LLP vs. Private Limited: How to Choose Company Incorporation

LLP or Pvt Ltd.? – well, that’s a common question a lot of early stage startups have.

[LLP or Pvt Ltd.? – well, that’s a common question a lot of early stage startups have. So here is Vakilsearch team helping you answer the query with few case studies. ]

A classic dilemma which an entrepreneur faces today is whether to choose between a Pvt. Ltd. Company and an LLP. In addition to Partnerships and Proprietorships, these two have become popular options for people starting businesses. Since we get asked this question all the time, and have heard quite a few stories and helped entrepreneurs choose, we thought we would clear the air a little bit with a few case studies to help you choose between these options. Please note that none of these are real client case studies and no confidential information has been discussed.

Case study 1: We are four friends who have an idea for a social networking platform which enables bloggers to showcase their blogs to like-minded folk. How should we start?

Good question. The best option here would probably be a simple Partnership, because a Partnership comes without the regulatory shackles which a Company or LLP bring with them, and more importantly, is cheap to form. A strong revenue earning potential in this site will be realized only when it gains serious traction. And that may take a long time.

So avoid investing the money in incorporating a Company or an LLP right now, and get started with a simple Partnership. Invest the money you save in online advertising and promoting the product.

 

Case study 2: We are scientists working on an interesting product. But we do not have a business plan yet and are not clear about how to monetize it. The idea came from one of us initially, but we have now all worked on it and contributed. How do we get started now?

This is a tricky one. The best option here would probably be a Private Limited Company, for two reasons.

Reason 1 – Your most significant asset here is your intellectual property. The process of valuing your intellectual property and exploiting its commercial value is going to be the key to your financial success.

A Private Limited Company here will be the most beneficial in the long term. From a financial perspective, a Company offers unmatched options to value and account for intellectual property, and selling a very small share of a successful company can bring you the resources to keep the Company going.

Reason 2 – The second reason why we would recommend a Company over an LLP in this case is an extension of the previous reason. An LLP is a huge advancement over traditional modes of doing business like a Partnership, but is still a partnership-like association in the sense that the process of bringing in additional human resources into the core group of founders is not as easy and smooth as it is with a Private Limited Company.

With your Company, you are a group of scientists, but from the facts described, you do not have any background or experience in product building and marketing. Hence, bringing in someone with a strong marketing background and capable of converting your great idea into a great product (sort of like what Eric Schmidt did at Google) will make all the difference between where you are and where you eventually want to be.

This was the first part of a 4 part series. We will be looking at multiple scenarios in subsequent parts and trying to help you make the right choice for your business.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

Recommended Read:

Discussion: LLP Vs Pvt Ltd from a tax efficiency perspective

» More Legal Resources for Startups

[This is a 4-part series. If you have any questions, please leave them in the comment section.

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