LLP or Private Limited? Why Your Agreement Template Matters

Two different statutes

A private limited company is a creature of the Companies Act, 2013. Its constitution is its memorandum and articles, its owners hold shares, and a great deal of what governs it, from related-party transactions to share transfers, sits in the Act itself.

An LLP is governed by the Limited Liability Partnership Act, 2008. Its owners are partners, its constitutional document is the LLP agreement, and the statutory framework is considerably lighter. That lightness is the attraction, and it is also why provisions drafted against the Companies Act have nothing to attach to.

What does not translate

• Share transfer restrictions, ROFR and tag-along: an LLP has no shares, so the analogous provisions govern transfer of partnership interest and work differently.
• Articles of association: an LLP has an LLP agreement, so the company-law point about mirroring the SHA in the articles does not apply in the same form.
• ESOPs: employee share options are a company concept and do not map cleanly onto an LLP.
• Preference shares, liquidation preference and anti-dilution: the instruments investors use are company instruments.
• Section 188 related-party approvals and Sections 185 and 186 on loans and investments are Companies Act provisions.

Why most funded startups are companies

Institutional investment is generally structured through a private limited company, because the instruments investors use, preference shares with defined rights, options pools, and the governance machinery around them, are company-law constructs. An LLP can raise capital, but not in the shape a venture investor expects.

That is the practical reason founders who intend to raise institutionally either incorporate as a company at the outset or plan a conversion before the round. Leaving it until an investor is at the table adds a workstream at the point when speed matters most.

If you are converting

Conversion from LLP to company is provided for and is done regularly, but it is a process with filings, approvals and tax considerations rather than a form-filling exercise. The documents also need to be rewritten rather than renamed, because the LLP agreement and the articles do different jobs.

The specific steps and the tax treatment depend on your situation and are worth taking to a company secretary and a tax advisor together, since the two sides interact and getting one right while ignoring the other is the usual failure mode.

What to check in the document you have

Read the document you are actually working from and see which statute it assumes. References to shares, shareholders, articles of association, board resolutions and the Companies Act indicate a company template. References to partners, contribution, designated partners and the LLP agreement indicate an LLP template.

A hybrid, which happens when a company template is edited by search and replace, is the worst outcome, because it reads as though it works. If you find one, that is worth having redrawn properly rather than patched.