) is another business structure type. This is basically a hybrid structure between the partnership and the LLC. Partnership firms enjoy flexibility when it comes to structuring the management aspect of their business, and LLCs enjoy liability protection. An LLP benefits from both of these characteristics.
Only two partners are required to form an LLP, and the business is viewed as a separate legal entity. There is no minimum requirement for the capital contributions of members. A capital contribution is the amount of money a member or partner of a business first puts into the business. LLPs form partnership agreements to govern the running of the business. It is fairly simple for other entity types and law firms to convert to an LLP if they want.
LLP and PLC Similarities
There are some similarities between LLPs and PLCs. Both entity types must have each of their directors obtain a DSC (digital signature certificate) and a DIN (director identification number). The DIN for a partner in an LLP is called a DPIN, or designated partner identification number.
Both business types must file formation documents in order to be legally recognized. These documents include articles of association and operating or partnership agreements.
Advantages of an LLP Over a PLC
Many business owners choose to form an LLP instead of a PLC, or even might convert their PLC to an LLP. They do so because they find some significant advantages to the LLP structure over the PLC structure. These advantages include:
- Member requirements.
- Formation requirements.
- Flexibility in member contributions.
- Registration costs.
- Fewer yearly requirements.
LLPs only need two members to form, and they do not have a maximum limit. This allows businesses of many different shapes and sizes to choose to form as LLPs. PLCs cannot exceed 200 members. LLPs are also easier to form than PLCs.
The partners of an LLP may contribute whatever they want to the company without restriction or minimum requirements. This means that a partner's contribution to an LLP could be in the form of manpower or property, rather than just what can be measured in dollar signs.
Forming LLPs is generally less expensive than forming PLCs. The formation fees and annual fees are lower. There are also fewer requirements to comply to when running an LLP. Throughout the years, PLC owners will need to keep up with annual requirements and filings, but LLP owners have fewer to worry about. PLCs are also subject to yearly audits, but LLPs do not face that requirement either unless they bring in a large amount of capital per year.
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