Choosing a business structure can be hard. So, if you are at a crossroads and can’t decide whether to start as a partnership or an LLP, this article is for you.
A Partnership vs Limited Liability Partnership is a confusion that many people face while starting their business. Each has its own pros and cons. In this article, we highlight the benefits and the drawbacks of each to help you make the right choice.
While both structures might seem similar except for minor differences, they vary vastly. Based on what your business is about, you need to choose the right one for you. The LLP is meant for professional and advisory firms with no need for equity funding. If this applies to your business, pick the LLP. It’s been gaining in popularity since 2008 because it combines the benefits of partnership firms and private limited companies. However, if you’re running a small business that will have no debts or liabilities, pick the partnership firm. Now let’s see Partnership Vs Limited Liability Partnership.
Partnership Vs Limited Liability Partnership
Partnership Vs Limited Liability Partnership, Let’s examine the features of both structures:
Features of an LLP
For Non-Scalable Businesses: If you’re running a business that’s unlikely to require equity funding, you may want to register an LLP as it combines several benefits of the private limited company and general partnership. It has limited liability, like a private limited company, and has a simpler structure, like a general partnership.
Fewer Compliances: The MCA: https://www.mca.gov.in/content/mca/global/en/home.html has given some concessions to the LLP. For example, an audit needs to be performed only if your turnover is greater than ₹40 lakh or paid-up capital is more than ₹25 lakh. Furthermore, all structural changes need to be communicated to the RoC in the case of private limited companies, that requirement is minimal for LLPs.
Tax Advantages: Particularly if your business is earning over ₹1 crore in profits, the LLP offers tax benefits. The tax surcharge that applies to companies with profits over ₹1 crore doesn’t apply to LLPs, nor does Dividend Distribution Tax. Loans to partners are also not taxable as income.
Number of Partners: There is no limit to the number of partners there may be in an LLP. So if you’re building a large advertising agency, for example, you needn’t worry about any cap on the number of partners.
Start-up Cost: Much cheaper than starting a private limited company, with government fees of ₹5000, no paid-up capital and low compliance costs.
Features of a Partnership Firm
Easy to Start: All you need to get started is a partnership deed. This you can have ready in just two to four days. Even registration, for that matter, can be completed in a day, once you have the appointment with the Registrar. As compared with a private limited company or Limited Liability Partnership, therefore, the procedure for starting up is much simpler.
Low Compliance: There is no burden of compliance for partnership firm. This saves you a ton of time and effort in terms of formalities.
Unlimited Liability: On account of unlimited liability, the partners in the business are liable for all of their debts. This means that if for whatever reason, you’re unable to repay a bank loan or are liable to pay a fine, this can be recovered from your personal possessions. So the bank, institution or supplier would have the right to your jewellery, house, or car.
While this might seem like a big deal, small businesses like lunch box services to the locality or low investment and low-risk businesses need not worry too much about it as you might not be incurring too much debt.
To sum up, a partnership company should be registered if it is a small business that will have no debts or liabilities. An LLP should be registered if the business is professional and advisory and has no requirement for equity funding.
Hope this blog related to Partnership Vs Limited Liability Partnership was helpful.
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