Limited Liability Partnership Firm

How to Differentiate Between LLP and LLC? – An Overview

calendar18 Jan, 2023
timeReading Time: 5 Minutes
How to Differentiate Between LLP and LLC? – An Overview

It is essential to choose the proper business structure to protect your new business from all those unforeseen legal and tax compliances. You must have come across the terms like LLP and LLC while incorporating your business. These two business forms are generally considered identical, but there are some significant variations between them. Most of us misunderstand these two, for one, as they both possess the characteristics of a general partnership and business.

So while choosing between the LLP and LLC, one must make sure that the legal entity can be operated within your country. Since the provisions of LLC are not applicable in India, this means a LLC cannot be formed in Indian Territory. So, LLP and LLC may share many similarities, but there are some differences between them; let us look at those differences and more detail.

What Is The Meaning Of LLP In India? – LLP and LLC

  • A limited liability partnership, short form LLP, is a partnership that is formed by two or more owners, they called as the partners of the firm. An LLP acts as a cross between a corporation and a partnership, where partners enjoy some limited liabilities, which means they cannot be held liable for the losses of the business. The Limited Liability Partnership Act was enacted by the Parliament of India in the year 2008 to govern the business arising out of LLPs in the country. 
  • Like a regular partnership (as governed by the Indian Partnership Act), LLPs are also regulated through a partnership deed. The deed contains the rights, liabilities and the duties of all partners. 
  • Section 2(m) of the Limited Liability Partnership of 2008[1] defines the term, foreign limited liability partnership and Section 2(n) of the Limited Liability Partnership of 2008, defines the term, limited liability partnership. 
  • All the LLPs that are incorporated in India must have two (2) or more people, and one of them must be the resident of India. Also, the person must be eligible to carry out lawful business activities.

What is the meaning of LLC in India? – LLP and LLC

  • An LLC, also known as Limited Liability Companies, is a business form that limits the liability of its owners or members.
  • An LLC is legally recognised in many countries, although it has still to be recognised under Indian Laws.
  • It has been recognised as a hybrid structure in the sense that it incorporates the characteristics of a general partnership and a company. It is the most common type of business structure in the United States, UAI, Poland, Brazil, etc.
  • The most attractive feature of an LLC is that they are exempted from paying taxes, so their gains and expenses are directly transferred onto their members.

Key differences between LLP and LLC in India

Following are the differences between LLP and LLC in India:

S. No. LLC LLP
1 It is a privately held business entity that combines the characteristics of both corporation and of partnership. It is a type of partnership where the liability of all the partners is limited and restricted to the amount that they have contributed in the partnership. 
2 This type of business entity is not recognised in India. The central government has enacted a separate law to govern the LLPs in India. The Limited Liability Partnership Act of 2008 talks about different provisions of the LLP.
3 All the corporate relations are managed by the Board of Directors of the company. All the corporate relations are managed by the partners of the firm.
4 All the rules regarding the governing of the company are mentioned under the AOA and MOA All the rules regarding the governing of the firm are mentioned under the partnership deed.
5 All the companies incorporated as Limited liability companies must add LLC in the end of their name. All the firms incorporated as limited liability partnerships must add LLP in the end of their name.

What are the advantages of an LLP and LLC?

Both of these business forms have a list of pros and cons. It is very important for you to consider them before making a decision to create an LLP or LLC for your business.  

The advantages of an LLC are as follows: 

  • Only one member is required during the incorporation; 
  • Any business can form an LLC, whether it is a small-scale business or a large scale. Although in some of the countries professional cannot form an LLC or be a member of it. 
  • There are so many tax advantages that are given to an LLC 
  • All the members have the limited liability, which means the member are not responsible to pay off the debts of the company by using their personal assets. 
  • LLCs provide more liability protection in comparison to LLPs.
  • The process of incorporating an LLC is very simple and requires fewer documents.

The advantages of an LLP are as follows:

  • To run a business form as LLP, two (2) or more partners are required. 
  • The provisions of the LLP act provides the protection to one partner from the negligent act of other partners
  • The operations of the LLP in India are governed by a partnership deed. The deed acts as a written agreement, and it talk about the profit and loss sharing ratios between the partner; it also defines the liabilities, duties and rights of all the partners of the firm 
  • Partnership deeds act as a piece of evidence in a court of law.
  • All the partners have the authority to manage the activities of the business; 
  • LLP has no such retraction on the entry and exit of the partners from the partnership 
  • All the members have the limited liability, which means the member is not responsible to pay off the debts of the company by using their personal assets.

What are the disadvantages of an LLP and LLC?

Following is the list of disadvantages associated with LLP and LLC:

The disadvantages of an LLC are as follows:

  • According to the laws of many countries a professional is not allowed to form a LLC. Also they are not allowed to be a member of it.
  • In many counties LLCs are required to file annual reports with the state.
  • All the members are required to include the profits of LLC in their personal taxes.  
  • LLC requires more capital to run than a LLP
  • A managing member must keep accurate business records and maintain bank accounts that are separate from their own personal accounts.
  • Creditors of the firm have all the rights to male members personally liable.
  • People are wary of investing in an LLC until members file their taxes

The disadvantages of an LLP are as follows:

  • As per the Indian laws, an LLP must appoint minimum of 2 designated partners in the firm.
  • The process of incorporation is but lengthy and requires a lot of paper work.
  • Even if LLP is not performing any business activity, still it is required to file the income tax return and MCA annual return for each financial year.

Conclusion

An LLC, also known as Limited Liability Companies, is a business form that limits the liability of its owners or members. An LLC is legally recognised in many countries, although it has still to be recognised under Indian Laws. On the other hand, limited liability partnership, short form LLP, is a partnership that is formed by two or more owners, they called as the partners of the firm. An LLP acts as a cross between a corporation and a partnership, where partners enjoy some limited liabilities, which means they cannot be held liable for the losses of the business.

Both the business forms have their cons and pros; therefore one must carefully study the structure of these business forms before starting a business.

Read Our Article: Advantages Of LLP (Limited Liability Partnership) Over Private Limited Company

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