Introduction

When planning to raise funds, your business structure matters — especially when choosing between LLP Registration and forming a Private Limited Company. Both come with unique advantages, but one may be better suited for securing investments and scaling your venture. In this detailed guide, Lawfinity helps you make this decision based on the investor's perspective, legal compliance, taxation, and flexibility of funds based on the recent Indian laws on fundraising under LLP vs Pvt Ltd Funding.

INVESTOR PREFERENCES

One of the most important factors in LLP vs Pvt Ltd Funding is the extent to which each entity structure corresponds with what the investors desire.

● Equity Issuance: Private Limited Companies are able to issue equity shares and convertible securities, thus attracting interest from venture capitalists and angel investors. In contrast, Limited Liability Partnerships do not issue shares; they issue partnership interests only.

● Investor Fit: Typically, venture capital funds, angel investors, and institutions are interested in investing in Private Limited Companies, not Limited Liability Partnerships.

● Governance Control: In Private Limited Companies, governance consists of a board of directors, reserved rights, and various investor protections. Limited Liability Partnerships are governed by flexible partnership agreements, which do not include the standardized corporate governance elements that venture capitalists tend to expect.

● Exit & Transferability: Exit and liquidation of shares in Private Limited Companies is straightforward compared to Limited Liability Partnerships. In the latter, legal complexity is added to the withdrawal of a partner.

● Market Trends: Most Private Limited Companies and high-growth Indian businesses operate in the startup space to conform to funding expectations and trends in the market.

● Investor Trust: The transparency that Private Limited Companies provide, along with the investor familiarity and support of corporate law, builds trust.

LEGAL COMPLIANCE

The final difference between LLP Registration and Pvt Ltd is the level of legal compliance and regulations that need to be adhered to under LLP vs Pvt Ltd Funding.

● LLP Compliance: Under the law, Limited Liability Partnerships have less formal compliance expectations. They do not need to hold board meetings, have annual general meetings, and only need to conduct audits if the business exceeds a turnover of ₹40 lakh or a capital contribution of ₹25 lakh.

● Pvt Ltd Compliance: It includes minimum of four board meetings in a year, annual general meetings, complete statutory audits, and multiple MCA filings like AOC-4, MGT-7, DIR-3 KYC, etc.

● New Compliance Rules for LLPs: Under amended LLP Registration rules, there are new obligations such as the maintenance of a register of partners and beneficial interest.

● Conversion Flexibility: While LLPs can be converted into Pvt Ltd Companies, the process requires approval from the MCA, consent from partners, and adherence to specific conditions.

● Small LLP Category: A new class of “Small LLPs” introduced under the amendments enjoys lower compliance costs, but is only applicable to businesses with lower contribution and turnover.

● ROC Filings & Transparency: Pvt Ltd companies are expected to maintain higher transparency standards, which aligns with the needs of investors’ due diligence assessments.

TAXATION DIFFERENCES

Your choice of entity also affects the taxation of profits, distributions, and investments — for the business and for the investors under LLP vs Pvt Ltd Funding.

LLP Taxation

● LLPs are taxed at a flat 30% rate on net profits.

● There is no dividend distribution tax (DDT) or secondary tax on profit sharing.

● Profits shared with partners are tax-free for the partners.

● There is no tax on re-invested profits unless a distribution is made.

● An audit will not be needed until a company reaches certain thresholds.

Pvt Ltd Taxation

● The taxation rates for Pvt Ltd firms are 25% to 30%, based on the firm’s turnover.

● Although DDT is no longer in place, dividends are now taxed in the shareholders’ hands.

● Shareholders are liable to pay capital gains tax as well while selling shares.

● Companies can issue ESOPs and other instruments which are taxed as per the Income Tax Act.

● An audit is necessary no matter the turnover or profit.

Tax Planning & Efficiency

● For smaller teams, LLPs are more tax effective in the distribution of profits.

● For Pvt Ltd entities, taxation is more predictable and structured, which is aligned with the expectation of the investors.

● The effective tax rate is slightly higher in Pvt Ltds due to double taxation, but it is more tolerable for investors compared to funding as LLPs.

LAWFINITY’S FUNDRAISING GUIDANCE

At Lawfinity, we provide complete support for businesses in selecting the appropriate structure and preparing for funding. Our legal experts integrate your business with your capital objectives, whether you are ideation or in the process of scaling under LLP vs Pvt Ltd Funding.

● Structure Advisory: We assess your projected growth, funding requirements, and determine whether you should go for LLP Registration or Pvt Ltd.

● End to End Incorporation: There is complete legal assistance for LLP Registration, Pvt Ltd incorporation, or conversion — from name approval to final certification.

● Customized Agreements: We draft LLP Agreements, Shareholder Agreements, ESOPs and more, while taking into consideration your funding objectives and negotiations with investors.

● Tax and Compliance Strategy: We assist you in comprehending the implications of tax, designing profit sharing arrangements, and ensuring legal compliance for all your filings throughout the various stages.

● Conversion Support: We provide all the necessary documentation and approvals to ensure a seamless legal conversion to Pvt Ltd from LLP Registration.

● Investor Readiness: Your business is made investor ready with data rooms, compliance documentation, and governance documentation for the business.

● Post-Funding Compliance: We will continue to manage the ROC filings, board resolutions, and all reporting obligations after you have raised funds.

● Fundraising Legal Strategy: We will assist in structuring your capital raise in a way that is both legal and attractive to your prospective investors to avoid any legal issues.