In this article, we will discuss - Limited liability Company vs. Private Limited Company
An LLC, although a business entity, but it is a type of corporation which is not incorporated. As the Limited Liability Company is a combination of corporation and sole partnership is having characteristics of both.
The characteristics of LLP which is similar to a corporation is that it is having limited liability and the characteristic of a limited liability company which is similar to a partnership is there is no double taxation. Limited Liability Company does not have many formalities to maintain.
Limited Liability Company is a matter of state i.e. it can be incorporated as per the state statute. Each state can have different regulations for setting up of Limited liability Company in its state, so the regulations of LLC differ from state to state.
Owners of LLC are known as members. In most of the states, there are no restrictions on the maximum number of members and in most of the states, there is a restriction that there should be the only single owner in LLC. Members of Limited Liability Company can be individuals, corporations, other LLC or foreign entities.
2. Insurance companies
Note: Such type of companies cannot be incorporated in India.
Type of Limited Liability Company;
1. Domestic Limited Liability Company:
When an LLC is conducted is conducting its business in the state where it was incorporated or
2. Foreign limited liability company:
When an LLC is having the physical appearance in the state other than in which it was formed it is called Foreign Limited Liability Company.
3. Professional Limited Liability Company:
When an LLC is organized to perform professional service. For the formation of such kind of company, various kinds of state licenses are necessary.
1. They have to comply with fewer regulations.
2. They have a separate entity
3. Pass through taxation i.e. profit directly goes to its owners and then it is charged for tax as their individual profit which will avoid double taxation.
4. They are easy to form and maintain.
5. They are more flexible as they have few restrictions.
The disadvantage of Limited Liability Company:
1. Limited Liability Company cannot be listed on stock market.
2. Obtaining funds from venture capital funds is difficult.
3. Limited liability Company has a limited life and they usually dissolve when a member dies.
Other important points:
1. Limited Liability Company is not required to have Board of Directors. It is managed by its members only.
2. Limited Liability Company does not have shareholders as the shares cannot be sold on the stock market.
Private Company can be termed as a Company which is having private ownership. Private Company may issue shares and have shareholders but their shares do not trade on public exchanges.
Private Company is held by few individuals privately having a separate legal entity. A Private Company should have a minimum number of 2 shareholders and maximum of up to 200 shareholders.
It should have a minimum number of 2 directors and it can have a maximum number of 15 directors.
Exemptions to private limited company
1. Incorporation by single form i.e. INC-29.
2. Name availability, allotment of DIN, Company incorporation & commencement of business will now be possible through a single form.
3. No need of minimum capital requirement as previously required.
4. Any director if interested in any transaction can participate in any meeting in which discussion regarding such transaction is taking place only after he has disclosed his interest.
5. There is no need to have separate voting on the resolution for the appointment of more than 1 director. In other words, a simple vote could also decide the appointment of two or more directors through a single resolution.
6. ESOP can be given by ordinary resolution instead of Special resolution.
The advantage of forming a Private Company:
1. Limited Liability:
2. Restricted Trade of shares:
This can be considered as an advantage because the restriction placed on the transferability of shares will prevent the hostile takeover as the shares cannot be acquired by the outside buyers.
3. Continued Existence:
As it has the existence even after the owner dies, it has an independent legal identity.
4. No minimum capital requirement:
As per earlier law, there was a mandatory requirement that to incorporate a private limited company there should be a minimum paid up capital of 1,00,000 but this requirement has been taken away by Companies Act 2013 as per 2013 Act no minimum capital is required now.
Reasons why to opt for Private Limited Company:
1. As now a day the success of the business is possible only if the employees are working efficiently, employees will work efficiently only when they are paid a handsome amount and something more is paid apart for basic salary. So only in case of Private Limited company and Public Company ESOP can be offered to its employees which will retain the talent of efficient employees.
2. In today’s scenario, the basic requirement for the growth of any business is capital, no business can be grown unless a sufficient amount of capital is infused in it. So the capital requirement of a private limited company can be fulfilled easily as it can issue private equity shares which is easily acquired.
3. The problem of the hostile takeover is not possible in case of a private limited company as the shares are not freely transferable so no outside buyer can acquire the shares so there are no chances of the hostile takeover.
4. In today’s scenario people like to get connected only with that business which is having transparency in case of sole proprietorship or limited liability partnership business are not registered with MCA so it is not easy to track their status but in case of Private Limited Company as they are registered on MCA any person before having a relationship with the company can easily track its record.
5. As in another form of business, it is not easy to exit but in the case of a private limited company, there is an exit strategy as all the shares can be sold or transferred to other entity without any difficulty.
6. Only Private Limited Company & LLP are allowed for 100% Foreign Direct Investment through automatic route in the permitted business activity. So funds from foreign can be received easily
Taxation requirement of Private Limited Company
1. Minimum Alternate Tax:
In case your taxable income does not exceed 1Crore – 20.0077%
In case your taxable income does not exceed 1Crore – 19.055%
It is applied only when the income exceeds 1Crore during the year.
3. Dividend Distribution Tax:
The dividend given by the company is required to pay DDT @ 16.2225%
4. Loans to Director:
It is treated as a deemed dividend in the hands of a director so liable for tax.
5. Expenditure for family planning for the benefit of employees:
It cannot be claimed as deduction u/s 36(1) (ix) as per Income Tax Act 1961.
6. Remuneration to Director:
Remuneration can be paid there is no maximum ceiling limit.
Tax saving tips for Private Limited Company:
1. Salary to Director:
Salary to directors is the easiest way of saving tax in private limited company. As you are a co-founder of the company, end of the day you will surely be taking out the salary from the profit of the and if take dividend instead of salary then your company will have dividend distribution in addition to income tax.
2. Sitting fees to Director:
A company may pay sitting fees to its Director for attending Board Meeting which is liable only to be deducted @10%.
3. Start up expenses:
The expense incurred for the incorporation of the company is generally borne by the owner but the advantage of such expenses can be taken.