Company vs LLP - Which is better for your new Startup Venture?

When starting a new startup in India, one of the first and most critical decisions founders face is choosing the right legal structure - Private Limited Company (Pvt. Ltd.) or Limited Liability Partnership (LLP). Both have their own benefits and challenges and making the right decision depends on multiple factors such as tax treatment, compliance requirements, investment-readiness, and mid & long-term vision.

We often get this query from startup founders, so we compiled a breakdown of the challenges and considerations for structuring your startup:

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1. Tax Rate:

Pvt. Ltd. Company:

• Taxed at 25.168% (if opted for Section 115BAA)

• No flexibility in tax treatment or income structuring

• No flexibility of fund management

LLP:

• Taxed at 31.2% (if income < ₹1 Cr), or 34.944% (if income > ₹1 Cr)

• Scope for tax planning exists through structured remuneration or profit-sharing

• Flexibility of fund management through Partner's current account and drawings

Challenge:

LLPs offer some tax planning flexibility but attract higher tax rates than companies (especially for higher-income startups). Pvt. Ltd. companies have lower fixed tax rates but no flexibility in structuring income or fund management.

2. Payout to Investors: Dividend vs. Profit Sharing

Pvt. Ltd. Company:

• Payouts are in the form of dividends, subject to TDS @10%

• Dividend is taxable in the hands of the founders and investors

LLP:

• Payouts can be in the form of remuneration (taxable) or share of profit (non-taxable). TDS @10% is applicable on remuneration, while no TDS is applicable on share of profit.

• Share of profit is fully exempt in the investor’s hands. Remuneration is taxable.

Challenge:

For investor-friendliness, Pvt. Ltd. Companies are preferred, despite double taxation on dividends. LLPs may appeal to closely held firms due to tax-free profit sharing but may deter external investors due to partnership-based structure.

3. Cost of Compliance and Incorporation

Pvt. Ltd. Company:

• Higher cost — MCA fees and stamp duty to be paid as a % of the Capital Amount, if it is beyond a certain level. The fees depend on the State in which the company is being incorporated.

• Cost begins at around ₹5,000 for capital of ₹10,00,000.

LLP:

• Lower cost — Registration and compliance fees range from ₹500 to ₹5,000.

• The registration amount is capped at ₹5,000 even if the capital contribution amount goes higher.

  
  

Challenge:

Startups on a tight budget may find LLPs more affordable to register. However, this cost-saving comes at the expense of lower credibility and scalability (discussed below).

4. Compliance Requirements

Pvt. Ltd. Company:

• Mandatory annual statutory audit, regardless of turnover

• Must maintain formal registers and more reporting requirements with RoC (Registrar of Companies)

LLP:

• Audit required only if turnover > ₹40 lakhs or contribution > ₹25 lakhs

• Fewer reporting requirements compared to a Pvt. Ltd. Company

Challenge:

Private companies face heavy compliance burden, suitable only for businesses with long-term investment or scaling goals. LLPs are easier for early-stage operations but can be limiting later.

5. Financing & External Investment

Pvt. Ltd. Company:

• Highly preferred by Venture Capital Funds (VCs), Angel Investors, Family Offices and Private Equity Funds, especially from foreign investors.

• Terms of investments can be agreed upon through standard agreements like Share Subscription Agreements (SSA) and Shareholder Agreements (SHA), which are widely prevalent and understood throughout the world.

• Shares are easily transferable and secondary transfer of shares can be easily executed.

LLP:

• Introduction of each new investor will require modification in LLP deed and endorsement of all partners

• Secondary transfer cannot be executed without involving other investors/partners

• Foreign investment is complex as valuation norms for valuing LLPs are not widely understood by regulators (based on our past experiences).

Challenge:

If you are planning to raise funds from institutional investors or foreign investors, Pvt. Ltd. is the way to go. LLPs are not ideal for businesses targeting equity-based fundraising.

6. Perceived Reliability and Market Acceptance

Pvt. Ltd. Company:

• Carries stronger brand and legal perception in India and abroad

• Often a requirement for vendor contracts or international expansions

LLP:

May not inspire the same level of confidence, especially among HNIs or foreign clients

Challenge:

Pvt. Ltd. Companies provide greater credibility in the eyes of investors, customers, and suppliers. LLPs might be seen as informal or limited in scope.

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Here's a summary of the above analysis of Company vs LLP legal structure for startup ventures in India:

Parameter	Pvt. Ltd. Company	LLP
Tax Rate	25.168% (when opted for section 115BAA)	31.2% (if income < ₹1 Cr.) 34.944% (if income > ₹1 Cr.) Scope for Tax Planning
Pay out to Founder or Investors	In the form of Dividend, which is subject to TDS @10% Pay-out will be taxable in the hands of the Investor	In the form of Remuneration which is subject to TDS @10%, or Share of Profit, which is not subject to any TDS. Share of profit will be fully exempt in the hands of the founder/investor Remuneration will be taxable in the hands of the founder/investor
Cost	High Stamp Duty and MCA Fees to be paid as a % of the Share Capital Amount, which is comparatively higher, starting from ₹5,000 for a capital of ₹100,000.	Low Fees ranges from ₹500 to ₹5,000, depending on the amount of contribution, however it is capped at ₹5,000.
Compliances	High Mandatorily required to get annual statutory audit done Statutory registers to be maintained and routine filings to be made under MCA rules	Low Audit required to be done only if annual turnover exceeds ₹40 Lakhs or Contribution exceeds ₹25 Lakhs Lesser filings to be made under MCA rules
Financing and External Investments	Most convenient format to induct new investors, especially foreign investors.	In the case of new investors, Partnership Deed will have to be updated, requiring ascent of all partners. Foreign Investment at premium valuation is a challenge.
Reliability	Conveys maximum reliability to the market, especially international markets.	May not be preferred by high-net-worth sophisticated investors.

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Conclusion

Both LLP and Pvt. Ltd. Company forms of legal structure are considered as 'Body Corporate' and in general both are considered as formal structures by Banks, Government and other Stakeholders. Both forms of business are also eligible for the Indian Governments' benefits under the Startup India initiative. However, as a startup grows, several other nuances like fundraising from investors and global expansion almost always kicks in, rendering the LLP structure a bit of hassle in the medium and long-term as it would necessitate conversion into a Pvt. Ltd. Company. That said, there is definite cost benefit in LLPs vis-a-vis Pvt. Ltd. Companies, given the lower set up and compliance costs. Therefore, if the founders wish to conserve capital in the early years, while knowing that they would be bootstrapped for the foreseeable future (at least 3 years), then it is better to go for an LLP structure. However, if the founders are certain that they will attract external investors and expand globally within 2-3 years of inception, then it's better to go for a Pvt. Ltd. Company structure from the get-go, to avoid the hassle of conversion from LLP to Company, which would be imminent in the near term.

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You can direct your queries or comments to the authors here.

Disclaimer: The material herein is provided for informational purposes only. The information should not be viewed as professional, legal or other advice. Professional advice should be sought prior to actions on any of the information contained herein. CKA is not responsible for any matter concluded by any person based on the contents of this article.