One of the first decisions you'll need to make is what type of legal entity to choose. Two common options are a limited liability partnership (LLP) and a sole proprietorship company. Here's a comparison of the two.
Sole Proprietorship
A sole proprietorship, also referred to as a ‘One Person Company,’ is a business structure established by a single individual who assumes complete responsibility for all its operations. Unlike other forms of business entities, it does not possess a distinct legal identity. The proprietor can conduct business under their own name or adopt a fictitious name, such as ‘Suresh Mobile Repair Shop.’ In this business form, the owner assumes personal liability for all financial, legal matters, debts, assets, liabilities, and more. Unlike entities like private limited companies or LLPs, there is no separation between the business and its owner. This type of business entity is suitable for small-scale entrepreneurs with minimal capital requirements who wish to avoid the complex and time-consuming process of legal registration.
Limited Liability Partnership
The Limited Liability Partnership (LLP) is established under the Limited Liability Partnership Act of 2008. It is a business entity formed by two or more partners who benefit from limited liability protection, safeguarding their personal assets. LLPs possess a distinct legal identity, with separate debts and assets for the company. This entity combines the features of a partnership and a corporation, ensuring that business owners are shielded from legal complications. Even in the event of insolvency, the personal assets of the owners remain unaffected. The incorporation process for LLPs is straightforward, accompanied by fewer legal requirements, making it an ideal choice for micro and medium-scale entrepreneurs.
LLP vs Sole Proprietorship Benefits
| LLP | Sole Proprietorship |
| Requires minimal legal requirements. | Quick and cost-effective establishment. |
| Allows for unlimited partners to be involved. | The owner has complete control over operations. |
| No mandatory requirement for an audit. | Personal and business assets are combined. |
LLP Company Formation Advantages
- The process of incorporating an LLP is relatively simple, with minimal legal requirements involved
- LLPs offer complete transparency and flexibility in company administration, as all details, including profit distribution ratios among partners, are outlined in the written contract
- Owners of an LLP are protected by limited liability, shielding them from the company’s obligations and liabilities
- LLPs have the freedom to have as many partners as they desire, making them a popular choice among CAs, CPAs, lawyers, and others who benefit from partners being exempt from paying DDT
- LLPs are not obligated to undergo mandatory audits
- There is no specific upfront capital requirement for establishing an LLP, as the partners collectively determine the amount of capital to be contributed to the venture.
Sole Proprietorship Advantages
- In a sole proprietorship, the owner assumes full responsibility for all aspects of the company and has the freedom to operate it according to their own discretion
- Establishing a sole proprietorship is a fast and cost-effective process for business owners
- Unlike many other business structures, a sole proprietorship does not require the owner to pay separate corporate taxes
- A sole proprietorship can be easily set up by a single individual without the need for additional partners or shareholders
- The owner of a sole proprietorship has the flexibility to combine personal and business assets in any manner they choose.
LLP vs Sole Proprietorship Disadvantages
LLP Company Registration Disadvantages
Due to its inability to issue equity shares, LLPs may face challenges in generating capital from its members. Consequently, venture capitalists, angel investors, and other types of investors often prefer to invest in private limited companies instead of LLPs.
LLPs are subject to a flat tax rate of 30% on their earnings, regardless of the amount of money they generate. However, for LLPs with an annual revenue of up to ₹ 250 crores, the standard tax rate is 25%.
To register an LLP, a minimum of two members is required. This ensures the presence of multiple individuals in the partnership.
Annual tax and MCA filings are mandatory for LLPs, even if they are not actively involved in business activities. Failing to submit these returns on time can result in penalties of ₹ 100 per day.
Sole Proprietorship Disadvantages
- A sole proprietorship business has a limited likelihood of surviving in the event of the owner’s death or insolvency.
- As the sole owner manages the entire organisation, they face limitations in obtaining additional funds.
- Sole proprietorship registration does not provide protection for the owner’s personal assets.
Documents Required for Sole Proprietorship & LLP in India
Sole Proprietorship
To establish a sole proprietorship, the following documents are required:
- KYC documents of the bank
- Identity proof of the owner (such as Aadhar Card, Voter ID card)
- PAN card of the owner
- Office address proof
- Utility bill
- Income tax returns of the owner
- Proof of office address (such as Rent Agreement, Possession letter, copy of property papers)
- NOC by the landlord for rented land
- Shop and Establishment License
- Service Tax Certificate (for service business)
- Chartered Accountant Certification (in special cases)
- CST/VAT certificate
Limited Liability Partnership
For LLP Registration, the following documents are required:
-
- PAN card of the directors
- Passport-sized photos of the directors
- Identity proof of the directors (such as Aadhar card, Voter ID card)
- Address proof of the office (such as rented agreement, possession letter, copy of property papers)
- Utility bill
- Latest bank statements
- NOC by the landlord for rented land
- Copy of the passport (in case of foreign nationals)
- Incorporation Certificate (if applicable)
Liability Protection and Risk Management
LLPs offer limited liability protection. This means that the partners’ personal assets are protected from business debts and lawsuits. Sole proprietorship companies, on the other hand, offer no such protection. This means that the owner is personally liable for all the debts and liabilities of the business.
Taxation and Compliance Requirements
Taxation
LLPs are taxed as a partnership and partners report profits and losses on their individual tax returns.
Sole proprietorship companies are taxed as a sole proprietorship. The owner reports business income and expenses on their personal tax return.
Compliance Requirements
LLPs have more complex reporting and filing requirements compared to sole proprietorship companies.
Sole proprietorship companies have simpler compliance requirements than LLPs.
Formation and Registration Process
Formation and Registration Process for LLPs
- Choose a name for your LLP
- Draft a partnership agreement
- Register the LLP with the Registrar of Companies
- Obtain a Certificate of Incorporation
- Apply for a PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account Number)
- Open a bank account in the name of the LLP
- Obtain any necessary licenses or permits
Formation and Registration Process for Sole Proprietorships
- Choose a name for your business
- Check if you need any licenses or permits to operate your business
- Register a “Doing Business As” (DBA) name if you plan to use a different name than your own legal name
- Open a bank account in the name of your business
- Obtain any necessary licenses or permits
- Ownership and Management Structure
- LLPs have a partnership structure, where the partners share ownership and management responsibilities. Sole proprietorship companies are owned and managed by a single individual.
Fundraising and Investment Opportunities
LLPs have more options for fundraising and investment opportunities than sole proprietorship companies. Partnerships can bring in new partners or issue new shares to raise capital. Sole proprietorship companies, on the other hand, have limited options for raising capital.
Branding and Intellectual Property Protection
When it comes to branding and intellectual property protection, there are some differences between LLPs and sole proprietorships.
An LLP Registration has more options to protect its intellectual property, such as patents, trademarks, and copyrights. These legal tools can help an LLP protect its brand name, logo, products, and services from being copied or stolen by others.
On the other hand, sole proprietorships have limited options for protecting their intellectual property. While they can use trademarks and copyrights to protect their brand name and logo, they cannot obtain patents. This can make it harder for sole proprietorships to prevent others from using or copying their products or services.
Overall, if branding and intellectual property protection are important to your business, then setting up an LLP might be the better choice.
Operational Flexibility and Scalability
LLPs are easier to change than sole proprietorship companies. LLPs can add or remove partners, and the agreement can change if the business changes. Sole proprietorship companies can’t change or grow as easily.
Conclusion
Deciding between an LLP and a sole proprietorship company depends on what your business needs and goals are. An LLP can give you more protection if something goes wrong, more ways to get money, and more options for growing and passing on the business.
But if you choose a sole proprietorship company, you can have an easier time starting and running it. There are fewer rules to follow, and the way you own and run the business is simpler. Think about what’s important to you and what you want your business to be like in the future when you make your decision. For any more queries, contact our Vakilsearch experts at the earliest.
Frequently Asked Questions
How does the liability of the business owner differ in an LLP compared to a Sole Proprietorship Company?
In an LLP, owners have limited liability, protecting personal assets. In a Sole Proprietorship, the owner bears unlimited liability, risking personal assets for business debts. The key distinction lies in the extent to which personal assets are safeguarded from business liabilities.
In terms of management and decision-making, how do the structures of an LLP and a Sole Proprietorship Company differ?
In an LLP, management is typically distributed among partners, fostering collaborative decision-making. A Sole Proprietorship, being a solo venture, centralises management with the owner. The choice depends on the business's size, complexity, and the owner's preferences for decision-making structures.
Can a single individual own and operate both an LLP and a Sole Proprietorship Company simultaneously?
Yes, an individual can own and operate both an LLP and a Sole Proprietorship simultaneously. This dual ownership offers flexibility but requires careful management to ensure each business's distinct needs and obligations are met.
How is the continuity of the business affected in case of changes in ownership or management in an LLP versus a Sole Proprietorship Company?
In an LLP, changes in ownership have less impact on continuity as the partnership structure allows for smoother transitions. In a Sole Proprietorship, changes in ownership, such as selling the business, may disrupt continuity, impacting relationships with clients and suppliers.
What considerations should be taken into account when choosing between an LLP and a Sole Proprietorship Company for a small business or startup?
Considerations for choosing between an LLP and a Sole Proprietorship include liability preferences, management structure, tax implications, and scalability. For startups or small businesses, LLPs offer flexibility and limited liability, while Sole Proprietorships are simpler but riskier.
In terms of flexibility, scalability, and ease of dissolution, what are the distinguishing features between an LLP and a Sole Proprietorship Company?
LLPs offer more flexibility in management and scalability, making them suitable for expanding businesses. Sole Proprietorships are simpler but less scalable. In terms of dissolution, LLPs may involve more formal processes, while Sole Proprietorships can be dissolved with relative ease.
Are there specific restrictions on the types of business activities that can be undertaken by an LLP compared to a Sole Proprietorship Company?
Both LLPs and Sole Proprietorships have flexibility in choosing business activities. However, certain regulated industries may require specific structures. Sole Proprietorships may face fewer restrictions, while LLPs may need to comply with industry-specific regulations.
How does the dissolution process differ for an LLP and a Sole Proprietorship Company, and what steps need to be taken in each case?
Dissolving an LLP involves formal procedures, including filing with regulatory authorities. In a Sole Proprietorship, the process is simpler, often requiring notification to clients and suppliers. Both processes necessitate settling debts, fulfilling obligations, and obtaining regulatory approvals.
How does the registration and protection of business names and trademarks vary between an LLP and a Sole Proprietorship Company?
LLPs and Sole Proprietorships can register business names, but the process differs. LLPs must follow formal registration procedures, offering more protection. Sole Proprietorships often rely on common law rights. Trademark registration offers additional protection for both structures, safeguarding intellectual property.
How is the dissolution of an LLP or Sole Proprietorship Company handled in the case of disagreements or disputes among owners?
Disputes during dissolution in an LLP may be resolved through partnership agreements, mediation, or legal proceedings. In a Sole Proprietorship, disagreements might lead to legal complications, impacting the dissolution process. Resolving disputes promptly and amicably is crucial for a smoother dissolution in either structure.
What Is a Limited Liability Partnership?
A limited liability partnership is a type of legal entity where the partners have limited liability protection.
Do sole proprietorship companies have liability protection?
No, sole proprietorship companies do not have liability protection, and the owner is personally liable for all the debts and liabilities of the business.
How are LLPs and sole proprietorship companies taxed?
LLPs are taxed as a partnership, and the partners report their share of the profits and losses on their individual tax returns. Sole proprietorship companies are taxed as sole proprietorship, and the owner reports the business income and expenses on their individual tax return.
Which is better LLP or sole proprietorship in India?
When comparing LLPs (Limited Liability Partnerships) and sole proprietorship in India, LLPs offer greater flexibility for making changes. LLPs have the advantage of being able to add or remove partners as needed, and the partnership agreement can be modified to accommodate changes in the business. On the other hand, sole proprietorship companies face limitations in terms of making changes or expanding their operations.
Why choose partnership over sole proprietorship?
Opting for a partnership rather than a sole proprietorship offers advantages such as shared responsibilities, resources, and losses. However, it also entails sharing profits and the potential for disagreements regarding business management. To minimise conflicts, it is advisable to establish a partnership agreement.
