The decision that outlives the business plan
Most founders pick a structure in a week and live with it for a decade. A Private Limited Company and a Limited Liability Partnership both give you limited liability and a separate legal identity — but they diverge sharply on tax treatment, compliance load and what investors will accept.
The short version: if you plan to raise equity, issue ESOPs or sell the company, incorporate a Pvt Ltd. If you are building a services or professional practice funded by its own revenue, an LLP is cheaper to run and taxed more simply.
Tax: flat rates, but different bases
A domestic company pays 22% (plus surcharge and cess, effectively ~25.17%) under Section 115BAA, or 15% for new manufacturing companies under 115BAB. An LLP pays a flat 30% plus cess — higher on paper, but partners can draw remuneration and interest on capital that is deductible for the LLP, which often narrows the gap for profit-distributing businesses.
The real difference shows up when money leaves the entity. Dividends from a Pvt Ltd are taxed again in the shareholder's hands at slab rates. Profit shares from an LLP are exempt in the partner's hands under Section 10(2A) — the LLP's 30% is the final tax.
AXAON note — Rule of thumb
If you intend to pull most profits out every year, an LLP usually wins on total tax. If you intend to reinvest profits and exit via a share sale, the Pvt Ltd's lower corporate rate compounds in your favour.
Compliance load: count the filings, not the forms
A Pvt Ltd owes a statutory audit regardless of turnover, AOC-4 and MGT-7A annually, DIR-3 KYC for every director, board meetings with minutes, and event-based filings for every share allotment or director change. Budget ₹25,000–₹60,000 a year in professional fees even at nil revenue.
An LLP files Form 11 (annual return, by 30 May) and Form 8 (statement of accounts, by 30 October). Audit kicks in only past ₹40 lakh turnover or ₹25 lakh contribution. A dormant LLP can run on ₹8,000–₹15,000 a year.
The annual minimum, side by side
- Pvt Ltd: statutory audit + AOC-4 + MGT-7A + DIR-3 KYC + ITR-6 + 4 board meetings
- LLP: Form 11 + Form 8 + DIR-3 KYC for designated partners + ITR-5
- Both: GST returns if registered, TDS returns if deducting, professional tax where applicable
Fundraising and ESOPs: the deal-breaker
Venture funds and most angels invest against equity shares or convertible instruments — neither exists in an LLP. Converting an LLP to a Pvt Ltd mid-raise takes 3–6 months and can stall a round. ESOPs, sweat equity and CCPS are Pvt Ltd-only tools.
If there is even a 30% chance you will raise institutional capital in the next three years, the Pvt Ltd's extra compliance cost is cheap insurance.
What we recommend to founders
Product startup with venture ambitions: Pvt Ltd, with 115BAA regime and a clean cap table from day one. Agency, consultancy or family business distributing profits: LLP, revisit only if an acquisition or fundraise appears. And in either case, put the founder arrangements in writing before the first invoice — the structure protects you from creditors, not from each other.