Which Form of business is better? Private Limited Company or LLP

There are many entities operating in India which can be used for listing of companies. These have their own structure and functioning way. Sole Proprietorship is one way of doing business in which the regulatory obligations are minimal. But in case of sole proprietor model the company is not having its own existence.

The proprietor and the company share all the legal and financial provisions and compliance. Thus in order to safeguard the assets of the owner, it becomes important to limit the boundaries of business into a separate entity. This can be done only through the registration of companies.

Limited Liability Partnership

The business can be registered in the form of LLP which is Limited Liability Partnership. In case of LLP, there is a formation of an entity which can be viewed as a separate entity than the owner. The LLP has its own legal and compliance regulations which are different from the directors/ partners. The LLP Act has been introduced in 2008 which mentions the flexibility of the entrepreneurs to function as traditional partners and at the same time providing them the necessary benefit of the corporate.

Further the LLP structure may not be suitable enough for some businesses. The regulatory and compliances which in case of the private limited company is stringent but has more safeguards provided to make secure the interest of the directors. The private limited companies need to follow the accounting standards which is not in the case of LLPs. In the case of non-compliances the penalties are very heavy in case of LLPs, however, the risk is mitigated by designated partners getting disbarred in the case of failure of compliance.

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Private limited company

A private Limited Company is a registered entity which has strict compliance and regulatory norms and follows the accounting standards. The regulatory part of the organisation hence formed has a direct relationship with the fundraising and procurement process.

As the Private limited company has directors with limited shares and hence the debt/equity ratio and liquidity is unaffected in case of non-compliance or any other regulatory issue. In case of limited liability partnership, these ratios are not defined and hence in case of oppression or mismanagement, the limited liability partnership can suffer as the liability is technically unlimited and is not bounded by shares.

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Thus, it solely depends upon the partners/ directors and the regulatory needs of the entity formed with respect to the business plan and the regulatory and statutory support needed to fulfil those plans. The business person can choose from these different forms of business structure.