You may have come across conflicting facts about a Limited Liability Company (LLC) and a Limited Liability Partnership (LLP) when you consider starting a new business (LLP). These two business categories may appear to be the same at first glance, but there are some significant variations between them. Most people misunderstand these two for one and the same thing because they combine the characteristics of a general partnership and a business. In LLP the internal governance structure is regulated by the partnership agreement, but in the case of LLC, the same is regulated by the respective statute.
The concept of LLPs was first introduced in India in 2008, with the enactment of “The Limited Liability Partnership Act 2008,” while the first limited liability partnership was established in 2009. As previously mentioned, LLP stands for Limited Liability Partnership, which means that each of the incorporated legal entity’s partners has only limited responsibility to the incorporated legal entity. The definition of an LLC (Limited Liability Company) is very similar to that of an LLP (Limited Liability Partnership). It, too, is a legal organization that acts as a combination of a partnership and a corporation, limiting the liability of its ‘partners.’ Since limited liability companies (LLCs) are not incorporated in India, the principles relating to them will be discussed first. State laws do dictate who is and is not allowed to form an LLC and an LLP.
Here in this article, we will discuss the basic difference between LLC and LLP.
What Is a Limited Liability Company (LLC)?
As previously mentioned, a limited liability company (LLC) is a legal entity, although it has yet to be recognized by Indian law. Due to its tax advantages and the essence of its management, it is usually favored by small businesses and companies in international law. LLCs are a combination of conventional companies and partnerships; as a result, LLCs may have multiple owners, ranging from private individuals to international entities and even other LLCs.
It’s a hybrid structure in the sense that it incorporates the characteristics of a general partnership and a company. It is the most common business structure in the United States, the United Arab Emirates, Poland, Japan, Brazil, and other nations, with different names. LLCs have a significant amount of versatility. They may, for example, have as many members as they want, and corporations are allowed to be the members. While corporations are subject to state-mandated membership and management reporting standards, however, LLCs are not.
Most notably, LLCs are exempt from paying taxes. Instead, like a partnership, their gains and expenses are transferred on to their members’ individual tax returns. As a result, members enjoy the advantages of avoiding the “double taxation” of corporations as well as receiving tax relief from the poor performance of their LLCs.
What Is a Limited Liability Partnership (LLP)?
A general partnership of two or more owners is known as a limited liability partnership (LLP) (called partners). LLPs enjoy the same tax benefits as LLCs. Corporations, on the other hand, are not permitted to own them. The most notable distinction between LLCs and LLPs is that LLPs are required to have at least one managing partner who is personally liable for the partnership’s conduct. Anyone in possession of an LLP is legally exposed in the same way as the owners of a simple partnership are. If silent partners and investors in an LLP do not take on a managerial role, they are protected from liability. If they do, a court could pierce the veil of liability protection.
LLPs shield their partners from liability by restricting their liability to the contribution agreed upon during incorporation. At the same time, as a legal entity, it is responsible to the full extent of its assets. LLPs help to prevent mutual responsibility of a partner who is not engaged with another and whose negligence causes misconduct by allowing liability limits. The partners’ relationship is regulated by the agreement they signed, which aids in the avoidance of minor disputes.
A minimum of two partners is required for the establishment of an LLP, with no maximum cap. regulated by the contract or agreement between partners, the roles and responsibilities of the said partners are governed by the law. An individual, corporation, or another LLP, may form a partnership and reach an agreement.
Key Differences Between LLC and LLP
|LIMITED LIABILITY COMPANY||LIMITED LIABILITY PARTNERSHIP|
|1. LLC is a privately-owned corporate entity that combines the characteristics of a company and a partnership.||1. LLP refers to a type of partnership in which partners’ liability is limited to the amount of capital they contribute.|
|2. The owners of LLC are known as members.||2. LLP is owned by the partners.|
|3. In LLC, the individuals are all protected from personal liability for any debts or lawsuits filed against the business. Creditors and individuals who have been directly harmed by the business can’t sue any of the business members for debts.||3. LLP, partners are personally liable, but only in so far as it applies to their own negligence. One partner will not be held responsible for the other’s actions. This means each individual has liability protection from wrongs committed by the other partner.|
|4. Memorandum and Articles of Association are the two documents that consist of all the details regarding LLC.||4. The limited liability partnership agreement is the document, that contains the basic details of LLP.|
|5. A limited liability company must add “LLC” at the end of its name.||5. Likewise, the limited liability partnership is required to add “LLP” at the end of its name.|
|6. A single person can form an LLC, and that individual can be a business person or anyone else.||6. With an LLP, the organization is limited to people who are licensed professionals in their distinctive fields.|
|7. A limited liability company maintains its books of accounts on an accrual basis.||7. LLP can choose to maintain their accounts either on a cash or accrual basis.|
|8. The life of an LLC is limited, in the sense that, if any of the members dies or leaves the organization, the business goes to dissolution.||8. On the contrary, an LLP has a perpetual succession|
|9. LLC is liable to pay various taxes that are income tax, dividend distribution tax and minimum alternate tax.||9. LLP is subjected just to income tax and alternate minimum tax.|
|10. An LLC is a business vehicle that is closely held and combines the elements of company and partnership.||10. An LLP is a kind of partnership, wherein the liability of partners is limited to the capital contributed by them.|
Compliance Requirement for Both LLC And LLP
In the case of an LLC, the annual cost of compliance may be significant. A limited liability company is required to consider balance sheet, profit, and loss account, hold meetings, directors report and auditors report; make a declaration with regard to dividend and appoint auditors under the Companies Act, 1956 and the Rules made thereunder.
On the other hand, annual compliance in the case of LLP consists of a presentation of statement of account and solvency along with annual report under Section 34(2) and 35(1) respectively of the LLP Act. Practically, the effort and cost of compliance in the case of LLPs is a fraction of what is required in the case of a private limited company.
LLCs and LLPs have been popular for the past decade because they provide a range of options to their members. Many people mistake these two for one and the same thing because they incorporate the attributes of a general partnership and a corporation. The partnership agreement governs the internal governance structure of an LLP, while the respective statute governs the internal governance structure of an LLC. The LLP’s corporate relations are managed by the partners themselves, while the LLCs are managed by the Board of Directors. These two business vehicles are suitable for small and medium companies due to their versatility in structure and operation. These are also well-known among entrepreneurs, professionals, and service providers, as the two organizational structures perfectly serve their interests.
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