People who want to start their own business venture have to face a very difficult question right at the outset — how to structure the venture. Should they go the sole-proprietorship way, or float a normal partnership, or even a Limited Liability Partnership (LLP). This is often a very confusing situation. One must remember that every business has to be judged based on its dynamics before the structure is chosen.
Over the past couple of years, LLP has gained a lot of popularity among entrepreneurs because of it numerous advantages. We bring you a comparison study between LLP and other structures for a quick view of the advantages/disadvantages and assessing the applicability.
LLP Vs Sole-Proprietorship:
• Liability: In a sole-proprietorship, the owners are the owners are personally responsible for business debts. If the assets of the sole proprietorship cannot satisfy the debt, creditors can go after each owner’s personal bank account, house, etc., to reclaim the debt in total. By contrast, if an LLP goes bankrupt, the owners are not liable.
However, there are certain circumstances in an LLP where an individual member may be liable for the debts of the firm. These circumstances include:
• If a member personally guarantees a debt.
• If personal funds are intermingled with LLP funds. • If the LLP has minimal capitalization or insurance.
• If the LLP fails to pay taxes or otherwise violates regulatory and enforceable laws.
• Fresh Capital Requirements: While sole-proprietors have limited choice for raising capital for their expansion plans, LLPs can admit new members by selling membership interests, and it can create new classes of membership interests with different voting or profit characteristics. Plus, investors will be assured that they are not personally liable for company debts.
• Transfer of Ownership: In case the owner of a sole-proprietorship wants to sell the business, hehas to sell/transfer the assets, licenses and permits individually. However, ownership interests in a LLP may generally be sold to third parties without disturbing the continued operation of the business.
LLP Vs Partnership: • Legal Entity: While a partnership firm is not a legal entity, a LLP is.
• Liability: In a partnership, every partner is jointly and severally liable and the firm is also liable for the wrongful acts or omissions of any partner. In a limited liability partnership, the firm is not liable for the acts done by the partners outside the scope of their authority and the partners are also not responsible for the wrongful acts of any other partner. Similarly any obligation of the Limited Liability partnership is the sole obligation of the Limited Liability Partnership and not of its partners personally.
• Registration: While a partnership firm is under no compulsion to register itself, registration and incorporation of a LLP is compulsory as per the LLP Act.
• Financial Disclosures: Once again, it is not mandatory for partnership firms to file financial disclosures. On the other hand, a LLP has to compulsorily file its disclosures to the requisite authorities.
• Taxation:However, in matters of taxation, both the structures are treated a legal entity and hence, taxed accordingly. As already mentioned, business dynamics and business requirements vary from venture to venture. Consequently, the applicability of one structure over the other changes depending upon the nature of business, location, clientele, market reach, etc. The ‘structure’ decision, therefore, needs to be assessed and taken based on these contingencies.