A physical presence in India is imperative to penetrate in the nation’s emerging market. Foreign companies should consider state regulations, physical connectivity, and go-to-market costs when deciding about their Indian expansion. Of equal importance is the form of company structure with a long-term view in mind. Having the right company structure can mean the difference between success and wasted efforts.
There are so many questions to ask when setting Up a business which you may forget to ask yourself how you intend to structure it before the last minute. Therefore, it’s imperative to understand the difference between LLP versus Private Ltd companies, and how should you select which is right for you?
Let us find
| Nature | Company | LLP |
|---|---|---|
| Cost of Formation | Minimum Statutory fee/ expenses (other than professional fees) for incorporation of Private Company of share capital of Rs 100,000 shall be approximately Rs 8,000-9,000. | Minimum Statutory fee/ expenses (other than professional fees) for formation of LLP shall be approximately Rs 3,500-4,000. |
| Taxation |
Company is charged to tax @ 30% plus applicable surcharge and education cess. Company is also subject to dividend distribution tax |
LLP is liable to tax at the same rate as applicable to company. However, share of profit in the hands of partners would be exempt. Deduction of partner salary will be allowed as per
Section 40(b). LLP is not subject to any tax on distribution to its partners |
| Ownership of Assets | Rests with Company independent of its members | Rests with LLP independent of its partners |
| Liability of Partners/ Members | Generally limited to the amount required to be paid up on each share. | Limited, to the extent their contribution towards LLP, except in case of intentional fraud or wrongful act of omission or commission by the partner. |
| Transfer / Inheritance of Rights | Ownership is easily transferable. | Regulations relating to transfer are governed by the LLP Agreement. |
| Transfer of Share / Partnership rights in case of death | In case of death of member, shares are transmitted to the legal heirs. | In case of death of a partner, the legal heirs have the right to get the refund of the capital contribution + share in accumulated profits, if any. Legal heirs will not become partners automatically. |
| Transferability of Interest | A member can freely transfer his interest | A partner can transfer his interest subject to the LLP Agreement |
| Admission as partner / member | A person can become member by buying shares of a company. | A person can be admitted as a partner as per the LLP Agreement |
| Cessation as partner / member | A member / shareholder can cease to be a member by selling his shares. | A person can cease to be a partner as per the LLP Agreement or in absence of the same by giving 30 days prior notice to the LLP. |
| Statutory Meetings | Board Meetings and General Meetings are required to be conducted at appropriate time. | There is no provision in regard to holding of any meeting. |
| Maintenance of Minutes | The proceedings of meeting of the board of directors / shareholders are required to be recorded in minutes. | A LLP by agreement may decide to record the proceedings of meetings of the Partners/Designated Partners |
| Maintenance of Statutory Records | Required to maintain books of accounts, statutory registers, minutes etc. | Required to maintain books of accounts. |
| Annual Filing | Annual Financial Statement and Annual Return is required to be filed with the Registrar of Companies every year. | Annual Statement of accounts and Solvency & Annual Return is required to be filed with Registrar of Companies every year. |
| Audit of accounts | Companies are required to get their accounts audited annually as per the provisions of the Companies Act. | All LLP except for those having turnover less than Rs.40 Lacs or Rs.25 Lacs contribution in any financial year are required to get their accounts audited annually as per the provisions of LLP Act 2008. |
| Credit Worthiness of organization | Due to Stringent Compliances & disclosures under various laws, Companies enjoys high degree of creditworthiness. | Will enjoy Comparatively higher creditworthiness from Partnership due to Stringent regulatory framework but lesser than a company. |
Another key consideration and a very important one is Tax Liability. From an Indian tax perspective, Dividend Distribution Tax (DDT) is currently not applicable in the case of Indian LLPs and thus, they stand on a beneficial footing vis-à-vis a Company which is liable to dual layer of tax i.e. corporate tax at company level and DDT on declaration of dividends. Share of profits earned by partners of an LLP, are exempt from tax in India. This is a big plus-point for foreign investors who are considering repatriation of surplus profits from their Indian subsidiaries in a tax efficient manner.
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NAZEERUDDIN MOHAMMED (Saturday, 19 September 2020 22:05)
What company structure should a foreign start-up company should follow to expand its software based solutions in India. Can you please advise?
Rainer Bostel (Sunday, 20 September 2020 08:13)
Well, share of profits earned by partners of an LLP, are exempt from tax in India. This is a big plus-point for foreign investors who are considering repatriation of surplus profits from their Indian subsidiaries in a tax efficient manner.