Company And Limited Liability Partnership Advantages And Disadvantages

Key takeaways

• The Indian Partnership Act of 1932 governs partnerships, and the Limited Liability Partnership Act of 2008 governs limited liability partnerships.
• The governing rules for private limited companies can be divided into two categories: general laws that apply to all companies generically and industry-specific laws that apply to companies based on their lines of business.
• A private limited or public limited company has the advantage over a limited liability partnership in terms of obtaining financing
• LLP is the greatest option for conducting business when one considers the cost of compliance, the simplicity of doing business, the ease of filing documents, and the maintenance of records.

Company

According to the Companies Act 2013, a limited company is one that has been registered. Private companies and public companies are the two main forms of businesses in India. Limited Liability Partnership (LLP) is more comparable to an alternative to Private Company and vice versa.

A Private Limited Company is a privately held small business entity that restricts the number of shareholders to 50 and does not permit public trading of the shares. It also limits the owner's responsibility to their shares. It is a business entity owned by a small group of persons that must go through the Companies Act of 2013 registration process in order to be recognised.

The share capital is the factor used to define ownership in a Private Limited Company; the percentage of ownership is based on the number of shares each owner holds in the company. The main reason this structure appeals to investors is that it enables them to claim ownership in the company while also limiting their liability to the shares they own.

Partnership 

Partnership is a business arrangement with two or more members who come together to share the earnings and losses of the business equally among themselves. This is also one of the key distinctions between a Partnership and a Private Limited Company

There are 3 major categories of partnership:

• General Partnership– A general partnership is a type of business arrangement when two or more people concur to divide all the assets, profits, and monetary and legal obligations of a jointly owned company. In a general partnership structure, all parties share equally in the earnings as well as the legal and financial responsibility.
• Limited Partnership- There are two fundamental conditions for a Limited Partnership setup: first, there must be at least one partner who will assume full personal responsibility for the partnership's debts, and second, there must be at least one partner who will only assume responsibility for the amount invested. The silent partner is another name for this partner. The silent partner won't participate in the partnership's management or day-to-day operations.
• Limited Liability Partnership- Any company with a minimum of two members and an unlimited maximum number of members is referred to as a limited liability partnership. Through the Limited Liability Partnership Act of 2008, LLP was first implemented in India.

Governing Acts

The Indian Partnership Act of 1932 governs partnerships, and the Limited Liability Partnership Act of 2008 governs limited liability partnerships.

The governing rules for private limited companies can be divided into two categories: general laws that apply to all companies generically and industry-specific laws that apply to companies based on their lines of business.

General laws that apply to all the companies: 

• Income Tax Act, 1961, 
• Payment of Gratuity Act, 1972,
• Central Sales Tax Act, 1956, 
• Employees State Insurance Act, 1948, 
• The Maternity Benefit Act, 1961,
• The Finance Act, 2004, 
• Wealth Tax Act, 1957, 
• Employees Provident Fund and Miscellaneous Provisions Act, 1952, 
• Environment Laws 
• Labour Laws and Provisions.

Advantages and Disadvantages of Pvt Ltd Company

Advantages

• Separate Legal Entity: By establishing the company as a legal person, one can profit from its advantages, such as owning property in the firm's name or even taking on debts. These debts will not be the liability of the company's shareholders or other debtors to the creditors.
• Sue and be Sued: The company can bring a lawsuit on its own behalf since it is a separate legal entity. By fighting under its own name, the company is able to protect the identities of its members.
• Limited Liability: The amount of shares a member of a firm owns determines how much liability they have. This lessens the additional weight of having to shoulder everything alone.

Disadvantages

• Restricted Shareholders: A Private Limited Company structure is limited to a maximum of 50 investors. Therefore, the likelihood of additional development or expansion is zero.
• Registration Process: To file all the required paperwork, the company registration process often takes 10 to 20 days. This makes it a demanding and busy job.
• Division of Ownership: Every decision must have the approval of two people since there must be a minimum of two directors and two shareholders in a company. Even if the other shareholders have a small number of shares, there must be a minimum of two shareholders.

Advantages And Disadvantages of Partnership

Advantages

• Easy to Form: It is simpler to start a partnership firm with the prior consent and willingness of two or more people because registration is not necessary. As a result, the beginning goes more easily for a partnership.
• Better Management: The partners are involved in the Partnership Firm's daily operations, which aids in better administration of the business.
• Sharing of Risk: As one of the fundamental tenets guiding the formation of the firm, in a partnership firm each partner assumes an equal share of the risk, alleviating the burden from other partners.

Disadvantages

• Not Being a Legal Entity: Contrary to the Company, a partnership firm is not a legal entity and has no independent existence. It ends when the partners split up.
• Uncertainty of Future: A partnership firm's future is extremely uncertain; it disintegrates if any of the partners pass away or declare insolvency, and the addition of a new partner can only be approved by the surviving partners.
• Conflicting Nature: Conflicts arise in a situation where there are multiple persons working and they all have the same amount of authority. This interferes with the company's regular operations or with the direction it was intended to take.

Advantages LLP has over a company

•  In an unlimited partnership, each partner is responsible for the negligence or wrongdoing of every other member; whereas, in an LLP, each partner is solely accountable for their own actions. The actions of other partners do not bind them. They alone are accountable for their activities, including what they do, how they act, and what happens as a result.
• Partners in an LLP are only liable for their proportionate share of the business, as opposed to all partners in a partnership, who are all subject to unlimited liability. In this situation, other partners in the partnership had to bear the loss brought on by the negative conduct of one or more partners.
•  Even though the shareholders are regarded as the true owners in a company structure, they are unable to participate directly in management. To take management-related activities, they must adhere to complicated legal requirements and lengthy procedures. In an LLP, the actual owners take an active role in management.

Similarities Between Pvt Ltd and Limited Liability Partnership

• Separate legal entity: They each have their own distinct legal entities. This implies that Private Limited Company or LLP is viewed by the law as a different person.
• Benefits on taxes (taxation): Tax advantages are provided to both types of business formations. 30% of the profits would be exempt from taxes.
• Limited Liability: The partners' liabilities would be constrained in an LLP or a private limited company.
• Registration Process: Both types of companies must register with the Ministry of Corporate Affairs: Pvt Ltd registration and LLP registration.

Conclusion 

After comparing the two, a private limited or public limited firm has the advantage over a limited liability partnership in terms of obtaining financing. However, LLP is the greatest option for conducting business when one considers the cost of compliances, the simplicity of doing business, the ease of filing documents, and the maintenance of records. A LLP offers clear benefits from a tax perspective.

Learn the practical aspects of CrPC HERE, CPC HERE, IPC HERE, Evidence Act HERE, Family Laws HERE, DV Act HERE